Basic Economics

by Sowell, Thomas

  Why are profit-seeking companies investing far more where they will have to pay high wages to workers in affluent industrial nations, instead of low wages to “sweatshop” labor in the Third World? Why are they passing up supposedly golden opportunities to “exploit” the poorest workers? Exploitation may be an intellectually convenient, emotionally satisfying, and politically expedient explanation of income differences between nations or between groups within a given nation, but it does not have the additional feature of fitting the facts about where profit-seeking enterprises invest most of their money, either internationally or domestically. Moreover, even within poor countries, the very poorest people are typically those with the least contact with multinational corporations, often because they are located away from the ports and other business centers.

  American multinational corporations alone have provided employment to more than 30 million people worldwide.{810} But, given their international investment patterns, relatively few of those jobs are likely to be in the poorest countries where they are most needed. In some cases, a multinational corporation may in fact invest in a Third World country, where the local wages are sufficiently lower to compensate for the lower productivity of the workers and/or the higher costs of shipping in a less developed transportation system and/or the bribes that have to be paid to government officials to operate in many such countries.

  Various reformers or protest movements of college students and others in the affluent countries may then wax indignant over the low wages and “sweatshop” working conditions in these Third World enterprises. However, if these protest movements succeed politically in forcing up the wages and working conditions in these countries, the net result can be that even fewer foreign companies will invest in the Third World and fewer Third World workers will have jobs. Since multinational corporations typically pay about double the local wages in poor countries, the loss of these jobs is likely to translate into more hardship for Third World workers, even as their would-be benefactors in the West congratulate themselves on having ended “exploitation.”

  REMITTANCES AND HUMAN CAPITAL

  Even in an era of international investments in the trillions of dollars, other kinds of transfers of wealth among nations remain significant. These include remittances, foreign aid, and transfers of human capital in the form of the skills and entrepreneurship of emigrants.

  Remittances

  Emigrants working in foreign countries often send money back to their families to support them. During the nineteenth and early twentieth centuries, Italian emigrant men were particularly noted for enduring terrible living conditions in various countries around the world, and even skimping on food, in order to send money back to their families in Italy. Most of the people fleeing the famine in Ireland during the 1840s traveled across the Atlantic with their fares paid by remittances from members of their families already living in the United States. The same would be true of Jewish emigrants from Eastern Europe to the United States in later years.

  In the twenty-first century, remittances are among the main sources of outside money flowing into poorer countries. In 2009, for example, the worldwide remittances to these countries were more than two and a half times the value of all foreign aid.{811}

  At one time, overseas Chinese living in Malaysia, Indonesia and other Southeast Asian nations were noted for sending money back to their families in China. Politicians and journalists in these countries often whipped up hostility against the overseas Chinese by claiming that such remittances were impoverishing the host countries for the benefit of China. In reality, the Chinese created many of the enterprises—and sometimes whole industries—in these Southeast Asian nations. What they were sending back to China was a fraction of the wealth they had created and added to the wealth of the countries where they were now living.

  Similar charges were made against the Lebanese in West Africa, the Indians and Pakistanis in East Africa, and other groups around the world. The underlying fallacy in each case was due to ignoring the wealth created by these groups, so that the countries to which they immigrated had more wealth—not less—as a result of these groups being there. Sometimes the hostility generated against such groups has led to their leaving these countries or being expelled, often followed by economic declines in the countries they left.

  Emigrants and Immigrants

  People are one of the biggest sources of wealth. Whole industries have been created and economies have been transformed by immigrants.

  Historically, it has not been at all unusual for a particular ethnic or immigrant group to create or dominate a whole industry. German immigrants created the leading beer breweries in the United States in the nineteenth century, and most of the leading brands of American beer in the twenty-first century are still produced in breweries created by people of German ancestry. China’s most famous beer—Tsingtao—was also created by Germans and there are German breweries in Australia, Brazil, and Argentina. There were no watches manufactured in London until Huguenots fleeing France took watch-making skills with them to England and Switzerland, making both these nations among the leading watch-makers in the world. Conversely, France faced increased competition in a number of industries which it had once dominated, because the Huguenots who had fled persecution in France created competing businesses in surrounding countries.

  Among the vital sources of the skills and entrepreneurship behind the rise of first Britain, and later the United States, to the position of the leading industrial and commercial nation in the world were the numerous immigrant groups who settled in these countries, often to escape persecution or destitution in their native lands. The woolen, linen, cotton, silk, paper, and glass industries were revolutionized by foreign workers and foreign entrepreneurs in England, while the Jews and the Lombards developed British financial institutions.{812} The United States, as a country populated overwhelmingly by immigrants, had even more occupations and industries created or dominated by particular immigrant groups. The first pianos built in colonial America were built by Germans—who also pioneered in building pianos in czarist Russia, England, and France—and firms created by Germans continued to produce the leading American pianos, such as Steinway, in the twenty-first century.

  Perhaps to an even greater degree, the countries of Latin America have been dependent on immigrants—especially immigrants from countries other than the conquering nations of Spain and Portugal that created these Latin American nations. According to the distinguished French historian Fernand Braudel, it was these immigrants who “created modern Brazil, modern Argentina, modern Chile.”{813} Among the foreigners who have owned or directed more than half of particular industries in particular countries have been the Lebanese in West Africa, {814}Greeks in the Ottoman Empire,{815} Germans in Brazil,{816} Indians in Fiji,{817} Britons in Argentina,{818} Belgians in Russia,{819} Chinese in Malaysia,{820} and many others. Nor is this all a thing of the past. Four-fifths of the doughnut shops in California are owned by people of Cambodian ancestry.{821}

  Throughout history, national economic losses from emigration have been as striking as gains from receiving immigrants. After the Moriscos were expelled from Spain in the early seventeenth century, a Spanish cleric asked: “Who will make our shoes now?”{822} This was a question that might better have been asked before the Moriscos were expelled, especially since this particular cleric had supported the expulsions. Some countries have exported human capital on a large scale—for example, when their educated young people emigrate because other countries offer better opportunities. The Economist reported that more than 60 percent of the college or university graduates in Fiji, Trinidad, Haiti, Jamaica and Guyana have gone to live in countries belonging to the Organisation for Economic Co-Operation and Development. For Guyana, 83 percent did so.{823}

  Although it is not easy to quantify human capital, emigration of educated people on this scale represents a serious loss of national wealth. One of the most striking examples of a country’s losses due to those who emi
grated was that of Nazi Germany, whose anti-Semitic policies led many Jewish scientists to flee to America, where they played a major role in making the United States the first nation with an atomic bomb. Thus Germany’s ally Japan then paid an even bigger price for policies that led to massive Jewish emigration from Nazi-dominated Europe.

  It would be misleading, however, to assess the economic impact of immigration solely in terms of its positive contributions. Immigrants have also brought diseases, crime, internal strife, and terrorism. Nor can all immigrants be lumped together. When only two percent of immigrants from Japan to the United States go on welfare, while 46 percent of the immigrants from Laos do, {824}there is no single pattern that applies to all immigrants. There are similar disparities in crime rates and in other both negative and positive factors that immigrants from different countries bring to the United States and to other countries in other parts of the world. Russia and Nigeria are usually ranked among the most corrupt countries in the world and immigrants from Russia and Nigeria have become notorious for criminal activities in the United States.

  Everything depends on which immigrants you are talking about, which countries you are talking about and which periods of history.

  Imperialism

  Plunder of one nation or people by another has been all too common throughout human history.

  Although imperialism is one of the ways in which wealth can be transferred from one country to another, there are also non-economic reasons for imperialism which have caused it to be persisted in, even when it was costing the conquering country money on net balance. Military leaders may want strategic bases, such as the British base at Gibraltar or the American base at Guantanamo Bay in Cuba. Nineteenth century missionaries urged the British government toward acquiring control of various countries in Africa where there was much missionary work going on—such urgings often being opposed by chancellors of the exchequer, who realized that Britain would never get enough wealth out of these poor countries to repay the costs of establishing and maintaining colonial regimes there.

  Some private individuals like Cecil Rhodes might get rich in Africa, but the costs to the British taxpayers exceeded even Rhodes’ fabulous fortune. Modern European imperialism in general was much more impressive in terms of the size of the territories controlled than in terms of the economic significance of those territories. When European empires were at their zenith in the early twentieth century, Western Europe was less than 2 percent of the world’s land area but it controlled another 40 percent in overseas empires. {825}However, most major industrial nations sent only trivial percentages of their exports or investments to their conquered colonies in the Third World and received imports that were similarly trivial compared to what these industrial nations produced themselves or purchased as imports from other industrial countries.

  Even at the height of the British Empire in the early twentieth century, the British invested more in the United States than in all of Asia and Africa put together. Quite simply, there is more wealth to be made from rich countries than from poor countries. For similar reasons, throughout most of the twentieth century the United States invested more in Canada than in all of Asia and Africa put together. Only the rise of prosperous Asian industrial nations in the latter part of the twentieth century attracted more American investors to that part of the world. After the world price of oil skyrocketed in the early twenty-first century, foreign investments poured into the oil-producing countries of the Middle East. As the Wall Street Journal reported: “Overall, foreign direct investment in the Arab Middle East reached $19 billion last year [2006], up from $4 billion in 2001.”{826} International investment in general continues to go where wealth exists already.

  Perhaps the strongest evidence against the economic significance of colonies in the modern world is that Germany and Japan lost all their colonies and conquered lands as a result of their defeat in the Second World War—and both countries rebounded to reach unprecedented levels of prosperity thereafter. A need for colonies was a particularly effective political talking point in pre-war Japan, which has had very few natural resources of its own. But, after its dreams of military glory ended with its defeat and devastation, Japan simply bought whatever natural resources it needed from those countries that had them, and prospered doing so.

  Imperialism has often caused much suffering among the conquered peoples. But, in the modern industrial world at least, imperialism has seldom been a major source of international transfers of wealth.

  While investors have tended to invest in more prosperous nations, making both themselves and these nations wealthier, some people have depicted investments in poor countries as somehow making the latter even poorer. The Marxian concept of “exploitation” was applied internationally in Lenin’s book Imperialism, where investments by industrial nations in non-industrial countries were treated as being economically equivalent to the looting done by earlier imperialist conquerors. Tragically, however, it is in precisely those less developed countries where little or no foreign investment has taken place that poverty is at its worst.

  Similarly, those poor countries with less international trade as a percentage of their national economies have usually had lower economic growth rates than poor countries where international trade plays a larger economic role. Indeed, during the decade of the 1990s, the former countries had declining economies, while those more “globalized” countries had growing economies.{827}

  Wealthy individuals in poor countries often invest in richer countries, where their money is safer from political upheavals and confiscations. Ironically, poorer countries are thus helping richer industrial nations to become still richer. Meanwhile, under the influence of theories of economic imperialism which depicted international investments as being the equivalent of imperialist looting, governments in many poorer countries pursued policies which discouraged investments from being made there by foreigners.

  By the late twentieth century, however, the painful economic consequences of such policies had become sufficiently apparent to many people in the Third World that some governments—in Latin America and India, for example—began moving away from such policies, in order to gain some of the benefits received by other countries which had risen from poverty to prosperity with the help of investments made in their countries by enterprises in other countries.

  Economic realities finally broke through ideological visions, though generations had suffered needless deprivations before basic economic facts and principles were finally accepted. Once markets in these countries were opened to foreign goods and foreign investments, both poured in. However small the investments of prosperous countries in poor countries might seem in comparison with their investments in other prosperous countries, those investments have loomed large within the Third World, precisely because of the poverty of these countries. As of 1991, foreign companies owned 27 percent of the businesses in Latin America and, a decade later, owned 39 percent.{828}

  Many economic fallacies are due to conceiving of economic activity as a zero-sum contest, in which what is gained by one is lost by another. This in turn is often due to ignoring the fact that wealth is created in the course of economic activity. If payments to foreign investors impoverished a nation, then the United States would be one of the most impoverished nations in the world, because foreigners took $543 billion out of the American economy in 2012 {829} —which was more than the Gross Domestic Product of Argentina or Norway. Since most of this money consisted of earnings from assets that foreigners owned in the United States, Americans had already gotten the benefits of the additional wealth that those assets had helped create, and were simply sharing part of that additional wealth with those abroad who had contributed to creating it.

  A variation on the theme of exploitation is the claim that free international trade increases the inequality between rich and poor nations. Evidence for this conclusion has included statistical data from the World Bank showing that the ratio of the incomes of the twenty highest-income
nations to that of the twenty lowest-income nations increased from 23-to-one in 1960 to 36-to-one by 2000. But such statistics are grossly misleading because neither the top twenty nations nor the bottom twenty nations were the same in 2000 as in 1960. Comparing the same twenty nations in 1960 and in 2000 shows that the ratio of the income of the most prosperous nations to that of the most poverty-stricken nations declined from 23-to-one to less than ten-to-one.{830} Expanded international trade is one of the ways poor nations have risen out of the bottom twenty.

  It is of course also possible to obtain foreign technology, machinery, and expertise by paying for these things with export earnings. The poorer a country is, the more that means domestic hardships as the price of economic development. “Let us starve but export,” declared a czarist minister—who was very unlikely to do any starving himself. The very same philosophy was employed later, though not announced, during the era of the Soviet Union, when the industrialization of the economy was heavily dependent on foreign imports financed by exports of food and other natural resources. According to two Soviet economists, writing many years later:

  During the first Five-Year Plan, 40 percent of export earnings came from grain shipments. In 1931 one third of the machinery and equipment imported in the world was purchased by the U.S.S.R. Of all the equipment put into operation in Soviet factories during this period, 80 to 85 percent was purchased from the West.{831}

  At the time, however, the growth of the state-run Soviet industrial complex was proclaimed a triumph of communism, though in fact it represented an importation of capitalist technology, while skimping on food in the Soviet Union. The alternative of allowing foreign investment was not permitted in a government-run economy founded on a rejection of capitalism.