October 17, 2015
That’s the question that has been raging across the Internet following a piece in the NYT by Paul Theroux. Theroux decried the poverty in the South in the United States and bemoaned the fact that it was partly attributable to the outsourcing of jobs to the developing world. This prompted commentary by Annie Lowrey and Branko Milanovic and others, asking whether the gains for the poor in the developing world were worth whatever losses might have been incurred by the working class and poor in the United States.
That might be an interesting philosophical question, but it has nothing to do with the reality at hand. It assumes, without any obvious justification, that job loss and wage stagnation was a necessary price for the improvement of living standards in the developing world. Clearly, there has been an association between the two, as the manufacturing jobs lost in rich countries meant hundreds of millions of relatively good paying jobs for people in poor countries, but that doesn’t mean this was the only path to growth for the developing countries. There are fundamental questions of both the size and composition of trade flows that this assumption ignores.
On the size front, there is no obvious reason that developing country growth had to be associated with the massive trade surpluses they ran in the last decade. In the 1990s, many developing countries had extremely rapid growth accompanied by large trade deficits. For example, from 1990 to 1997 GDP annual growth averaged 7.1 percent in Indonesia, its trade deficit averaged 2.1 percent of GDP. In Malaysia growth averaged 9.2 percent, while its trade deficit averaged 5.6 percent of GDP. In Thailand growth averaged 7.4 percent, while the trade deficit averaged 6.4 percent of GDP.
This actually was the textbook story of development that economists used to tell until it became politically inconvenient. Capital was supposed to flow from rich countries where it is plentiful, to developing countries where it is scarce. This meant that developing countries would run trade deficits as they financed their development with investment flows from rich countries.
This happy textbook story came to a sudden end with the East Asian financial crisis in 1997. The I.M.F. stepped in and imposed harsh conditions on the countries of the region. The message that they and other developing countries took away from this episode was that it was best to maintain large trade surpluses and accumulate massive amounts of reserves. This meant never having to be at the mercy of the I.M.F.
There was in fact a sharp reversal in capital flows following the crisis with developing countries becoming huge net lenders of capital. This is the period that corresponded to the explosion of the trade deficit in the United States and the loss of millions of manufacturing jobs. That is the tale of much of the outsourcing and poverty that concerned Theroux.
Those arguing that this path was necessary are effectively saying that the only way developing countries could grow was by buying up massive amounts of foreign reserves from the rich countries (mostly the United States). This kept down the price of their exports and ensured that they would continue to run trade surpluses. It meant in effect that poor countries were paying rich countries to buy their stuff.
Is there really no other way developing countries could sustain demand for their output? For example, instead of paying people in rich countries to buy their stuff, could they not pay their own people to buy their stuff?
That might seem a channel worth exploring. Perhaps the fear of the folks at the I.M.F. ruled out this option, but then our attention should be focused on the I.M.F. which made it necessary to have a trade-off between the well-being of workers in rich countries and the poor in the developing world.
In addition to the quantities of trade, there is also the question of the composition. Our trade deals focused on making it as easy as possible for U.S. manufacturing companies to set up operations in the developing world and ship back their output to the United States. There was nothing natural about this process. We could have structured trade deals to make it as easy as possible for people in the developing countries to train to U.S. standards and work as doctors, lawyers, dentists or in other highly paid professions in the United States.
This would have led to enormous gains in the United States as we would get these services at much lower cost. This argument is the same as the standard argument of gains from trade, except in this case the trade would be promoting equality in the United States rather than inequality. It also would have been possible to construct arrangements whereby a portion of the earnings of these professionals are taxed away and repatriated so that two or three doctors, dentists, etc. can be trained in the home country for everyone that comes to the United States. This is a great win-win story.
We also did not have to impose protectionism in the form of copyright and patent protection (especially on prescription drugs). These government-granted monopolies raise the price of the protected products by several thousand percent above the free market price. There is nothing natural about these forms of protectionism. It was Bill Clinton, not God, who gave developing countries patents and copyrights. These forms of protection are an enormous and unnecessary drain on the developing world.
Of course it can be argued that it would have been politically impossible to craft trade deals that helped developing countries at the expense of our professionals, and the drug and entertainment industry. This is entirely plausible, but then we aren’t looking at a moral argument as to why the working class in rich countries had to suffer to allow the poor in the developing world to benefit. We are looking at a political argument that professionals and corporate interests are powerful enough to ensure that development does not take place at their expense, which means that they can dump the burden on the working class.
This isn’t the way that most economists and intellectual types like to pose the issue. It is less satisfying and requires a bit more thought than just blaming rich country workers for being selfish. But what would you expect from people who couldn’t see an $8 trillion (@$10 trillion in today’s economy) housing bubble?
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