I was on BBC 1’s Heaven and Earth Show on Sunday talking about consumerism. I made the point that rather than hindering developing countries, when we buy from poor countries, we help their economies to grow. We can complain about “sweatshops” in developing countries, but we in Britain got rich by by the same process.
Capitalism is failing North Korea?
Brian Micklethwait is rather amused that “market reforms” are being blamed by the BBC for starvation in North Korea. The communist country, by virtue of its communist economy, has been unable to produce enough food. The ability of government to provide enough food to everyone has broken down. So the government has cut the food it provides to each of its citizens. This is not market failure: it is government failure.
Perhaps from this BBC report we should conclude that North Korea should become more communist. On the other hand, perhaps North Korea should become more like Britain, where there are 9p tins of baked beans and 15p loaves of bread?
Claire Melamed on perfect competition
Christian Aid’s policy wonk Claire Melamed says that for free markets and free trade to work:
…everybody has to have perfect information - everybody has to know everything about what’s going on in the market and everyone has to know the same amount about what’s going on in the market.
That she takes this line is a bit odd because free-marketeers are normally quite vocal in their opposition to the notion of perfect information. Indeed, a key reason why people support free markets is precisely because perfect information does not exist.
If everyone were omnipotent, centrally planning the world economy would become a lot easier. Politicians and civil servants would be able to decide production and set prices. We might be able to let Christian Aid manage the world economy - after all, they would know everything.
A key reason why markets work best is precisely that there is no such thing as perfect information. As consumers, we cannot know what producers are all thinking. When buying a hammer in B&Q or Home Depot, we do not know what the Chinese firm which made it are thinking. We do not personally know the workers who made it. What we do know is that price of product and we can make a good call about its quality. When selecting a hammer, we do not know much about which types of materials used to make it, but we can know that one type of material costs more than another. We do not know if a lot of trees grown to produce a certain type of hammer caught fire - but the high price as a consquence might encourage us to buy another type.
When buying a DVD player we do not all have the same amount of information. Some customers might have studied how DVD players work for their physics degree. Others will simply know they are better than VHS players. Others still might have been given a DVD for Christmas and be determined to play it. Yet all three groups go into Currys or John Lewis and are able to successfully benefit from the market economy.
It is Christian Aid’s model for running the world economy that requires perfect information, not the free market.
Responding to Claire Melamed of Christian Aid
The debate on protectionism continues in the new issue of The Church of England Newspaper. There are a number of letters replying to an article by Christian Aid’s Claire Melamed who defended protectionism.
This from the Rev. Dr Mark Hart:
Sir, Just because I believe the Church should not back Christian Aid’s campaign for protectionism, Claire Melamed (6 May) misrepresents me as believing that the Church should not be concerned for the poor. No area of life is beyond the scope of God’s mission, but plenty of areas of expertise are beyond the competence of General Synod. There is wide expert opinion in favour of free trade. To disregard it is to fail to search for what God might already be doing in the world in spite of the Church’s officialdom.
This from Dr Andrew Lilico:
Sir, Further to the interesting discussion about free trade and “trade justice” on your pages, since I am actually an economist, I thought I might comment. Be under no illusion: belief in protectionism is not mainstream economics. In many ways its status among economists is similar to the status among historians of the view that men from Atlantis founded all the world’s civilisations: long ago it was quite a normal, even majority point of view, and even today there is a small band of believers who sell millions of books to innocent laymen, but among mainstream practitioners it is utterly discredited.
Claire Melamed, writing on May 4, quotes Joseph Stiglitz as a supporter of her view. Stiglitz did win the Nobel Prize, but for his work on economics of information, not international trade. He subsequently wrote a journalistic book attacking the IMF and other institutions and favouring protectionism - a book which was attacked by many experts in the field and which does not represent a mainstream point of view. The opinions of protectionists, like those of supporters of the Atlantis thesis, do not go away and continue to be interesting listening, but for now are definitely somewhere between “quaint” and “fringe”.
Now the thing is that if I agreed with the fringe economic opinions of Christian Aid, then I would have little to dispute about their Christian opinions. If I believed that free trade harmed the poor and benefited only rich western multinationals, then I would agree that it was our Christian duty to campaign against it. Since campaigning for such quaint beliefs is the raison d’etre of Christian Aid, I have little criticism of that organisation except to state that its leaders are misguided.
What I do criticise, however, is the attitude of Church of England bishops and of the General Synod, which, by backing protectionism, has chosen to put the Anglican Church’s credibility and resources behind a campaign that most experts will tell you would harm the poor of the developing world and favour vested interests and corrupt rulers.
This makes the Church look stupid and naive, and is counterproductive in trade negotiations. How that furthers the Gospel I fail to see.
And, finally, this from me:
Sir, I was disappointed by Clare Melamed’s article in last week’s newspaper. She feels necessary to blind readers with the term “Computable General Equilibrium Models”, which is a discredited economic tool anyway. The most appropriate economists’ tool is a much simpler one. The first rule of economics, as Frederic Bastiat pointed out in the 19th Century, is to look at both “what is seen” and “what is not seen”.
In trade policy, Christian Aid sees that some are put out of business when trade is liberalised. A good economist, however, looks at the effects in an economy as a whole. In 19th Century Britain, the farmers complained that free trade would put them out of business. The poor hated protectionism because it forced them to pay more for food. Protectionists, much like Christian Aid today, campaigned in favour of the Corn Laws. Yet when the Corn Laws were removed, it was a great victory in the fight against poverty. The poor had a saying: “If I be protected, I be starving.”
The article points out the Rev Mark Hart is not an economist. But the point he was making does not require him to be one. His argument was simply that many economists disagree with Christian Aid’s line, and therefore it is inappropriate for the church to give a one-sided perspective. Christian Aid would like all churchgoers to believe that it is the final authority on all matters economic. The fact that free trade is supported by almost all of the world’s prominent trade economists, and also by the British government, points to a different conclusion. It is time for Christian Aid’s monopoly on Christian economics to be broken.
Poverty, footwear and anecdotal evidence
Yazad Jal writes:
Rediff has published a piece by me on how poverty has decreased in India. It started as a response to Dilip D’Souza, but I make one important point. Anecdotes don’t matter. Dilip talks about the overwhelming poverty he saw while on a train trip. I write about how I see more poor Indians wearing shoes, acquiring consumer durables and cellphones. While our observations might be diametrically opposite, both of us are right. How do we then know whether India is poorer or richer (or unchanged) in terms of material prosperity?The only way is to use some measurement tool (or a combination of them). I’d look at per capita income, the UN’s Human Development Index, and the Economic Freedom Index. By all three measures, India is better off in 2005 than it was in 1990. We’re not doing as well as we should, we’re nowhere near. But we’re doing better than fifteen years ago. That itself should be an indicator that the reforms in 1991 were in the right direction.
Free trade’s specialisation is essential to wealth creation
It is sometimes argued that America became rich without pursuing free trade, and that therefore poor countries ought not to follow free trade. This argument, however, shows a misunderstanding of both trade economics and of history.
Trade is beneficial because enables us to specialize in what we are best at. It makes us richer. While a subsistence farmer can only produce as much as his family will eat, through specialization we create a surplus. Trade makes us richer whether we do it just with our local community, with a number of communities, with our country, with a trade bloc or with the entire world. When Britain unilaterally followed free trade in the 19th Century, it was beneficial for the Brits even though there were far fewer people alive in the world than today. If only half of the world’s countries existed, free trade would still be good. The point is that small zones of free trade create wealth - though bigger zones create even more wealth.
A US newspaper discusses a speech given by W. Michael Cox, a senior vice president of the Federal Reserve Bank in Dallas: “In the late 19th and early 20th centuries, with railroads leading the charge, people stopped producing most of what they needed in their immediate vicinity. At a cost of much disruption - “churning,” he called it - America adjusted to the Railroad Age and the regional specializations that made possible, Cox said. Eventually, many cars began to be made in Detroit, Mich., because of this kind of specialization, he said.”
The United States in effect it pursued bilateral free trade between all the States. The US free trade zone involve a huge land mass and a large number of people. It also brought in 20m immigrants. As Bruce Bartlett has said: “In effect, the United States was a giant, continental-size free-trade zone, from the Atlantic to the Pacific - the equivalent of the distance from Madrid to Moscow.”
BusinessWeek hails microfinance
Dr Eamonn Butler on the Adam Smith Institute Blog discusses microfinance:
I learn from the Globalisation Institute’s excellent daily news digest that BusinessWeek has spotlighted the rise of microcredit. Quite right: it can be a powerful agent for economic development.
Recently a friend gave me a short paper on an interesting example, the Grameen Bank in Bangladesh, which (it explained) is owned by its borrowers, the overwhelming majority of whom are poor women. It takes no donor funds, but almost always turns a profit.
Small loans are available for housing, for education, and for micro-enterprises. For example, the Bank has provided loans to 90,00 women to buy mobile phones, which the borrowers then charge other people to use: an easily-managed business for a poor woman in Bangladesh. The Bank proudly claims that over half its customers have been helped to rise above the poverty line through its programmes.
All this happens without written loan agreements - most clients are illiterate anyway. But the Bank insists that borrowers should belong in five-member groups, which perhaps places some social pressure on them to use the money wisely. If someone cannot repay a loan, the Bank says its focus is to help them, rather than pursue them as ‘defaulters’. There is an insurance plan so that loans are repaid on the death of a borrower.
The Bank even tries to help beggars out of poverty by providing interest-free loans to them. And it teaches borrowers the basics of self-reliance and sustainability: hygiene, cultivation, having small families and ensuring that children are educated.
Microcredit takes many forms, but it seems to work because it is built entirely around the needs of those who actually use it. And if it can provide poorer people with the small capital they need to educate their families or start micro-enterprises that will lift them out of poverty, that must be a good thing.
NGOs should get over the 1970s
When listening to some of the development NGOs, it is like listening to hard-line socialists from the 1970s. Extensive state ownership and controls were done away with in Britain, but it is those policies that brought Britain down to its knees in the 70s that these NGOs want to impose around the world.
Take water: water companies are privately-owned in the UK like many countries. Before water privatisation, there was massive underinvestment and Britain’s water was failing meet the stringent European Union requirements. Now, water quality is significantly higher and the water industry is much more accountable than it was under state-ownership. No one in the mainstream political debate would seriously advocate renationalising it - even though its privatisation was widely opposed at the time.
The gains from water privatisation in developing countries are very much higher, where water provision is heavily politicised. It is often the case that if you’re in with the President, you get running water. If you’re not, you don’t. You will have seen the pictures of Africans traveling miles to get water: that’s the legacy of nationalisation of water. It has been a complete unmitigated disaster. So that politically well-connected groups get rewarded, they do not have to pay the cost of the water. This means that running water provision is a drain of central government. The consequence is that there is a huge incentive not to increase provision. Where water privatisation has happened, companies have been putting in the investment and increasing provision.
But ideological NGOs do not see this. They still think in terms of “people before profits”, and regard free water as a human right. Well, free water is all very well but communism didn’t work and nor do communist ideas of water provision. Private water provision offers the best method for reaching universal running water provision. It is time for the NGOs to get over the collapse of the Soviet Union and the end of the 1970s and be a little more constructive.
Globalisation and world cinema
I watched L’Appartement last night. It is an excellent French film by Gilles Mimouni. I find myself increasingly watching what is commonly described as “world cinema”. Sure, I love Holywood films too - I recently watched Without a Paddle. But I also like films from elsewhere in the world, too.
People complain about globalisation imposing “conformity”. They point out how as countries get rich they gain many of the same attributes. Like Starbucks and McDonald’s. But while diversity is doubtless decreasing between countries, it is increasing within countries. I was in HMV recently (a British music and film retailer) and sought out the world cinema section. There were literally hundreds of titles - even a dedicated section for Bollywood.
Globalisation is the great civilising influence of our time. Not only does it bring humankind together in bonds of peace, it also helps us to grow culturally. It enables us to enjoy a wider variety of styles of content and helps us expand our horizons. Imagine if we could only buy movies produced in our own country? A scary thought.
Church newspapers on free trade and Christianity
The Church Times - an independent Anglican newspaper - quotes me in its latest issue, talking about how the Church of England should cover the issue of free trade.
Meanwhile, Claire Melamed of Christian Aid has a particularly arrogant article in The Church of England Newspaper. She sneers at a vicar who dared to point out that many prominent economists disagree with Christian Aid, and perhaps therefore the Church needs to consult more widely than just with Christian Aid. She feels necessary to blind readers with the term “Computable General Equilibrium Models”, as if to prove how clever she is. She would do better adopting a much simpler economists’ tool: to look at both what is seen and what is not seen.
In trade policy, Christian Aid sees that some are put out of business when trade is liberalised. A good economist, however, looks at the effects in an economy as a whole. In 19th Century Britain, the farmers complained that free trade would put them out of business. The poor hated protectionism because it forced them to pay more for food. Protectionists, much like Christian Aid today, campaigned in favour of the Corn Laws. Yet when the Corn Laws were removed, it was a great victory in the fight against poverty. The poor had a saying: “If I be protected, I be starving.”
Christian Aid acts as though it is the final authority on all matters economic. The fact that free trade is supported by almost all of the world’s prominent trade economists, along with the British government, points to a different conclusion. The Financial Times has described Christian Aid as a “malign influence” and said that its trade campaign is “strikingly irresponsible”. Christian Aid is losing all credibility.