Our Word is Our Weapon

Now Tim Worstall has responded to my response to his response to the NY Times article on Latin American farmers going out of business due in part to the market power of supermarket chains. In short, his argument seems to be that free trade is the panacea to end all panaceas and the faster Latin American farmes go out of business the better.

In my post, I pointed out that mass bankruptcy of Latin American farmers is not “progress”, since there few employment opportunities available in manufacturing and services and these farmers will probably just end up unemployed in an urban slum. Worstall seems to think this is okay, as “18 th Century England was not a great place to be a peasant farmer with an acre or two of land either”. Well, true, but we’ve moved on a bit since then, and if Worstall’s point is that the best the Latin American farmers can look forward to is a short life in a Satanic mill before dying of cholera he might have a hard job selling this whole process. He then goes off to talk about property rights in urban slums, which I think is irrelevant to the argument over whether oligoplistic supermarkets forcing farmers out of business when there’s no other jobs available is really a good thing.

Anyway, says Worstall, “None of this points to the idea that propping up inefficient peasant agriculture is a good idea. That’s just perpetuating one problem, instead of going and solving what we know are the others”. I disagree: sometimes, “Propping up inefficient peasant agriculture” may actually be the most efficient solution in the medium to long term, especially if
(a) the alternative is mass destitution,
(b) aid is spent on raising the productivity and efficiency of peasant agriculture, for example through infusions of know-how and better technology (like better agricultural techniques, tools, fertilisers, etc), improving transport and customs infrastructure and providing cheaper credit (the going rate of interest for peasant farmers in Guatemala is apparently 21%), and
(c) the problem is also being caused by market failures, in this case the aforementioned cost of credit, and the monopolistic and oligopolistic markets dominated by a few supermarkets.

It is not a free market that it is putting the Latin American farmers in the article out of business - it is a manifestly unfree market, dominated by oligopolistic supermarket who cancel orders on a whim and take weeks to make payments, simply because their dominant market position allows them to. Get rid of those market failures and we can start talking about progress.

Worstall goes on to talk about some research by Nordhaus (no link) which apparently found that 3% of the benefits of market changes went to firms and the other 97% to ’society at large’, or something. Again, this ignores the distribution of those gains within ’society’ (however defined), and I’d say the farmers in a desperately poor Latin American country who have to get by without the safety nets and high-quality social infrastructure we take for granted wouldn’t mind a bigger share of those ‘gains’. Worstall thinks this point negates my argument about redistribution, but it seems to me that it does exactly the opposite.

Worstall also disagrees with my argument that poor countries should be allowed protect themselves against imports of products heavilly subsidised by rich countries:

If the morons in Brussels are insane enough to send nearly free beef to Africa the correct response of Africans is to say “Thanks very much for your taxpayer’s money. We’ll go and do something else.” It is indeed a negation of the efficient use of resources which free trade leads to, it is indeed a costly diversion of said resources, but the Africans get richer at the expense of the EU citizens. It is us, after all, who are doing the subsidizing.

Well, no. The problem is that subsidies are preventing poor countries from trading in and profiting from what should be their comparative advantage. Worstall implies that, for example, the Jamaican dairy farmers bankrupted by subsidised milk imports from the EU should have used the opportunity to become sports car manufacturers, but oddly enough that didn’t happen. This is because those farmers had built up their businesses over years (decades in some cases), investing all the while in physical and human capital, only to see all that destroyed pretty much overnight by an outside force. All that investment was wasted, all that capital basically destroyed, all their expertise negated, and in that kind of situation it’s very hard indeed to start all over again at something completely different. Sure, the price of milk was lower, but unemployment was also much higher. We cannot expect peasant farmers to keep switching occupations on the whims of “morons in Brussels” (or Washington), because in real life expertise and capital are not infintely flexible but can become obsolete. In fact, the faster these external shocks come, the worse it usually is for those affected.

Ultimately, I’ve no wish to see peasant agriculture artificially maintained either, but I do object to farmers being forced out of business by oligopolistic supermarkets and export subsidies while some cheer on from the sidelines and call it progress. I also think that where genuine market forces are putting farmers out of business, some redistribution of income and wealth to cushion the blow and help them take up opportunities elsewhere is desirable. Since markets (and the gains from markets) now flow across borders, it seems only right for this redistribution to do so too.

Worstall finishes up by declaring that global ‘free trade’ would mean that “we would see productivity levels in currently poor countries rise to those of rich countries … If we actually had free trade in capital and goods (and, if possible, in labour) then global redistribution would simply happen, with no need for Governments and taxation to come into it.” Well, maybe, but the evidence (as opposed to the simplified, assumption-rich economics that tends to underly this kind of claim) doesn’t seem to support him. I seem to recall having a discussion with Worstall on his site (can’t find the link), in which he claimed that Latin America grew faster after the trade liberalisations of the 1980s and 1990s than it did in the import-substitution era beforehand. I pointed out that this was exactly wrong, but unlike Keynes, it seems that when the facts change, Worstall doesn’t change his mind. And if he thinks that South Korea, China or India, for example, developed as a result of ‘free trade’, then he’s very, very wrong.

(Updated 01/01/05 to clarify lines on ‘propping up inefficient agriculture’ and fix typos)

A New York Times editorial on the ’stinginess’ of the US in giving international aid has predictably aroused the ire of many in the land of the free. Daniel Drezner has a go at clearing things up:

1) Is the United States stingy with disaster relief? Compared to other OECD countries, no.

President Bush was correct in pointing out that the U.S. is the largest provider of “humanitarian relief aid” in terms of total dollars — in 2003, the U.S. gave $2.478 billion … Of course, the United States is also the biggest economy, so the raw dollar term doesn’t mean that much. What about in per capita terms? Here’s the ranking of contries by relief aid per capita per day (in cents, not dollars):

1. Norway 21.04
2. Sweden 11.81
3. Denmark 5.95
4. Switzerland 5.85
5. Netherlands 5.15
6. Belgium 2.94
7. United Kingdom 2.58
8. Finland 2.38
9. United States 2.34
10. France 2.17
11. Canada 2.10
12. Australia 1.93
13. Ireland 1.83
14. Austria 1.23
15. New Zealand 1.18
16. Spain 0.61
17. Germany 0.61
18. Italy 0.42
19. Greece 0.27
20. Japan 0.06
21. Portugal 0.03

Out of the 21 major donors, we’re ninth — hardly stingy, though not the most generous.

Since we’re looking at whether the US is ’stingy’, I think looking at aid in per capita terms gives just as incomplete a picture as the dollar total. After all, is a millionaire who signs a check for $50 really less ’stingy’ than a minimum wage worker who gives half that much? Per capita income in the US is significantly higher than almost every other country in that list, so I think another adjustment needs to be made. But it wouldn’t make an enormous difference, and Drezner is quite right to point out that in terms of humanitarian relief aid the US is nowhere near the stingiest, and that “the most shocking figure in that table is how ungenerous the Japanese have been on this front”.

Drezner goes on:

2) Beyond humanitarian relief, is the United States stingy with aid? Pretty much, yeah … Even if you factor in private giving, the United States ranks 19th out of 21 rich countries in terms of per capita expenditures, according to the 2004 Ranking the Rich exercise.

The disconnect between the US’s average generosity in terms of humanitarian relief and it’s relative stinginess in terms of overall aid highlights exactly the point repeatedly made by Jeffrey Sachs (and noted in a previous NY Times piece); i.e. the US only seems to stop being ’stingy’ when full-on disaster strikes and people are dying in droves, but won’t help people with the investment needed to actually prevent or greatly reduce the impact of the disaster (famine being the best example) in the first place. Sachs gives the example of Ethiopia, to which the US gave $500m in humanitarian relief after it was struck by a famine (as it is regularly), but only $4m in aid to invest in the kind of agricultural development that would reduce the risk of famine. As the NY Times asked, “How about giving aid before the explosion, not just after?”.

The discrepancy between aid for emergency relief and aid for investment strikes me as extremely wasteful in the long term in both human and financial terms, and the reasoning behind it is quite unclear. The cynical explanation is that US governments like getting credit for being big-shots during emergencies, or that it’s all part of some misguided Republican strategy to impart responsibility and moral fibre to the poor and huddled masses of the world, but I don’t know, and looking for reason behind US aid policy has long been a fool’s game anyway.

[Update: Japan was mentioned above as notably ungenerous in terms of humanitarian aid, but since this post was written it has massively increased (to about $500m) its promise of aid to help the tsunami victims. The US has also pledged hunreds of millions, and, more significantly in immediate terms, has an aircraft carrier group in the Aceh region ferrying supplies to cut-off areas by helicopter]

Tuesday’s New York Times had a long article about how small-scale farmers in Latin America are struggling to cope in markets increasingly dominated by giant supermarket chains. Tim Worstall responds:

This is progress folks, this is what allows civilisation itself to flourish. As less labour is used to grow the food then society has the food surplus to allow people to do other things, write operas, become actuaries, play sports, set up health systems, in short, to do all of the things that we regard as our right in the modern world. It’s being going on since the Neolithic. The reason that Latin America is poorer than, say, the US, is because the process is less developed there. We should not be looking for ways to help peasant farmers stay in business on their one and two acre plots. We should be looking for ways for them to join the mainstream, those of us who do not sweat under the open sky for a living. More industrialisation, more service industries, less peasant farming.

In my view, perhaps the most obvious problem with this paragraph (which I think reflects a widespread if limited perspective on economic development) is that it assumes ignorance on a suicidal scale amongst Latin American farmers, who apparently prefer to farm tiny unprofitable plots rather than take advantage of the various marvellous opportunities in industry and services. After all, if those superior alternatives were really there, then farmers would have to be pretty thick to not take them up. If we don’t assume mass stupidity, the persistence of a large unprofitable agricultural sector must be due to a lack of opportunity in other sectors. My point here is that development is best served by other sectors pulling labour out of agriculture through higher demand, rather than labour being pushed out of farming through mass impoverishment. The growth of huge slums of mass unemployment around Latin American cities suggests that manufacturing and services industries do not simply spring into existence at the appearance of a large pool of surplus labour. That labour will eventually be soaked up if growth in manufacturing and services is strong enough for long enough, but as the article points out there’s no sign of that in Latin America.

Another flaw in Worstall’s thinking is that he believes the simplistic theoretical assumption of a single unified economy reflects reality. That is, the ’society’ in which surplus is generated is the same one in which all that extra extra labour and all those new opportunities exist. This rather ignores the reality that the international division of labour can generate profits, opportunities and surplus labour in completely different countries, or even just in different and somewhat disconnected parts of the same country. The winners and losers from the ‘global economy’ are often part of the same broad economic system but quite distinct ’societies’. So while the supermarkets in the NY Times article (which are all part foreign-owned) probably send their profits away to generate wealth and opportunity in North America or Europe or the mansion districts of Latin American capitals, these effects don’t reach the people at the sharp end of the process, i.e. the impoverished farmers. Proponents of economic liberalisation often seem to simply assume that the ‘winners’ will somehow compensate the ‘losers’. This may have happened to an extent in the past, but in a world comprising a (narrowly) globalised economy and nationalised society/polity, it looks hopelessly naive.

Of course, a compensation process of this kind does quite often take place at the national level, particularly in developed countries. Redistributive systems effectively recycle a portion of profits to provide safety-nets and opportunities for the population. If not taken to extremes, the effects on growth seem to be positive, as safety-nets in the form of welfare actually encourage risk-taking behaviour, and public investment in health, education and economic infrastructure such as transport and power networks widen and deepen opportunity in general.

Similarly extensive systems are generally not found in developing countries, and there’s nothing of the sort at the international level, the one exception being the European Union, which implemented redistribution (generally in the form of massive investment in physical infrastructure) to accompany the introduction of the common market. This is one reason that poor countries like Ireland have generally done well out of European liberalisation.

The other difference between European and global economic integration is that migration is far more free between EU countries. Freeing up international migration would bring us much closer to a true global economy, but the difficulties of intra-national migration in many countries suggest that simply opening borders by itself won’t be sufficient. The political obstacles to freer international migration would be significant, more so I think than the obstacles to higher redistribution through say a doubling of international aid (as polls suggest people already believe aid is higher than it really is).

Another significant step towards a true global economy would be to completely eradicate the enormous subsidies with which rich countries distort world trading patterns in their favour. I don’t see how anyone who truly believes in free and fair trade can demand liberalisation by poor countries in products heavily subsidised by competitors. We tend to hear quite a lot, and rightly so, from proponents of free trade on what rich countries should do to stop distorting trade with subsidies, but surprisingly little on what poor countries should do to protect themselves against this particular form of econocide while the subsidies continue.

To sum up, I’ll stop being angry and start being surprised at the poverty and inequality generated by global economy (it obviously isn’t the only cause of poverty and inequality, but that’s another discussion) when it actually becomes a global economy in the true sense. And I think there’s three main steps we can take in that direction: global redistribution, freer migration and an end to distorting subsidies.

Interesting. Scanning Oxfam’s ranking of (some) OECD countries by their generosity on aid (ODA as % of GNI), it occurred to me that the list was kind of familiar. Generally, Luxembourgh and the Scandinavian countries are at the top, followed by the other social democratic countries of Europe, and towards the bottom you get the UK and other Anglo-Saxon economies, and finally the Southern Europeans. Familiar, because the ranking of countries according to their rate of absolute child poverty is quite similar (table is from UNICEF’s League Table of Child Poverty in Rich Nations).

Taking the sixteen countries that feature in both samples and plotting their child poverty ranking (1 is lowest child poverty rate) and aid generosity ranking (1 is most generous), we get the following chart, which shows a fairly close relationship from an admittedly small sample. Click the pic for a bigger version.

From one perspective (e.g. mine), this is enough to warm the bleeding heart of anyone who worries about a trade-off between compassion at home and abroad. From another perspective, it’s proof that some governments just don’t know when to stop giving away other people’s money to undeserving cases like the poor.

The relatively close relationship between aid generosity and low child poverty (and presumably, by proxy, high social spending) strikes me as slightly odd when you consider that aid spending makes up such a small proportion of government budgets. Similarly, aid budgets seem to suffer from a kind of inertia, generally changing only quite slowly. I’ve a feeling this is because they attract a degree of political attention disproportionate to their purely financial importance, partly due to the apparently widespread popular misconception that aid budgets are much higher than the reality.

Anyway, it makes a nice chart, and that’s the most important thing.

[Update: Just noticed that the similarity of the flags of Luxembourg and the Netherlands may cause some confusion. Luxembourg is the one on the left (number one on child poverty, number four on aid generosity), the Netherlands on the right (a bit of an outlier - number three on aid generosity but ninth on child poverty). Apparently their flags are almost identical, but on these versions (copied from Oxfam’s site, which may not be the best source - see the odd Stars and Stripes) the middle white band seems wider in the Dutch one.]