In a
previous post (http://thinkingabouthumansociety.blogspot.ca/2013/03/issue-analysis-welfare-social-safety-net.html),
I came out in favor of a governmentally-provided minimal social safety net for
the desperately poor. When I was writing that post, the implicit context was
that this policy would apply in a sovereign nation-state in a relatively
economically developed part of the world (North America, Europe, some of East
Asia). As was recently pointed out to me though, the question remains: what to
do about desperately poor people in ‘third-world’ countries? Do they get a
minimal social safety net too?
The question
is complex because of the fact that there isn’t a single world government, but
multiple territorially-bounded governments in the world. One could just
recommend that every government apply that policy, but what if they don’t? Then
the question becomes: what can the government of the first-world country that I
live in do to help desperately poor people in the third world countries?
One option
is to get the first world governments in question, with their own taxpayers’
resources of course, to bankroll minimal social safety nets for people in the
third-world. There are numerous problems with this solution though, above and
beyond the problems of just providing a social safety net nationally. They are:
1. Administrative
Difficulties: Who exactly is going to operate the safety net programs? Will it
be the foreign first world government who is funding the program, or will it
be the government of the third-world country in question? If the former, the
government of the third-world country might protest that allowing foreign
governments to administer programs within ‘their jurisdiction’ is a violation
of their sovereignty, thus potentially creating international tensions. Also,
there would be personnel issues and language/cultural-barrier issues, as the
first world government would need to hire all manner of personnel to operate in
the third-world country, personnel who might not speak the language well enough
or be familiar enough with the country’s culture. If the third world government
administers it, how can the first world government ensure that the program is
being administered properly? How can they ensure that it is not turning into
something that was not intended or ensure that the money isn’t being
misappropriated by corrupt officials?
2. The ‘Bad Government’ Trap: As many international charities
have found out, it is difficult to make a lasting difference in the living
standards of the people they are trying to help if these people live under a
government that is corrupt, oppressive, or that generally adopts policies that
are not at all conducive to economic development. Most people would probably agree
with the adage that it is better to teach a man to fish so that he can support
himself in the future than to just give him some fish to eat in the present.
But under a terrible government, trying to help people to help themselves is
like trying to teach someone to fish in an area where government officials have
prohibited fishing. It must be very frustrating trying to help people whose
governments, through corruption, oppression, or bad policies, basically prevent
those people from using the help to actually better their material conditions
in a sustainable way. If first world taxpayers are to be expected to fund a
social safety net for the third world, they should at least be assured that the
government of the third world country won’t be able to seriously reduce the
effectiveness of their help through corruption, oppression, and bad policies.
The only real way to assure this though, is for the government of the first
world country, or for a world government, to take over the administration of
the third world country. Though possible, it seems highly unlikely that this
would ever occur, due to the territorial jealousy of every government in the
world and because of the memories of 19th century European
imperialism that this would bring up.
3. Magnitude Issues: One of the reasons why, in my previous
post linked to above about welfare social safety net policies, I came out in
favor of a very minimal safety net was because I assumed that, being applied in
a developed country, the cost to the taxpayers wouldn’t actually be that high,
and thus it wouldn’t too seriously hamper economic development through the
higher taxes it would entail. If first world taxpayers are to be expected to
fund a safety net that covers all the impoverished masses of the third world,
this assumption has to go straight out the window. Also, because the wage rates
and standard of living of the poorest working members of third world societies
are substantially lower than those of the poorest working members of first world
societies, the standard of living provided by the minimal social safety net
would have to be set at a much lower level in the third world country than in
first world countries, if the safety net is not to dissuade people who are capable
of it from starting to work their way up the employment ladder of their society. If
it was set at this much lower level in the third world countries, this would
help make the program less costly for first world taxpayers and help minimize
the perverse incentive problem. This would make the program more feasible to
implement, though the egalitarians of the world would no doubt oppose this
‘unfair treatment’, and would undoubtedly push for a more generous safety net
program in the third world.
4. Sympathy Issues: As a general rule, people have more
sympathy for others who share things in common with them. In particular,
geographical vicinity, cultural similarity, and sharing a language generally
results in more sympathy between people than when these things are absent. For
a welfare social safety net program, which heavily relies on sympathy for its
popularity, getting first world taxpayers to pay for the safety net of people
who live halfway across the world, have completely different cultural traditions,
and have a completely different language would probably make the program more
unpopular than the same program applied on a more local scale. This is not a
decisive objection against the program, but it is definitely something to keep
in mind when considering the feasibility of the program.
Now, the
establishment of a world government or of colonial government could potentially
solve the first and second problem, but the third and fourth would remain.
Since the establishment of either a world government or a colonial government
over a populous third world country is incredibly unlikely, all four problems
will probably remain, making a world minimal social safety net, in my view,
unfeasible.
If we
admit that this idea is unfeasible, what can be done by citizens of first world
countries to help the impoverished masses of the third world? Before we answer
this question, we need to understand why inhabitants of third world countries
are so much poorer than inhabitants of first world countries in the first
place. For that, we need to keep in mind a few fundamental principles of
international economics:
1. The only way to make real wages (wages in terms of the
real resources the money wage can buy, as opposed to the money, or nominal,
wage rate alone) go up significantly and sustainably is to increase the average
productivity of workers. The more productive the worker, the more they can
contribute to the production of an employer, and the more they can contribute,
the more (real resources) employers are going to be willing to pay for their
services. The major way to increase the productivity of workers is to equip
them with more and better capital goods (capital goods including machines,
tools, equipment, vehicles, factories, commercial buildings, etc…), and to
integrate them in a more sophisticated production structure. In turn, the only
way to do this is through saving and capital accumulation, as I talk about
briefly in tip #27 here: (http://thinkingabouthumansociety.blogspot.ca/2013/03/how-to-think-about-human-society-tips.html)
2. The more incentive to produce well for the consumers and
to save resources for the future, and the more resources that are left in the
hands of thrifty, productive people who are skilled at investment for them to
save and invest, the more saving, investment, and capital accumulation will
occur. Levying high taxes on corporations, the incomes of rich people, and inheritances
retards capital accumulation or, if pushed far enough, can result in capital
consumption, as I talk about in effects #1 and #3 here: (http://thinkingabouthumansociety.blogspot.ca/2013/03/issue-analysis-higher-taxes-on-wealthy.html)
3. The main reason for significant real wage differentials
between different parts of the world is differing amounts of capital available
per active worker. Many third world countries have a higher population density
than first world countries, meaning more active workers to ‘distribute’ capital
to, and they generally have less accumulated capital available within their
borders than first world countries do.
4. Luckily for the inhabitants of third world countries, the
owners of capital seek to invest capital in locations where, other things
equal, there is better land/natural resources available and where, due to a
higher supply of active workers, market conditions allow for a lower wage rate
to be paid to acquire the services of workers. This latter condition especially
is fulfilled by many third world countries, and as long as the governments of
these countries aren’t too predatory or disrespectful of the property rights
of foreign investors, foreign capitalists will be eager to invest their capital
within these countries. This explains the phenomenon of ‘outsourcing’ a lot of
manufacturing that is destined to be consumed in the first world to China and
India. Even with the extra transportation costs that must be paid, the lower
wages prevalent in these countries makes the outsourcing economically rational.
The more such foreign capital is invested within these countries, the more the
real wages of workers in these countries will go up, as long as their
populations do not expand too rapidly.
5. Though land and natural resource sources are immovable,
labor is mobile, as long as immigration or migrant labor is permitted. Thus, in
the absence of immigration barriers, the laborers from relatively overpopulated
countries will tend to be drawn, as long as their psychic attachment to their
homeland is not powerful enough, by the allure of higher prevailing real wage
rates, to relatively under-populated countries with more capital accumulated
within their borders.
With these
principles in mind, we can now think of things that could help the working
populations of third world countries improve their standards of living. The
first is not to place any restrictions on the natural flow of capital from
relatively under-populated to relatively overpopulated countries, and for the
governments of third world countries to respect the property rights of foreign investors.
This will tend to increase the average real wage in these countries, and give
them a head-start on further economic development.
The second
is to allow people from impoverished, relatively overpopulated and capital-poor
countries to immigrate to, or work as migrant laborers in, developed,
relatively under-populated and capital-rich countries. This will allow these
workers to earn higher real wages and to enjoy a higher standard of living.
Besides
directly helping workers in poorer areas of the world, these policies would
also be beneficial to the world’s consumers, taken as a whole, and would increase the general
productivity of the world economy. This is because the more capital is allowed
to be invested freely in areas with relatively favourable land and labor conditions,
the more the international division of labor can be extended and the more
efficient it can be made, and thus the more productive the world’s workers and
the world economy as a whole can be.
Contrary to
Marxist fables, this increased productivity does not just result in higher
profits for ‘exploitative’ capitalists, with the living standards of workers
and consumers remaining unchanged. In reality, an increase in productivity that
begins as a source of exceptionally high profits for the innovative businessmen
and capitalists who push for it, soon becomes, due to the imitation of these
successful profit-making tactics by other businessmen and capitalists or even
the potential threat of such imitation, indispensable means for even keeping up
with the competition at all. In a drive for increased market share and
competitive advantage, businessmen will use the lower unit costs of production,
made possible by the increase in productivity, to lower the market price of the
good or service in question. This, in turn, increases the purchasing power of
everyone’s income, which means that the same money income can now buy more in
terms of real goods. Among other things, this means that every worker gets an
automatic real wage increase, even if their money wage rate stays the same or
is lowered by less than the increase in productivity.
Besides
this, these more productive arrangements will most likely result in more
capital accumulation. This is because if the average productivity of capital
goods is increased by them being invested in areas with more favourable land
and labor conditions, a greater share of the producers’ (as opposed to the consumers’)
output of those capital goods can be devoted to producing additional quantities
of capital goods, rather than to just maintaining intact the existing quantity
of capital goods or their substitutes. The likely result is real capital
accumulation, that can take place even if more monetary saving does not take
place, and thus which can take place alongside the increased production of
consumers goods mentioned in the preceding paragraph.
It is with
these beneficial effects in mind that we can now turn to examining the
arguments against the free international flow of capital and the free
international movement of labor. The primary economic objection is made on
behalf of the workers of the first world, relatively under-populated,
capital-rich countries. If more capital is exported from these countries than
is imported, or if the supply of labor, due to immigration, is increased faster
than capital is accumulated or imported, the money wages of the average worker
in these countries will fall.
In response,
though such a fall in money wages for first world workers could happen, the
increased productivity of free international economic arrangements would result
in an increase in the purchasing power of each monetary unit of wage received,
as outlined above. It would also result in real capital accumulation, meaning
more real capital to go around, meaning a higher real wage for the workers of
any areas this additional capital is invested in, as also discussed above. How
quickly this rise in general real wages would make up for the possible fall in the
money wage rates of first world workers is an empirical question, open only to
estimation.
At the end of the day though, the
objection is not consistent with the context of this discussion in the first
place, which is how best to help the impoverished masses of third world
countries. If the goal is to maximize the short-term incomes of first world
workers, than neither a world welfare state nor allowing the free flow of
capital and labor would be the way to go.
If, however,
the goal is to help these impoverished masses, preferably in a way that doesn’t
require too much sacrifice on behalf of first world citizens, than the free
flow of capital and labor most certainly is the way to go. This policy has the
potential not only to help impoverished third world residents without requiring
too much first world sacrifice, but to help them while increasing the long-run
standards of living of the entire world, including the first world workers who might
experience a short-term drop in their real wages. And given that a world
welfare state is both unfeasible, as we discussed above, and even if feasible
would require actual long-run and short-run sacrifices in living standards on
the part of the first world, capitalists and workers alike, to implement, I can
only conclude that allowing the free flow of capital and labor is the best
solution to the problem of third world poverty.
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