Friday, August 20, 2010

Once Upon a Time When Krugman Was an Economist

Someone sent me this link of a Paul Krugman article from 13 years ago, "In Praise of Cheap Labor," and I find it absolutely fascinating. I doubt seriously that Robin Wells would let her husband write something like this today, but nonetheless there is real economic analysis in this piece.

Krugman begins by describing the appalling conditions at the municipal dump in Manilla (and it reminds me of what I saw at the dump in Guatemala City 10 years ago when we adopted our now-11-year-old daughter), and then makes the following statement:
The occasion was an op-ed piece I had written for the New York Times, in which I had pointed out that while wages and working conditions in the new export industries of the Third World are appalling, they are a big improvement over the "previous, less visible rural poverty."
Of course, this admission was followed by a spate of hate mail, but Krugman goes on, applying solid logic and empirics to his argument:
...moral outrage is common among the opponents of globalization--of the transfer of technology and capital from high-wage to low-wage countries and the resulting growth of labor-intensive Third World exports. These critics take it as a given that anyone with a good word for this process is naive or corrupt and, in either case, a de facto agent of global capital in its oppression of workers here and abroad.

But matters are not that simple, and the moral lines are not that clear. In fact, let me make a counter-accusation: The lofty moral tone of the opponents of globalization is possible only because they have chosen not to think their position through. While fat-cat capitalists might benefit from globalization, the biggest beneficiaries are, yes, Third World workers.

After all, global poverty is not something recently invented for the benefit of multinational corporations. Let's turn the clock back to the Third World as it was only two decades ago (and still is, in many countries). In those days, although the rapid economic growth of a handful of small Asian nations had started to attract attention, developing countries like Indonesia or Bangladesh were still mainly what they had always been: exporters of raw materials, importers of manufactures. Inefficient manufacturing sectors served their domestic markets, sheltered behind import quotas, but generated few jobs. Meanwhile, population pressure pushed desperate peasants into cultivating ever more marginal land or seeking a livelihood in any way possible--such as homesteading on a mountain of garbage.
He continues:
...wherever the new export industries have grown, there has been measurable improvement in the lives of ordinary people. Partly this is because a growing industry must offer a somewhat higher wage than workers could get elsewhere in order to get them to move. More importantly, however, the growth of manufacturing--and of the penumbra of other jobs that the new export sector creates--has a ripple effect throughout the economy. The pressure on the land becomes less intense, so rural wages rise; the pool of unemployed urban dwellers always anxious for work shrinks, so factories start to compete with each other for workers, and urban wages also begin to rise. Where the process has gone on long enough--say, in South Korea or Taiwan--average wages start to approach what an American teen-ager can earn at McDonald's. And eventually people are no longer eager to live on garbage dumps. (Smokey Mountain persisted because the Philippines, until recently, did not share in the export-led growth of its neighbors. Jobs that pay better than scavenging are still few and far between.)
I agree with Krugman that conditions in Third World countries where these producers are permitted to open factories are improving. (Guatemala City certainly was a good example, and what I found there was that even poor people were earning more than did a doctor in Cuba at the time, and the shops and markets were overflowing with goods.)

However, to some people, this is not good enough. Krugman's explanation of the opposition to trade around the globe is insightful:
Why, then, the outrage of my correspondents? Why does the image of an Indonesian sewing sneakers for 60 cents an hour evoke so much more feeling than the image of another Indonesian earning the equivalent of 30 cents an hour trying to feed his family on a tiny plot of land--or of a Filipino scavenging on a garbage heap?

The main answer, I think, is a sort of fastidiousness. Unlike the starving subsistence farmer, the women and children in the sneaker factory are working at slave wages for our benefit--and this makes us feel unclean. And so there are self-righteous demands for international labor standards: We should not, the opponents of globalization insist, be willing to buy those sneakers and shirts unless the people who make them receive decent wages and work under decent conditions.
However, as Krugman note, this is a very shortsighted view and it does harm to the people who these activists supposedly want to help:
This sounds only fair--but is it? Let's think through the consequences.

First of all, even if we could assure the workers in Third World export industries of higher wages and better working conditions, this would do nothing for the peasants, day laborers, scavengers, and so on who make up the bulk of these countries' populations. At best, forcing developing countries to adhere to our labor standards would create a privileged labor aristocracy, leaving the poor majority no better off.

And it might not even do that. The advantages of established First World industries are still formidable. The only reason developing countries have been able to compete with those industries is their ability to offer employers cheap labor. Deny them that ability, and you might well deny them the prospect of continuing industrial growth, even reverse the growth that has been achieved. And since export-oriented growth, for all its injustice, has been a huge boon for the workers in those nations, anything that curtails that growth is very much against their interests. A policy of good jobs in principle, but no jobs in practice, might assuage our consciences, but it is no favor to its alleged beneficiaries.

You may say that the wretched of the earth should not be forced to serve as hewers of wood, drawers of water, and sewers of sneakers for the affluent. But what is the alternative? Should they be helped with foreign aid? Maybe--although the historical record of regions like southern Italy suggests that such aid has a tendency to promote perpetual dependence. Anyway, there isn't the slightest prospect of significant aid materializing. Should their own governments provide more social justice? Of course--but they won't, or at least not because we tell them to. And as long as you have no realistic alternative to industrialization based on low wages, to oppose it means that you are willing to deny desperately poor people the best chance they have of progress for the sake of what amounts to an aesthetic standard--that is, the fact that you don't like the idea of workers being paid a pittance to supply rich Westerners with fashion items.

In short, my correspondents are not entitled to their self-righteousness. They have not thought the matter through. And when the hopes of hundreds of millions are at stake, thinking things through is not just good intellectual practice. It is a moral duty.
I'm not sure that Krugman could write such prose today, and certainly not for the New York Times. Furthermore, Krugman actually refers to things like factors of production, something that Keynesians routinely ignore in their analysis, except to surmise that factors generally are homogeneous.

So, while I oppose most of what Krugman writes today, I fully agree with his assessment in this article. If we care about poor people, we will not yank away job opportunities because some leftist activist believes that unless a Third World citizen will refuse to work for a wage less than what the activists deem "just," that poor person can go live in a garbage heap. Out of sight, out of mind.


Daniel Hewitt said...

It's hard to remember sometimes that Krugman used to be an economist. Another old paper of his defending free trade:

Also, in his book The Great Unravelling, there are a few more articles of this type.

Another Anonymous said...

It's impossible to analyze free trade and societies like Guatemala without mentioning the elephant in the room: the history of US intervention to implant murderous dictatorships serving the most narrowminded, shortsighted US interests. Had the US not overthrown Arbenz in the 50s it would surely be a great deal more advanced and prosperous. Whether they want free trade or not is their decision. What the US owes to Guatemala is monetary reparations for criminal acts; not economic advice or investment. With business and large landowners incestously involved with a state that rules by terror, as Guatemala frequently has been, leftist demands for some kind of "fair trade" are more reasonable even from the laissez-faire point of view - the side that employs the workers certainly has not played by the rules, and played a great part in creating this "previous, less visible rural poverty."

William L. Anderson said...

I would agree with you, 11:10. Americans like to think that THEIR interventions are not socialistic in nature, but that is not true. Furthermore, our interventions have created conditions that make political divisions even bloodier than they would have been otherwise.

As one who went for a year during with Vietnam War with a draft card of 1-A (I took my draft physical 45 days before the Peace Accords were signed, which saved me from the draft and the war), it is horrible to see the same failed arguments promoted today that we have to intervene to "save the world."

Unknown said...

@Another Anonymous:
> What the US owes to Guatemala is monetary reparations for criminal acts; not economic advice or investment.

As an Honduran (Guatemala's neighbor), I'll take investment over monetary reparations every time. Money can be squandered by "digging ditches" or many other ways but capital that comes to our countries AND the knowledge of how to use it can be re-utilized even if it was (at first) squandered.

William L. Anderson said...

Good point! Aid generally is pure consumption, and if there is "investment," it is state-run (and ultimately politicized) investment that serves the political elites.

Anonymous said...

The left generally applies the same shallow thinking to the Industrial Revolution. They decry the awful conditions in factories in which children worked, completely missing the point that even such conditions were a vast improvement from earlier standards of living. Before the revolution in Britain, most kids died before the age of 10. They were starving, they were thieves, vagabonds, prostitutes, alcoholics. The opportunity to work did more to improve things for children than any subsequent child labor laws (which were largely motivated by the influence of unions who saw children as competition).

ekeyra said...

Socialists would rather you live in a garbage heap than to have a job they arbitrarily deem you "underpaid" for. Too many self esteem and narcissism problems to go into.