Tuesday, September 05, 2006

Free Trade 3: Protectionism PerpetuatesPoverty

An article at tcsdaily.com, Forget the World Bank, Try Wal-Mart By Michael Strong (22 Aug 2006), has this story:
Between 1990 and 2002 more than 174 million people escaped poverty in China, about 1.2 million per month. With an estimated $23 billion in Chinese exports in 2005 (out of a total of $713 billion in manufacturing exports), Wal-Mart might well be single-handedly responsible for bringing about 38,000 people out of poverty in China each month, about 460,000 per year.
There are estimates that 70 percent of Wal-Mart's products are made in China. One writer vividly suggests that "One way to think of Wal-Mart is as a vast pipeline that gives non-U.S. companies direct access to the American market." Even without considering the $263 billion in consumer savings that Wal-Mart provides for low-income Americans, or the millions lifted out of poverty by Wal-Mart in other developing nations, it is unlikely that there is any single organization on the planet that alleviates poverty so effectively for so many people. Moreover, in sofar as China's rapid manufacturing growth has been associated with a decline in its status as a global arms dealer, Wal-Mart has also done more than its share in contributing to global peace.
How can this be, given the vast and growing literature documenting Wal-Mart's faults? We have seen workers in the factories of Wal-Mart's suppliers complain on tape about being forced to work long hours under terrible conditions. Certainly no one should be forced at any workplace. And yet even articles documenting Wal-Mart's faults often mention other facts that ought to be considered before coming to too quick a judgment concerning the overall impact of the corporation...
This article further proves the beauty of free trade, of search for bargains by consumers around the world. When an average American household for instance, makes some $300 of savings per month from buying cheap commodities from China and other countries, they do not burn their savings. In one year they will make some $3,600 of savings. Some guys may use of that money to travel abroad and enjoy the beaches or mountain resorts, waterfalls, bars, of the tropics. That creates jobs and income in poorer countries, and that helps alleviate poverty there. Some guys will use the money to buy more tropical fruits and veggies, tropical marine and livestock products, which again creates more jobs in poorer countries, which helps alleviate poverty. That is why "bargain-hunting" through free trade is a perfectly rationale behavior of consumers, a behavior which many big governments and protectionist business and labor interests consider as irrational, that is why they restrict trade and their citizens' freedom (whom and where they can buy, how much quantities, etc.). In addition, such big governments are addicted to collecting large amounts of import taxes to help finance their bloated bureaucracies.

Compare this with foreign aid, which is 100% financed by high taxes. High taxes limit the people's purchasing power. Instead of buying 5 kilos per week of mangos or bananas or pineapples from poorer countries, over-taxed citizens of rich countries will buy only 4 kilos, thereby limiting trade. And limiting job creation and incomes in poorer countries, indirectly contributing to perpetuation of poverty.

The key to "fighting poverty" in the world, are (a) drastic tax cuts in all countries, especially in rich countries, to free resources from the bloated bureaucracies (and consultants) of big governments, into the pockets of households and ordinary consumers, and (b) free trade, to allow people around the world the freedom to go "bargain-hunting", which gives them lots of savings. Both moves are de-facto "pay rise" to consumers, which they can use to buy more goods and services, which contributes to more economic growth and more job creation.

What about the "exploited workers" in poorer countries just to satisfy the hunger of "bargain-hunters"? Consider that people are more "exploited" by nature if they are not hired, if they lie idle, unemployed and unproductive, because they will have no or little resources to feed themselves and their family.

A job that pays $2/day but is available is better than the same job that pays $10/day but is not available, that is not existing yet. As skills improve, output expands, and average wages move upwards. That is why in some parts of China, wages are no longer cheap, so some foreign companies put up factories in Vietnam, other emerging economies. The only people who are unhappy with this kind of capital mobility are the over-protected (and pampered) workers and the jobless people in rich countries. Slowly they see jobs slipping out of their hands. Nonetheless, they enjoy the fruits of cheaper labor elsewhere because they can buy cheap goods and services imported from poorer countries.

See also:
Free Trade 1: Estonia's Free Market, Globalization, May 09, 2006
Free Trade 2: Unilateral Trade Liberalization, May 17, 2006

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