One of the reasons why developing countries are failing to progress is the fact that the bright students who come to the countries like Australia to receive an education, fail to return home to give their home country the benefit of their education. Instead they remain here because they decide it is a much better place to live and our greedy government wants to keep their new found talents here. Unless we send them home again, this situation will continue.

David

The analogy used, that of a developing nation is like a child, is to suggest the developing world is too immature to carry on the business of “nation running” and should be re-colonized by the developed world.

“Tilting the playing field is not just a matter of fairness. It is about helping the developing countries grow faster. Because faster growth in developing countries means more trade and investment opportunities, it is also in the self-interest of the rich countries.”

I recall Bob Hawke’s speech on a level playing field. Being ofr smaller government and an anti-protectionist, it was one of the few speeches of hawke’s that I could agreed with.

Suggesting the playing field be tilted now is as stupid a suggestion as I have ever heard and will do nothing to help developing countries. Indeed, the inevitable result will be of one nation matching tariffs and quotas with another and the negative impact on the consumers of both developed and developing nations will produce a world recession, which whilst impoverishing the developed world will devastate the developing.

The thing that the developing world needs more that anything is education, particularly of young girls, as this is the only non-violent way to reduce the rise in their population. If this is not done, and the third world population doubles to 8 billion over the next 25 years, there will be no hope for the world. The first world population has stabilised, and we must do the same for the rest of the world, otherwise the environmental effects such as global warming will be catastrophic.

To see the success of these policies, you only have to look at countries that have managed to control their population such as Japan (in the late 1940's), and China, with its one child policy. These countries demonstrated that you have to control population first, and increased living standard comes after.

Of course this policy would be violently opposed in many third world countries, particularly muslim ones, who hope to conquer the world by population pressure. This opposition may require sanctions (countries not agreeing to educate their girls would lose all trade, investment and tourism), and could even require military intervention.

It never ceases to amaze me that people become concerned about topics such as pollution and global warming, without realising that they are but symptoms of the wider problem, overpopulation, and that if you don't fix the overpopulation, all other efforts will be in vain.

If we don't fix the overpopulation problem, it will be done by the four horsemen of the apocalypse, namely WAR, FAMINE, PESTILENCE, and DEATH.

As the author suggests, the “infant industries” argument has a long and fairly non-controversial role in economic theory.

The problem has been that, in practice, the protected infants seldom grow up to be strong and competitive adults.

Behind protectionist tariff walls industries have no incentive to innovate, to reduce costs and improve efficiency, or provide customers with the goods and services they most want.

India’s recent economic history provides a very good example of the dangers of protectionism. Its heavily regulated and protected manufacturing industries sustained only modest growth producing expensive and sub-standard products until its governments started a program of economic reforms in 1991, since when its growth has accelerated markedly.

http://imf.org/external/pubs/ft/wp/2004/wp0428.pdf

To extend the analogy, the solution may be to place the protected infant on a very strict and transparent weaning program, permitting high levels of protection initially but phasing them down over a number of years – rather as Australia has done with its once highly protected motor vehicle and textile clothing and footwear sectors.

However, this requires courage and nerve on the part of governments that inevitably face huge pressure from protected industries and those that benefit from their protection (such as labour unions) to sustain protectionism.

As India’s experience suggests, after an initial shock the “cold shower” effects of more rapid deregulation can actually lead to better economic growth in a relatively short period.

An excellent and well argued article. I was interested in this rebuttal argument by Rhian;
"Behind protectionist tariff walls industries have no incentive to innovate, to reduce costs and improve efficiency, or provide customers with the goods and services they most want."
Surely this would only be true if a domestic monopoly existed; i.e. why is domestic competition be naturally inferior to international competition?
And even in a domestic monopoly... I remember when Telecom had regional depots, and repairs would be carried out in the middle of a Saturday night.
Now, thanks to a more 'rational', 'competitive' environment, if my phone line in QLD plays up, I have to wait until an unspecified no. of other complaints occur before it's viable to send a crew up from Victoria.
That's progress?
In the sixties, we proved conclusively that if we kept paying the Japanese to manufacture our goods, they inevitably got richer, while we got poorer.
It's pretty simple, really. If you take money out of your pocket to give to someone else, they end up with your money.
wow.
When we import goods from other countries, we are employing workers in other countries.
those workers pay taxes in other countries.
Those other countries get rich.
Duh.

The employers in the other countries get rich, but don't kid yourself that too much of it gets to the workers.

It is taking even the Chinese a while to catch up and look at the cost in terms of pollution.

David

Grim
Domestic competition could in theory induce innovation.

Infant industries arguments, however, are used in favour of developing countries protecting new (hence “infant”), capital intensive industries requiring large lumps of capital to be economically viable – car or aircraft manufacture, for example – which (it is argued) will not spontaneously evolve in developing countries in the face of the economies of scale and incumbency advantages of established competitors. Hence they cannot by definition face domestic competition (or they would not be “infant” industries) and will almost inevitably be monopolies or oligopolies.

Moreover in practice, and not only in developing countries, industries capable of persuading government to “protect” them are often concentrated either geographically (e.g. agriculture) or structurally (such as Australia’s car making oligopoly), making collusive behaviour and interest group lobbying more profitable and feasible – “rent seeking” (http://en.wikipedia.org/wiki/Rent-seeking) in the economic jargon. This is even more true in developing countries such as India, where protected industries were often either state owned or heavily regulated.

You have the trade equation upside down. When we import from other countries, we gain the fruits of foreigners’ labour. When we export, they gain the fruits of ours. The whole point of exporting is not to obtain foreign currency but to obtain the things that currency will buy – i.e. to import. By concentrating on things we’re relatively good at making (such as LNG and education services) and exchanging them for things that the Chinese or Japanese are relatively good at making (such as TVs and T shirts), both parties gain. It’s called comparative advantage and it’s one of the most compelling arguments in economics (http://en.wikipedia.org/wiki/Comparative_advantage).

VK3AUU

China’s inequality has increased enormously, but it has also raised more than 400,000 people above the absolute poverty line in a generation. The ILO observed that "A reduction in poverty on this scale and within such a short time is unprecedented in history" (ILO World Employment Report 2004-05, p.156 http://www.ilo.org/public/english/employment/strat/download/wr04c3en.pdf).

It would be perverse to reject a growth process because it makes the rich richer, when it is also so successful at making the poor less poor.

Under Mao, it was bad governance which kept the peasants poor. I was there 13 years ago and the countryside still looked pretty poor, even though the cities were getting better, although overall, pollution was getting worse. They are probably doing better than the Indians economically, although the culture is completely different.

David

I would argue that we need tariffs on imports into Australia from those industrialising companies employing slave labour (China, India) to tilt the playing field back our way. One issue seemingly forgotten in an otherwise lucid article is that in its industrial heyy-day, and certainly during the 200 years of the industrial revolution from Walpole's time to 1914 the UK suppressed by brute force any claim of its workers for a fair day's pay for a fair day's work. Just like China and India today. Same state of affairs in the USA, when it was industrialising. Any economy can grow rapidly on the backs of slaves.

She'll be right mate. As long as we can export coal and iron ore to the Chinese, the Aussie economy will continue to charge along. It won't matter that all our manufacturing industries and farmers have gone out of existence. We can all live on welfare from the income generated by the miners.

That seemed to be the attitude of Howard and his merry men and Rudd thinks that the Aboriginals will all get up off their a88es and keep us after he has said sorry to them.

David

HenryVIII

No modern industrial economy has ever grown rapidly on the back of slaves – look at the differences in living standards in the North and South of the USA at the time of the civil war, echoes of which still persist today.

The freedom of workers to move into industries and locations where their labour is in most demand and attracts the highest wages has been an essential part of the process of improving living standards in every successfully industrialising economy, as it is today in China.

How do you expect third world countries to match first world wages when their average productivity – the volume of stuff typically produced by a worker – is a tiny fraction of what we can produce here, with our developed infrastructure, advanced technology, and educated workforce?

The choice for Chinese workers is not between their wage levels or our wage levels. It’s between the wages and conditions in their new industries – shocking and miserable as they are by our standards – and the conditions and wages they can eke out in those parts of China not yet exposed to the trade-driven development of the costal cities, where living standards are much worse.

This article by Paul Krugman exposes the moral vanity of those who want to “protect” foreign workers from exploitation by denying them the opportunity to improve their living standards:

http://hei.unige.ch/~baldwin/ComparativeAdvantageMyths/PraiseCheapLabour_PK.htm

VK3AUU:

The shift in Australian employment in the past two decades has not been from manufacturing to mining but from production industries (mining, manufacturing, agriculture) to services (finance, business services, health, community services, retailing) as it has been in pretty much every rich, developed economy. Again, this is driven by comparative advantage – concentrating on doing what we do relatively well and exchanging some of it for goods and services others produce relatively well (for example, cheap manufactures from China).

Australians’ real earnings are at their highest level ever, and unemployment at its lowest in a generation. This is much better than trying to preserve its economy as an industrial museum of textile workers or even chip manufacturers.

Rhian,
" The whole point of exporting is not to obtain foreign currency but to obtain the things that currency will buy – i.e. to import."
No cash profit motive? That is a totally unique and original argument.
As I recall, the Japanese in the sixties were very keen on gaining foreign currency; specifically American dollars.
I thank you kindly for the link to the Wikipedia article on comparative advantage. i particularly liked the example of the fit young man and the old man, and the "mutual" benefit they could provide each other. Clearly, however, the young capable person could not have been a Capitalist; with no altruistic motive what would -and always has- happen is that the old man would end up a virtual slave, no doubt constantly reviled for doing everything badly, and forced to live on scraps.
"...but it has also raised more than 400,000 people above the absolute poverty line in a generation."
400,000, in a country of 4,000,000,000. Very impressive.
"It would be perverse to reject a growth process because it makes the rich richer, when it is also so successful at making the poor less poor."
It would, however, make perfect sense in a finite world, with finite resources and finite real wealth, to reject a growth process which makes the rich richer, at the inevitable expense of the world's -current and future- poor.
grim@thecomensality.com

Grm

Of course businesses export for profit. But what use is a US dollar or Japanese Yen except for the things it will buy? Without the capacity to exchange it for something useful, it’s no more than a piece of paper. This view is neither unique not original (sadly - I’d like to have thought of it first).

In the dim and distant past trade was conducted in gold and silver, so foreigners’ money was perceived (wrongly) to be worth acquiring for itself, rather than the things it could buy. But this old mercantilist view is long discredited.
http://en.wikipedia.org/wiki/Mercantilism

Sorry, my mistake, on the poverty data, I left off a few zeros. The data have also been updated since I last viewed them. The latest estimates are that the number of Chinese living below the absolute poverty benchmark of $1 a day (at purchasing power parity, in “real” 1993 US dollars) decreased by 505 million people, from 634 to 138 million (or from 64% to 10% of China’s population) between 1981 and 2004, which really is quite impressive:

http://econ.worldbank.org/external/default/main?pagePK=64165259&theSitePK=469372&piPK=64165421&menuPK=64166093&entityID=000016406_20070416104010

You say that making the rich richer is “inevitably” at the expense of the poor. Overwhelmingly, the evidence points the other way. Countries that have escaped poverty for the bulk of their populations have always seen both the rich get richer and the poor get richer.

Development is not a zero sum game. I don’t give a fig for the fate of China’s wealthy compared to the fate of its poor, but I’m convinced that policies that try to make to poor richer by making the rich poorer never work, and indeed I can’t think of a single case where they have been other than counter-productive. Can you name any country that has sustainably raised the living standards of its poor by reducing the living standards of its rich?

VK3AAU. Modern economies do very well on the back of slaves. Please, don't feed me the theoretical notions of Hayekkian economics (he never did a day's toil in his life). Try working 14-16 hours a day as a child or pregnant woman (or even as a man), 7 days a week, with no sick leave and being docked pay to go to the toilet in the good old cotton mills of the UK, or down its coal-mines. OK-they got a wage. But it was about the equivalent of 50cents a day in today's money. The Vietnamese, the Chinese and Indian booms are being built on the massive labour surplus these countries have, a complete lack of provision for the futures of their workers, and wages no greater than USD $1 per day. And don't even think about health-and-safety issues in the coal mines in Vietnam or China. At least the slaves in the cotton fields of Confederate America had to be fed and housed by their owners, which was certainly not the case for the wage-slaves in the hey-day of the British industrial revolution.Many of them had to spend their minimalist wage at the company shop, and prices were no doubt inflated to maximise profit.

Rhian “Countries that have escaped poverty for the bulk of their populations have always seen both the rich get richer and the poor get richer.”

I agree with the intent behind your post.

Some folk here think that the world must be a place where every one, first and foremost “equal”, instead of taking the realistic view. We call them socialists.

They are passionate and emotional about their beliefs but, sadly, lack the pragmatism and realism to actual perform competitively in what is and always has been a “competitive world”.

My own view is we are all individuals and we perform best when left to deploy all our qualities freely, free of the socialist myth of universal equality.

One thing which is always true is all developments and innovations originate from an individual with an interest and never from some government bureaucrat or politician playing politics.

Limit the individual and you limit the potential individuals have, which will not only benefit the inventor but all those who will buy the invention.

The point with China is they have consciously turned away from the Maoist state regulatory system and discarded the eternal revolution of the gang of 4, who succeeded Mao.

China is adopting a market economic approach to manufacture and trade instead of all that communist state managed crap.

And just as everyone is not equal in the western world, so too the Chinese peasant subsistence economy has been replaced by an economy with significant urban development and social improvements, including the development of a middle class (or “kulaks” in Lenin speak).

Not every Chinese person is now equal.

Reality was they never were.

HenryVIII “wage-slaves in the hey-day of the British industrial revolution. Many of them had to spend their minimalist wage at the company shop, and prices were no doubt inflated to maximise profit.”

The British industrial revolution commenced in the later part of 18th century and might have had its “heyday” throughout the 19th century

You have, obviously, never heard of the "Truck Acts", which were enacted from 1464 onward.

"Of course businesses export for profit. But what use is a US dollar or Japanese Yen except for the things it will buy? Without the capacity to exchange it for something useful, it’s no more than a piece of paper."
Perhaps you should offer Messrs Howard, Costello, Rudd and Swan the benefit of your wisdom. They all seem rather fond of hanging on to those silly little pieces of paper.
Once again, I thank you kindly for the link. I was interested to learn from it that China's path to profit has largely been due to the 'long discredited' mercantilist strategy. Incidentally, you may wish to revisit your link to another link:
http://www.newsweek.com/id/34952/page/1
It mentions that nasty "M" word.
I notice you didn't actually address the problem of living in a finite world, where -for everyone to enjoy the 'average' living standards of 'average' Americans- we would need the resources of an additional 4 planets.
Can I name any countries where the rich ruling classes voluntarily took a cut in living standards, to benefit the poor?
Oh gee, let me think...
I can think of a couple of circunstances which dramatically forced wealth into a slightly more equitable distribution, though.
the great depression, and Rooseveldt's "new deal"...
And then there were World Wars 1 and 2... great levellers, -at least for the surviving cannon fodder.
I don't have to go far from home.
When I was a child in Oz, income disparity was much less than today. Doctors still made house calls, we were angry about hospital waiting lists (whole weeks), petrol was 10c a litre (45c /gallon) and an average wage for a tradesman was around $200.00 week.
At $1.40/litre, a tradesman should now make $2600./week, instead of closer to $600.
A block of land in the Blue Mountains was $4,000, or less than 6 months wages.
I know, I was there.
And I'm really sick of being told how I've never been better off.
Go on, tell me about how high the 'average ' (but never the median) wage is.

Grim

You’ll notice Samuelson is not exactly fond of mercantilism, and as he states in the article, China is looking to achieve more balanced growth.

I didn’t address your question on a “finite world” because I don’t agree with its assumptions. Economic growth is not primarily about doing more and more of the same things, but finding new and better ways to use the resources we have. So while in some important senses the world is truly “finite”, in many equally important senses the economy is not.

I’m not against redistribution policies, but I don’t think they’re the main game in poor countries, when the key issue is growing the size of the economy. As I said earlier, no country can pay its people more that the value of what they produce.

From your anecdotes I’d guess you’re remembering the late 1970s. It’s true that petrol prices have increased by more than (median and average) wages since then, but the prices of most other goods and services have risen by less. The overall CPI has risen by significantly less than either median or average earnings:

_______________________________ Aug 78 __ May 06 __ increase (%pa)
earnings:
median ________________________ $193_____ $926 _____ 5.8%
average ________________________ $210____ $1045 ____ 5.9%
Prices (index):
Vehicle fuel _____________________ 29.2 ____ 227.6 ___ 7.6%
small electrical appliances _________ 61 ______ 93.3 ____ 1.5%
poultry _________________________ 53.4 ____ 97.3 ____ 2.2%
tobacco ________________________ 27.7 ____ 412.3 ___ 10.1%
CPI ___________________________ 39.7 ____ 154.3 ___ 5.0%

Sorry - tables alway look messy
Data from ABS (yearbooks, CPI & employee hours and earnings survey)

sorry Rhian, I refuse to accept the median wage quoted as $926.
May I refer you to this article by Dr Andrew Leigh, in March 2006:
http://www.theage.com.au/news/opinion/only-rich-people-want-to-lower-the-top-tax-rate/2006/03/02/1141191789275.html
In which he quotes a median income (granted not the same thing as median wage) as only $26k. He also lists the common errors factored into calculations of median wages.
While these figures are remarkably slippery, award wages are not.
In 1975, a boilermaker was making $196.80/week, within your median figure.
The award today is $663.
In rural Australia, most workers do work for award wages.

Grim

As Leigh’s article points out, median adult income includes people with no income and people whose income derives from government benefits.

I quoted wages because your earlier post referred to the earnings of a typical tradesman in your youth, and I was trying to get data as close as possible to that example. It would be misleading to compare the living standards of a working tradesman in 1978 with an unemployed person today and conclude that living standards have fallen. Likewise, while Leigh is right that growth in part-time employment has dampened overall growth in both median and average earnings, if we’re trying to compare like with like over time, we should compare full-time earnings then and now.

I accept that average wages are generally skewed upwards by a small number of high income earners, and medians are a better representation of typical earnings. Hence I quoted both median and average wages. However, the common perception that average wages have risen much faster than the median is not supported by the data. Both have risen ahead of inflation, at very similar rates (5.8% and 5.9%, for the time period shown).

The HILDA survey that Leigh quotes does not go back to the 1970s, but I’d guess that, while the median adult income level is less than the median wage, it will have risen faster than the median because:

- Benefit payments as a percentage of household income are much higher now than then;

- Unemployment is lower, and the labour force participation rate is higher, so there are fewer non-employed people;

- The proportion of households deriving significant income from sources other than benefits and wages (eg superannuation and shares) has risen markedly.

Your comparison of trade rates in your youth with minimum wages today is misleading. Either compare minimums with minimums, or actuals with actuals. Most boilermakers earn far more than the minimum. The ACTU’s website says the market rate for a boilermaker is 30-35% above the award:

http://www.worksite.actu.asn.au/showall.php3?secid=4&page=article&artid=42

Here in WA, the market premium is much higher.