The Accidental Theorist: And Other Dispatches from the Dismal Science

by Paul Krugman

  In Praise of Cheap Labor: Bad Jobs at Bad Wages Are Better than No Jobs at All

  For many years a huge Manila garbage dump known as Smokey Mountain was a favorite media symbol of Third World poverty. Several thousand men, women, and children lived on that dump—enduring the stench, the flies, and the toxic waste in order to make a living combing the garbage for scrap metal and other recyclables. And they lived there voluntarily, because the ten dollars or so a squatter family could clear in a day was better than the alternatives.

  The squatters are gone now, forcibly removed by Philippine police in 1996 as a cosmetic move in advance of a Pacific Rim summit. But I found myself thinking about Smokey Mountain recently, after reading my latest batch of hate mail.

  The occasion was an op-ed piece I had written for the New York Times (“We Are Not the World”), 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.” I guess I should have expected that this comment would generate letters along the lines of, “Well, if you lose your comfortable position as an American professor you can always find another job—as long as you are twelve years old and willing to work for two dollars a day.”

  Such 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.

  Given this lack of other opportunities, you could hire workers in Jakarta or Manila for a pittance. But in the mid-seventies, cheap labor was not enough to allow a developing country to compete in world markets for manufactured goods. The entrenched advantages of advanced nations—their infrastructure and technical know-how, the vastly larger size of their markets and their proximity to suppliers of key components, their political stability and the subtle-but-crucial social adaptations that are necessary to operate an efficient economy—seemed to outweigh even a tenfold or twentyfold disparity in wage rates.

  And then something changed. Some combination of factors that we still don’t fully understand—lower tariff barriers, improved telecommunications, cheaper air transport—reduced the disadvantages of producing in developing countries. (Other things being the same, it is still better to produce in the First World—stories of companies that moved production to Mexico or East Asia, then moved back after experiencing the disadvantages of the Third World environment, are common.) In a substantial number of industries, low wages allowed developing countries to break into world markets. And so countries that had previously made a living selling jute or coffee started producing shirts and sneakers instead.

  Workers in those shirt and sneaker factories are, inevitably, paid very little and are expected to endure terrible working conditions. I say “inevitably” because their employers are not in business for their (or their workers’) health; they pay as little as possible, and that minimum is determined by the other opportunities available to workers. And these are still extremely poor countries, where living on a garbage heap is attractive compared with the alternatives.

  And yet, 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 teenager 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.)

  The benefits of export-led economic growth to the mass of people in the newly industrializing economies are not a matter of conjecture. A country like Indonesia is still so poor that progress can be measured in terms of how much the average person gets to eat; since 1970, per capita intake has risen from less than 2,100 to more than 2,800 calories a day. A shocking one-third of young children are still malnourished—but in 1975, the fraction was more than half. Similar improvements can be seen throughout the Pacific Rim, and even in places like Bangladesh. These improvements have not taken place because well-meaning people in the West have done anything to help—foreign aid, never large, has lately shrunk to virtually nothing. Nor is it the result of the benign policies of national governments, which are as callous and corrupt as ever. It is the indirect and unintended result of the actions of soulless multinationals and rapacious local entrepreneurs, whose only concern was to take advantage of the profit opportunities offered by cheap labor. It is not an edifying spectacle; but no matter how base the motives of those involved, the result has been to move hundreds of millions of people from abject poverty to something still awful but nonetheless significantly better.

  Why, then, the outrage of my correspondents? Why does the image of an Indonesian sewing sneakers for sixty cents an hour evoke so much more feeling than the image of another Indonesian earning the equivalent of thirty 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.

  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.

  A Note on Globalization

  My favorite concrete example of the driving forces behind globalization is the recent and rapid rise of Zimbabwe’s vegetable exports. In recent years, truck farmers near Harare have got into the business of supplying fresh vegetables to London markets. The vegetables are picked and trucked immediately to the airport, flown through the night to Heathrow, and are there on the shelf in Tesco the next morning.

  This export business depends on at least three things. First, it depends on cheap air transport—the beat-up old Boeings that have become the tramp steamers of modern commerce. Second, it depends on modern telecommunications—the vegetables are delivered to order, which means that messages must be sent to the farmers in a way that used to be possible only in advanced countries with good phone systems. Finally, of course, the trade depends on an open British market. It could not happen if import quotas or high tariffs prevented the sales.

  Now how do you feel about all of this? Here are some facts: The vegetables are produced using “appropriate technology”—that is, they are hand-grown and handpicked, using labor-intensive methods with relatively little machinery. As a result, the truck farms create quite a few jobs in an economy that desperately needs them. They are nonetheless cost-competitive because the workers are paid low wages, which they are happy to get given the lack of other opportunities. And, oh yes, the workers are black—and not only are their British customers white, but the farmers who employ them are white colonial settlers who have chosen to stay on under the new regime.

  The East Is in the Red: A Balanced View of China’s Trade

  Want an easy way to eliminate the U.S. trade deficit? Just declare New York City a separate “entity,” with its own balance-of-payments statistics. I can almost guarantee you that the trade deficit of the rest of the country—call it “mainland America”—will disappear.

  After all, if New York’s numbers were counted separately, we would no longer treat goods imported into New York as debit items in the U.S. balance of payments. Furthermore, all of the goods that mainland America ships to New York City would be considered U.S. exports. True, the goods that New York ships to the rest of the world would be struck off the export tally, while the goods the city ships to the rest of the United States would henceforth count as U.S. imports. But these would be minor adjustments: New York City is basically not in the business of producing physical objects. So we can be sure that the city runs a huge trade deficit—probably bigger than that of the United States as a whole, which is why splitting it off from the rest of the country would give the mainland a surplus.

  Of course, most if not all of New York’s deficit in goods trade is made up for by exports (to mainland America and the world at large) of intangibles such as financial services and tickets to see Cats; and the city also has a disproportionate number of wealthy residents, who receive lots of income from the property they own elsewhere. It would not be surprising to find that the city actually runs a surplus on its “current account,” a measure that includes trade in services and investment income as well as the merchandise trade balance. But if it’s the trade deficit you worry about, splitting New York off from mainland America will take care of the problem. Nothing real would have changed, but maybe it would make some people feel better.

  What inspires this idea is China’s assumption of political control over Hong Kong, which removes the last faint excuse for treating China and Hong Kong as separate economies—and therefore offers a way to make some of the same people feel better about another trade issue, the supposed threat posed by China’s trade surplus. In recent years, China-sans-Hong Kong—what we used to call “mainland China”—has been running large and growing surpluses in its merchandise trade (although its balance on current account has fluctuated around zero). But China-plus-Hong Kong does not run big trade surpluses. In the year ending in April 1997, China ran a trade surplus of almost $24 billion—but Hong Kong, as one would expect for a mainly service-producing city-state, ran an offsetting deficit of $19 billion, reducing the total to a fairly unimpressive $4.6 billion. China’s trade surpluses, in other words, are largely a statistical illusion produced by the fact that so much of the management and ownership of the country’s industry is located on the other side of an essentially arbitrary line.

  Pointing this out doesn’t change anything real, but perhaps it may help calm some of the fears being fostered by underemployed Japan-bashers who, like old cold warriors, have lately gone searching for new enemies.

  Professional trade alarmist Alan Tonelson gave a particularly clear statement of the new fears in his New York Times review of The Big Ten: The Big Emerging Markets and How They Will Change Our Lives, a book by former Commerce Undersecretary Jeffrey Garten. (The review caught my eye because some of it matched word for word a speech by House Minority Leader and presidential hopeful Richard Gephardt.) After praising Garten for taking seriously the possibility that “the growing ability of the 10 to produce sophisticated goods and services at rock-bottom prices could drag down the standard of living of even affluent, well-educated Americans,” Tonelson chided him for imagining that developing countries, China included, would provide important new markets for advanced-country exports: “[C]onsumer markets in these emerging countries are likely to stay small for decades…if they don’t keep wages and purchasing power low, they will have trouble attracting the foreign investment they require, both to service debt and to finance growth.”

  I am always grateful when influential pundits make such statements, especially in prominent places, for in so doing they protect us from the ever-present temptation to take people seriously simply because they are influential, to imagine that widely held views must actually make at least some sense.

  Tonelson’s claim is that as emerging economies grow—that is, produce and sell greatly increased quantities of goods and services—their spending will not grow by a comparable amount; equivalently, he is claiming that they will run massive trade surpluses. But when a country grows, its total income must, by definition, rise one-for-one with the value of its production. Maybe you don’t think that income will get paid out in higher wages, but it has to show up somewhere. And why should we imagine that people in emerging countries, unlike people in advanced nations, cannot find things to spend their money on?

  In fact, one might well expect that emerging economies would typically run trade (or at least current account) deficits. After all, such countries will presumably attrac
t inflows of foreign investment, allowing them to invest more than they save—which is to say, spend more than they earn. To put it another way, a country that attracts enough foreign investment “both to service debt and to finance growth” must, by definition, buy more goods and services than it sells—that is, run a trade deficit. The point, again, is that the money has to show up somewhere.

  How can a country run a trade deficit when it has the huge cost advantage that comes from combining First World productivity with Third World wages? The answer is that the premise must be wrong: When productivity in emerging economies rises, so must wages—that is, the supposed situation in which these countries are able to “produce sophisticated goods and services at rock-bottom prices” never materializes.

  I am sure that, despite its logic, my position sounds unrealistic to many readers. After all, in reality Third World countries do run massive trade surpluses, and their wages don’t rise with productivity—right?

  Well, let’s do some abstruse statistical research—by, say, buying a copy of the Economist and opening it to the last page, which each week conveniently offers tables summarizing economic data for a number of emerging economies. We immediately learn something interesting: Of Garten’s Big Ten, six run trade deficits (as does the group as a whole); nine run current account deficits. Of the twenty-five economies listed, seventeen run trade deficits and twenty run current account deficits. Wage numbers are a little harder to come by, but the U.S. Bureau of Labor Statistics makes such data available on its Foreign Labor Statistics Web site. There we find that in 1975, workers in Taiwan and South Korea received only 6 percent as much per hour as their counterparts in the United States; by 1995, the numbers were 34 percent and 43 percent, respectively.

  Surprise! The facts fit the Panglossian economist’s vision quite nicely: Emerging economies do typically run trade deficits, wages do rise with productivity, and actual experience offers no support at all for grimmer visions.