Is The Global Economy *REALLY* Competitive?

John A. Quayle blueoval57 at VERIZON.NET
Mon Dec 1 09:45:22 MST 2008


Why Are Wages Low in Developing Countries?

Daily Article by <>Art Carden | 
Posted on 12/1/2008

Low wages in developing countries are among the many sins allegedly 
committed by global capitalism, but few of those making the charge really 
stop to think about why wages are so low in some developing countries.

In his 2007 book <>The Myth of 
the Rational Voter, economist Bryan Caplan proposes an interesting thought 
experiment which suggests that people implicitly accept the results of 
competitive markets. Caplan asks if those who criticize companies that pay 
low wages overseas feel that they could get rich quick by investing all of 
their resources in overseas enterprises ­ specifically, enterprises in poor 
countries. After all, it stands to reason that if workers in developing 
countries are underpaid and exploited, a profit-seeking businessperson 
would be able to reap immediate profits by hiring the workers away from 
their current occupations and re-employing them elsewhere.

If people pass on the opportunity, Caplan argues, then they implicitly 
accept the tragic-but-nonetheless-real fact that workers in very poor 
countries simply are not very productive. Low wages, then, are not the 
product of exploitative multinational corporations but of extremely low 
productivity. The relevant question for those concerned about the very poor 
is not "how do we convince (or force) multinational corporations to pay 
more" but "how can we improve the productivity of the world's poorest workers?"

This is where there is room for improvement, and this improvement should 
come by improving contracting institutions in poor countries. I don't have 
the specific local or cultural knowledge to know exactly how these 
institutions will evolve, but socially conscious investors or activists 
should try to encourage the development of institutions that constrain 
coercion and limit fraud.

Suffice it to say that the strategy of blocking overseas investment is 
ineffective at its best and positively harmful at its worst. I'm willing to 
grant the possibility that global labor markets are monopsonistic rather 
than competitive, but international capital flows suggest that this is not 
the case.

In a study of wages and working conditions in developing countries, 
economists Benjamin Powell and David Skarbek found that the textile 
sweatshops derided by rich westerners offer higher wages and better working 
conditions than the alternatives in very poor countries. People in 
developing countries need more sweatshops rather than fewer.

On the domestic front, people have argued that they are for "free trade" 
but that environmental standards should be improved so as to ensure that 
workers in poor countries are not exploited and their environments 
pillaged. But this eliminates poor workers' competitive advantage, reduces 
the possible gains from trade, and relegates them to an underground labor 
market of prostitution or picking through garbage dumps.

Regulation also will not change the productivity of very poor workers. It 
will only change the incentives, and this will likely produce unwanted 
consequences. Environmental regulation and onerous labor laws will alter 
the incentives in such a way as to increase the relative profitability of 
evading the law, tilting the competitive balance in favor of the relatively 

"That might be true," people might respond, "but can't multibillion-dollar 
multinational corporations afford to pay more? Isn't it unconscionable that 
CEOs are able to take home millions while workers in underdeveloped 
countries earn mere cents per hour?"

Is it sad? Yes. Is it unconscionable? No. Can companies "afford to pay 
more?" Again, the answer is no. Firms might be able to pay above-market 
wages in the short run, but in addition to operating in internationally 
competitive labor markets they also operate in internationally competitive 
capital markets and internationally competitive goods markets. Firms that 
sacrifice profits in order to pay higher wages will reduce their ability to 
earn profits, attract capital, and expand in the future. In the short run, 
we can improve standards of living for some people. In the long run, this 
illusory prosperity comes at the cost of increasing future poverty.

The current crisis faced by American automakers provides a useful and 
tragic case in point. For years, they were able to pay some workers at 
union pay scales with union benefits. Over time, however, they were 
undercut by competitors who were unhampered by these costly restrictions 
and they were themselves sharply restricted in their ability to expand. 
Now, apparently, there isn't anything left to loot.

Finally, when it comes to a firm's production decisions, wages are not all 
that matters. Firms will invest in inputs ­ say "unskilled labor" and 
"skilled labor" ­ until the ratio of the marginal products of the factors 
to the prices of the factors are equal for all inputs. If an American 
worker earns $30 per hour while a Chinese worker earns $1 per hour, this is 
not by itself sufficient to show that investing in China is in a firm's 
best interests. If the American worker can produce 120 units of output in 
an hour while the Chinese worker can only produce two, then producing the 
good in the United States is actually cheaper. Each unit produced in the 
United States costs twenty-five cents, while each unit produced in China 
costs fifty cents.

The idea that expanding and integrating the global marketplace exploits the 
poor is a myth that causes avoidable misery. Protesting and trying to slow 
the advance of international capitalism is not the solution. Encouraging 
the development of institutions in which the world's poor can increase 
their productivity is.



Art Carden is assistant professor of economics and business at Rhodes 
College and an adjunct fellow of the Independent Institute. He has been a 
visiting research fellow at the American Institute for Economic Research, 
and a summer research fellow at the Ludwig von Mises Institute. Comment on 
the <>blog.
<>Join the Mises Institute 
<> Store
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