Comparative advantage of poverty

[Chris Burford <cburford@xxxxxxxxxx>]

The Europhile resident correspondent in Paris of the International Herald
Tribune promoting European interventionist economics rather than Bush's
liberal world market.

Chris Burford





Bush's remedy is only half a loaf   William Pfaff   International Herald
Tribune Thursday, March 28, 2002


PARIS The great policy debates tend by nature toward caricature. The issues
themselves tend to get settled in practice, but the vocabulary of
confrontation is confiscated and perpetuated by partisans.

The U.S. argument in Monterrey last week was that market development is
better for poor countries than assistance or loans from the international
development agencies leading to state action. Experience and pragmatism say
that the answer to that is yes - or no - or both.

Obviously, it is better to provide people with the mechanisms of
self-improvement than to hand out charity.

The microloan technique, for example, originated in Bangladesh, giving tiny
loans to women to create tiny enterprises, gets certain communities more
effectively out of poverty than certain top-down development projects of
the kind traditionally favored by the international lending agencies.

On the other hand, you can't attack the grave social ills of lack of
education, public health and corruption, or create infrastructure, with
microloans.

Foreign investment is Washington's remedy for poverty, as President George
W. Bush again made plain with his speech in Monterrey. This works by
drawing societies into the international economy. And this, as experience
again shows, has negative, as well as positive, consequences.

When it works, it is because - to use David Ricardo's term - being poor is
the comparative advantage possessed by the poor. Because poor countries are
poor, they can furnish investors with low-cost and docile labor. This is an
advantage that automatically disappears if development is successful.

The investors move on. Ricardo, an 18th-century English economist, was also
the author of what he called the iron law of wages, which says that wages
tend to stabilize at just above subsistence level. This is because if wages
rise, so does demand for the jobs, and the competition for employment will
tend to force wages back down.

This until recently has been largely theoretical, since the theory only
works if the labor supply is infinite - and in practical terms, because of
geographical, political, craft and trade union barriers, the available
labor supply in most situations is limited.

For labor, the unfortunate consequence of globalization has been that it
has at last created the world of David Ricardo's theory, in which the pool
of labor is virtually unlimited. That is what has been at the heart of the
debate over globalization for the past decade.

In Europe, where free markets have never enjoyed quite the unqualified
enthusiasm they enjoy in the United States, centrally directed development
is again gaining respect because of the contrast between the highly
successful state infrastructure development of certain continental
countries and the fiasco of infrastructure privatization in Britain.

Continental Europe's steadily enlarging network of high-speed railways has
had an enormously beneficial effect on economic and political
decentralization and the internationalization of industry.

Public enterprise does not even have to be state- financed. Some European
superhighway systems have been built by public corporations using private
investment, guaranteed by toll income. Privatization of these corporations
now is under consideration in France, but the highways would never have
been built by the private sector acting alone.

A recent Milken Institute Review article about America's economic "myths,"
by three former high officials of the Johnson administration - Charles
Zwick, Peter Lewis and Robert A. Levine - cites some of the public
institutions that have been essential to the success of the modern American
economy.

These include the Federal Deposit Insurance System, the Federal Housing
Administration, the Interstate highway system, rural electrification and
the Tennessee Valley Authority, and the National Institutes of Health.

Economic development is not spontaneous. It has to be directed. That was
not part of the American message at Monterrey, but it should have been.