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Posted on 09/29/2002 3:50:25 PM PDT by Willie Green
For education and discussion only. Not for commercial use.
NEW YORK (Reuters) - The World Bank and the International Monetary Fund are coming under heavy fire, yet increasingly, the most dramatic protests are not on the streets, but in academic quarters.
After stinging criticism of the two organizations by Nobel Prize winner and former World Bank chief economist Joseph Stiglitz, a new book from a Cambridge University professor challenges the very bedrock of these institutions -- that globalization and free trade are a sure-fire path to prosperity.
Those notions, embodied in the World Bank, the IMF and more recently in the World Trade Organization, were challenged most spectacularly in 1999, when tens of thousands of demonstrators descended on the streets of Seattle to disrupt the WTO's ministerial meetings.
His style is less flamboyant, but Ha-Joon Chang, Assistant Director of Development Studies at Cambridge, does not mince his words either.
"The failure of the current orthodoxy is that it has not delivered growth at all," Chang told Reuters in an interview in New York, shortly before the World Bank and IMF hold their annual meetings in Washington, D.C.
The main problem, Chang says, is that the Washington Consensus -- the mix of conservative macroeconomic policy, trade liberalization, deregulation and privatization recommended by the World Bank and IMF -- has not worked.
"We were promised that if we used this free-market policy, we would get growth," he said.
Instead, growth in developing countries was halved to around 1.5 percent between 1980 and 2000 from the annual growth rates seen between 1960 and 1980, Chang said.
"And even that was because China and India -- two countries that have not been following World Bank policies -- were growing very fast," Chang said.
Chang, who has edited a collection of Stiglitz' speeches, says the two economists have similar views. The only difference is that Stiglitz criticized the push to liberalize capital markets, whereas Chang's research has focused on the effects of freeing up trade and industrial policy.
Liberalization has helped some countries, Chang said, but the measure should never have been prescribed as a panacea.
"In others, nothing is happening. The only answer the World Bank and IMF has is 'You should do more liberalization.' But this hardly amounts to a long-term development strategy.
"This is embarrassing."
HISTORICAL HYPOCRISIES
Embarrassing, perhaps. But not surprising, according to Chang's recently-published book, "Kicking Away the Ladder," which examines the economic policies that today's industrialized countries used during their development.
"The title of the book comes from a passage from German economist Friedrich List," Chang said, adding that the 19th century economist complained that British calls for free-trade policies were simply attempts to thwart growth and development in poorer nations such as Germany.
The British were trying to kick away the ladder -- protectionist economic policies -- by which they themselves had climbed up, Chang quotes List as saying. Two centuries later, Chang said List's complaint can be leveled against the United States.
American officials of the 19th century were deeply skeptical of free trade and Chang argues that U.S. industries were literally the most protected in the world until 1945.
Newly established industries were aggressively coddled and promoted, making the United States an early believer in the "infant industry" argument -- the same one many developing countries use today to impose limits on free trade and liberalization.
But now, the world's leading industrialized country is also its leading champion of the benefits of free trade.
"In exactly the same that Britain did, when America reached the top, it started saying 'free trade is the way'."
"Unknown to many people, this country is where the infant industry argument started. This notion that free-trade was against national interests was very widespread in the United States in the early 19th century," said Chang.
In the context of these historical inconsistencies, Chang said President Bush's recent efforts to protect the struggling U.S. steel industry are not surprising. In March, ignoring cries of outrage and the risk of a major trade war with Europe, Bush imposed unilateral sanctions of up to 30 percent on U.S. imports of steel.
"When it comes to the crunch, even now, we're not doing what we say," Chang said.
FREE TRADE, A STRAIGHT AND NARROW PATH
Free-traders may also do well to heed the "health warning" Chang includes in his book -- the results of his historical research contradict the widespread notion that industrialized powers became rich through laissez-faire economics.
History, Chang says, has shown that free trade is a harder road to growth and prosperity -- only Switzerland and Hong Kong have successfully walked the free trade path to development and wealth. The 25 other countries he studied resorted to a variety of measures -- heavy tariff barriers, lower tariffs for imports of machinery and subsidies for exports, among others.
Even Switzerland had no patent laws until the early 1900s and flouted intellectual property rights as it sought to grow.
Today's developing countries, by contrast, negotiate with their industrialized counterparts at the WTO whether and how to circumvent patents, including those for medicine against debilitating diseases such as malaria or HIV.
"I'm not saying no one should do free trade, but that it's against the odds. Countries should be aware of the odds," he added.
It only works if it's practiced by honest people.
labor is driven to the subsistence level.
This is true to a point. However, there is still that element of personal choice involved. The laborers entered into their "subsistence jobs" on the theory that they were better than what they'd had.
In some cases it's better, but of course it's ofen not better. One has to wonder why people won't leave.
They often don't leave -- maybe what they've got is better than what they had. Of course, to a slave, a master who doesn't beat you is better than one who does. At any rate, the work conditions in third-world factories are bad enough that they'd be condemned here. This shows no signs of abating -- it's too lucrative. What it all really shows is that the libertarian and free-trader reliance that "the market" will address such ills, is misinformed. The market does not punish exploitation -- so long as the poor conditions can be maintained (and costs thereby kept low), the market actively rewards it.
The market is fine when most of the players are honest. But as the recent scandals have pointed out, the lure of money works against honesty. If one is most interested in the bottom line, one doesn't really have to care about the conditions under which one's third-world employees have to work.
It's always mystified me that free-marketeers are so unwilling to admit that company executives might not give a damn about what they do to others. One can conquer with money at least as effectively as with armies.
Would you emigrate to Mexico or India to get paid a couple of dollars for a 12-hour day?
Now, Willie, we've already been through this once. Ricardo said no such thing.
To save time, let's recap the argument from last time:
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Willie:
In the work where Ricardo presents this theory, "On The Principles of Political Economy and Taxation", he also demonstrates that wages for labor stabilize at the subsistance level.
Me:
I presume you are referring to this paragraph (and the one that follows it) in Ricardo's work:
In the natural advance of society, the wages of labour will have a tendency to fall, as far as they are regulated by supply and demand; for the supply of labourers will continue to increase at the same rate, whilst the demand for them will increase at a slower rate. If, for instance, wages were regulated by a yearly increase of capital, at the rate of 2 per cent, they would fall when it accumulated only at the rate of 1 1/2 per cent. They would fall still lower when it increased only at the rate of 1, or 1/2 per cent, and would continue to do so until the capital became stationary, when wages also would become stationary, and be only sufficient to keep up the numbers of the actual population. I say that, under these circumstances, wages would fall, if they were regulated only by the supply and demand of labourers; but we must not forget, that wages are also regulated by the prices of the commodities on which they are expended.
But several paragraphs down, he continues: It appears, then, that the same cause which raises rent, namely, the increasing difficulty of providing an additional quantity of food with the same proportional quantity of labour, will also raise wages; and therefore if money be of an unvarying value, both rent and wages will have a tendency to rise with the progress of wealth and population.
The earlier exposition was the special case of an agrarian economy in a transition phase. Once the transition is made, as Ricardo points out, the standard of living goes up in general "with the progress of wealth and population".
Willie:
No, you merely contrast two opposing scenarios, one under conditions where wages fall, the other under which wages rise. Ricardo's contention was that the "natural" price of labor stabilized at the subsistance level:
"Labour, like all other things which are purchased and sold, and which may be increased or diminished in quantity, has its natural and its market price. The natural price of labour is that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution"
Me:
Ah, but you are confusing the natural with the market price. The "natural" price will indeed be subsistence level, because anything below that would not maintain the resource. That's like saying that the "natural" price of wheat is approximately the price of the resources and labor required to farm it.
This contrasts with the "market" price, which is what people actually get paid.
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You need to quit maintaining that Ricardo's work supports your anti-free trade stance. It doesn't. And continuing to maintain that it does is intellectually dishonest. There are plenty of others you can cite in support of your claims, though it happens that most of them are leftist economists.
NAFTA supposedly was going to get Mexico some good jobs but instead immigration to the US became extreme during the same time.
Labor has not been a factor in mass produced goods for nearly a century. When Henry Ford Sr doubled his employees wages over 80 years ago people were certain that he would go broke. Just a few years earlier there had been 400 hours labor in making a car. And doubling wages would have nearly doubled the price of a car.
What the critics didn't know was that Fords assembly line had reduced the labor in a single new car from 400 hours to 4 hours. Back then wages were two dollars and fifty sents a day. Ford doubled them to five dollars a day. That meant he increased his cost per car by one dollar and twenty five cents. Cars cost 250 dollars back then. A static analysis showed it to be less than a half a percent cost increase. Actually workers were so happy with the raise and so afraid of loseing their jobs that production increased. Fords cost of labor per car went down when he doubled wages.
The only number that counts is the value added to the product for each dollar of labor spent. That number is great here in the USA. It is not better in other countries. How much it costs to make the product is the factor. What labor is getting paid is not a factor. The labor cost in each item produced is the important labor number. That number is very good in the USA.
The ratio today are even greater than it was in Fords time. Companies don't take jobs to foreign nations to save on labor. There are only very small if any savings in cheaper foreign labor. Usually transporting the stuff back to he US to sell costs more than the higher labor costs in the US. The reaon jobs leave here to go to foreign nations is the cost of government.
Politicans never tell you that. But it is the truth.
Labor costs are small as a percentage of total costs. But governemnt costs way over half of the profits in the USA. Government regulations and taxes and other government chrages cost way more than labor. So if the cost of taxes (government) and regulations (government) is very low in other nations, a company can put up with poor quality labor and higher unit labor costs of the lousy foreign workers. It actually costs more labor to make mass produced products in other nations. The only exceptions are labor intensive, hand made items. If it is hand made, the labor costs are cheaper outside the USA. But few items are hand made today. Most everything is mass produced.
If Cheap labor were the answer then the South with free slave labor would have out produced the North in the Civil War. The North while paying greatly inflated war wages out produced the South.
Africa has many nations that allow slave labor. Is any labor cheaper than slave labor? Why can't the Slave owners in Africa get work for their slaves. They can't even make stuff to sell in other slave holding nations.
Another good example is Malaysia which REFUSED to follow the IMF and Western pressure while Indonesia obeyed. Malaysia is doing fine and Indonesia is barely surviving.
Read the excellent explanation by Mahathir Mohamad: How And Why It Happened . (This is a large pdf file, so you can download it for convenience and future reference.)
No Joe, it is YOU who are confusing natural price and market price. That is the point I made when I stated that "you merely contrast two opposing scenarios, one under conditions where wages fall, the other under which wages rise. Ricardo's contention was that the "natural" price of labor stabilized at the subsistance level."
Your two scenarios, one of rising wages, and the other of falling wages, do indeed reflect "market price", which is, as you say "what people actually get paid." And it is also "market price" which Ricardo contends eventually converges upon "natural price" at the subsistance level.
That is what is meant by the word "stabilizes", Joe. When Market Price = Natural Price.
I apologize for not having explained that to you before,
I must've assumed that you were sharp enough to understand it on your own.
Anyway, thanks for bringing up that old conversation.
I'm happy to straighten out any misperceptions you may have had.
Reuters may be just as "leftist" as the Associated Press, the New York Times, ABC, BBC, CBS, NBC, CNN, etc. etc. etc.
But they're still "mainstream" media, dumbass.
Also car prices haven't fallen since they've been manufactured in other countries. In the 70's it was possible to buy a new car for only $3000 - $4000 which isn't close to what they cost now. And that was with Americans making far more money than the foreign workers are making now.
Sorry. Saying it doesn't make it so. There's nothing in Ricardo to support this assertion. As Ricardo clearly says in the earlier passages I quoted, the "natural" price only holds sway during transition periods, when things are sorting themselves out. Thereafter, wages go up "with the progress of wealth and population", as the market price diverges from the natural price.
That's what has happened in every single industrialized economy that adopted free trade to some degree or other. Inflation-adjusted wages go up and up and up. They may occasionally take a temporary decrease during depressions, but in the long term they go up.
I note that I'm the one quoting Ricardo. Except for the out-of-context quotation you always use (which is refuted by Ricardo's own words a bit later, as I pointed out), you never do. That should be a pretty good indicator of who understands his theories better.
No Joe, you're the one who refuses to understand the word "stabilizes".
I'm not going to waste my time chasing you around in your convoluted circles.
Ciao.
No, FITZ believes that the economy is zero-sum, and that we "give away" jobs when we trade. Free traders believe that there are net positive benefits to free trade. (And positive is definitely not zero.) I do agree that other countries should adopt democratic capitalism; that does not remove the benefits of free trade.
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