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October 28, 2005

Comments

Rick Lowe

There is so much here I would like to comment on but I will stick to three or four points:
1. Labour: A person should be able to 'sell' their labour for whatever they wish. Just as someone else should be able to 'buy' that labour for whatever they wish. If they cannot agree the labour is 'sold' to someone else. The government should not force anyone seller or buyer of labour to accept conditions. The market works best when excahnges for labour are voluntary.
2. Free Trade: People and businesses trade - not governments. Governments should stick to writing minimal rules to keep everyone as honest as possible. These rules already exist. Govenrments injecting themselves into the middle of trade transactons will only raise the cost for everyone. Besides, the only barriers to trade here in The Bahamas is our mercantilist heritage - protectionism.
3. The Market. I think you over simplify the market with your example about so few controlling the infrastructure. Unless I have misunderstood you. We have comparative advantage, like sun, sand and sea to trade. Basically, this means we do not necessarily need to produce.
4. Oil to the consumer: In one sense you are correct when you say the suppliers with the best prices should be able to negotiate directly with the consumer. Where I think you are missing the point locally is the government prevents competition in the market with price controls and moratoriums. Therefore, cheaper suppliers cannot entire the market.

nicob

Thanks for the comments, Rick. I agree with you fully on No. 1, but I think it's important to recognize that the concept of the labourer selling his or her labour is a newer idea than the concept of the purchase of labour, and that all concepts are politically embedded.

I'm not convinced on No. 2, however. It's a utopian ideal, not a reality; and because trade is politically embedded, I don't think it will ever be a reality, or not in our lifetimes, at least. Even those people who believe in "free" trade between individuals engage actively in influencing the leaders of nations to reduce government, permit trade, yadda, yadda, but the point is that governments are involved, whether they should be or not. As long as governments are elected by people, they will be involved. The freedom to trade with people in the USA, the freedom to compete with American farmers and manufacturers is not available to anybody other than Americans; this is what has slowed the FTAA agreement down to a halt, and why the US government is now negotiating bilateral trade agreements with individual countries. Divide and conquer is tried and true.

As for #3, perhaps we both oversimplify. However, when you can demonstrate to me that Bahamians can actually continue to compete with sun, sand, and sea alone, and *without* engaging advertising companies and investing in hardware and software and other technology -- all manufactured overseas -- and, further, demonstrate that the benefits affect the individual Bahamian, and not the multinational resort conglomerate that has the requisite infrastructure, I might be easier to convince. I agree that we don't need to produce; but I am also saying that simply to compete, we make other nations richer, because we don't control the basic materials and objects (and, btw, skills and attitudes, though we have more control over them) needed to become competitive.

Rick Lowe

Hello Nicolette:
Thanks so much for your response.
I always become unravelled when we blame the multinationals for our internal problems. Why haven't our fellow Bahamians made these investments?
As you can tell, I have come to view governments (read politicians) as creating many of the problems. They certainly create few solutions.
By the way, who has better PR thank the political parties at election time?

nicob

"By the way, who has better PR thank the political parties at election time?"

Ain't that the truth.

Ralph Massey

The article on “On Why Free Trade Isn’t Free” by Dr. Nicolette Bethel that was posted to the Bahamas Pundit web site on October 28, 2005 merits comment because this noted Bahamian anthropologist has made some serious errors relating to economic history. I would like to comment on two such errors and then to offer a short alternative history.

Falacies
1. “The communist ideal is fundamentally democratic.” She states that “the democracy practiced by the Soviets in Russia was not hugely different from the Electoral
College system that elects American presidents.” Her claim can only be true if you look at the laws establishing the form of each institutional setting (you compare one abstract ideal against another) without looking at the way the systems actually worked in practice. In fact, one was a single party totalitarian state and one was a democracy with all the flaws that such a democracy can have. However, Communism collapsed (except for Cuba and North Korea) with the fall of the Berlin Wall in 1989.
2. “If your economy is not a producer [of computers, telephones, satellites and programmes} you have begun at a disadvantage, and your trade can’t be free.” This simply overlooks the reality of the world. Ireland, Finland, South Korea and India, for instance, were all poor countries outside the Global Industrialized World. All adopted policies and had entrepreneurs that pushed them all into front of the Global economy.

Alternate History
(This Alternate History is taken from the Report on Trade Liberalization by the Tourism Taskforce on Trade Liberalization that was presented to the Trade Commission of the Bahamas in April 2003. Download a copy from the Nassau Institute web site at: http://www.nassauinstitute.org/wmview.php?ArtID=298 or hard copies can be obtained from the Chamber of Commerce.)

Adam Smith made the first “ground breaking theoretical case for free trade” in 1776. In examining economic growth he saw three things:
1. Output greatly increased with the rational application of new ideas and the specialization of labour.
2. Governments imposed restraints on imports and encouraged exports with bounties, treaties and colonies. These measures blocked change but they did satisfy some national objectives and protected specific private interests.
3. The benefits of trade free of those restraints accrue to specific businesses but more importantly to consumers in the form of lower prices. “In every country it always is and must be the interest of the great body of the people to buy whatever they want from those who sell it cheapest.”

Adam Smith demonstrated the advantages of free trade to society as a whole; but he was skeptical. He doubted that it could ever “carry the day” because of “the prejudices of the public, but what is much more unconquerable, the private interest of many individuals who irresistibly oppose it.”

This free trade conflict between national economic welfare and political/private interests persists everywhere…including the Bahamas.

Despite Smith’s skepticism the world experienced two great bursts in international trade. The first came in the century after Adam Smith (see table); and was propelled by electricity, railways, steamships and the telegraph.

Growth in International Trade
Period Percent per year
1780 – 1840 2.50
1840 – 1870 14.67
1870 – 1913 9.77

As an example these allowed the exchange of Argentine wheat and beef for British manufactured goods. Up until then Argentina, one of the six richest agricultural areas of the world, was at a comparative disadvantage relative to British agriculture. Literally, it was too far away. But…this changed. Within a lifetime Argentina became one of the richest countries in the world and with Canada, Australia, New Zealand and the U.S. became part of a new global order.

But dislocation and political conflict accompanied that growth.

Within Great Britain free trade pitted the landed gentry against the exporters. The landed gentry prospered behind regulations and tariffs that kept cheap foreign grain out. A pair of textile manufacturers “organized the Manchester-based urban interests against the landed elite. The seven-year campaign of the Anti-Corn Law League achieved victory in 1846 with the repeal of the Corn Laws and the elimination of all duties on imported grain.”

This “free trade induced” era of prosperity ended in 1913 with World War I and its aftermath. The competitive nationalism that led to the war; the centralized command economies during the war; and the Great Depression after it produced political movements hostile to political freedom and free trade. These included Communism in Russia, National Socialism in Germany, Fascism in Italy, Fabian socialism in England and Keynesianism in both England and the U.S.A. They produced higher tariffs everywhere.

The brief recovery in international trade of the early 1920s was more than wiped out with the recession. The US economy declined 30 per cent and imports fell 70 per cent between 1929 and 1932. Between 1929 and 1938 the volume of trade for the U. S. was down 20 per cent, for the UK 30 per cent and France and Germany 38 percent. It was not until the early 1970s that international trade recovered to 1913 levels.

U.S. tariff reductions actually started before World War II in a series of bilateral trade agreements and continued after the war with the General Agreement on Tariffs and Trade (GATT) that covered 23 countries and 80 percent of world trade. Also there was the movement to free exchange rates and to eliminate multiple rates and capital controls. The initial beneficiaries of these initiatives were the United States, Western Europe and then the Pacific Rim countries of Japan, Taiwan, Hong Kong and Singapore.

Even bigger changes came in the 1990s with the collapse of Communism and the significant enlargement of the Global marketplace.

The Perfect World
In the perfect world every country would be led by a Prime Minister who would be wise enough to see that free trade benefits people as a whole…it produces growth and lower prices to the consumer. After a brief discussion with the other PMs in his part of the world, he and they would each unilaterally eliminate tariffs, quotas and restrictive regulations. Without wearisome and costly negotiations, the “doctrine of comparative advantage” would take over. “I grow bananas” and “You catch conch” would become a reality. The PMs would help the adjustment in the short run by collecting a tax from the now more profitable banana growers or conch catchers and give temporary readjustment grants to those less fortunate who would be displaced. The consumers and tax paying citizens collectively would be the big winners.

The U. S. Paradox
Unfortunately in some respects the world has not changed much since the days of Adam Smith; and it helps to be clear about how free trade works…especially in the U.S., a good but admittedly imperfect country.

In 1950 the free world faced the Communist Bloc, and one could not have imagined the position of the U. S. a half-century later. Within 50 years the U. S. became --
∑ The world’s military and economic super-power by a big margin,
∑ The world’s great super market with shoes, clothing, appliances and cars from Asia often selling with price tags so low as to defy simple logic,
∑ The home for wealthy Latinos…producing a booming housing market in South Florida…and the destination of choice for the less fortunate…those often traveling in anything that floats,
∑ The provider of golden opportunities for those with great talent and ambition like Asian engineers in Silicone Valley, Asian mathematicians in every university and Russian ice skaters in the country’s skating clubs.

And it also became the “victim” of “de-industrialization” as the new economy spawned by the computer revolution and free trade drastically changed its factory towns.

However, the United States exceeded the fondest hopes of Adam Smith. The U.S. is “rightfully considered among the most open economies on earth” and certainly one of the most prosperous.

Nevertheless, free trade has not completely carried the day. Big pockets of protectionism remain and have brought negotiations for broadly freer trade to a standstill. Within the U. S. these obstacles include sugar cane growers, steel and apparel producers, farmers who are heavily subsidized, etc. Free trade is a negotiated process that started during World War II and continues to today.

Ralph J Massey
The Nassau Institute
October 29, 2005

i Smith, Adam, Wealth of Nations, reprinted by Prometheus Books, 1991, page 383.
ii Ibid, page 368.
iii Lindsey, Brink, Against the Dead Hand: The Uncertain Struggle for Global Capitalism, Wiley, 2002, page 65.

nicob

Thanks to Mr. Massey for his comments, which I welcome, though I disagree with the idea that they prove my position is erroneous; rather, they seem to reinforce it. Our interpretation diverges, but this is because, I would argue, we start from fundamentally different points of view. While it is absolutely true that the implementation of the Soviet model is what made it substantially different from the Electoral System model, my point was that the pure theory of the communist state was as democratic (in the pure, Greek sense) as the American electoral system. The difference does not lie in the philosophy but in the implementation.

And with regard to the second point of disagreement, I would observe that of the countries he listed, only South Korea and India could be considered as being near "the front of the Global economy". Still, the economic choices of Ireland and Finland reinforce my original point; Ireland is a producer of computer hardware, but it is a secondary producer which responds (like many third-world nations) to the dictates of industry leaders elsewhere in the world (Apple comes to mind). Finland, on the other hand, has mastered both the hardware and the software technology of cellular telephones. In both cases, those economies have found a niche in the global technological industries, once again proving my point.

With regard to South Korea and India, who are larger players on the global economic scene than Ireland and Finland, both countries have sizeable industrial sectors; South Korea, following the Japanese model, produces cars, radios, telephones and computer hardware, although not all under the South Korean name. India, however, is an interesting case, and is worth far more study. But it proves my point. Like Bill Gates, the Indian technological sector focussed on software, with the result that Indian programmers have cornered several cyber-markets.

Perhaps I need to make it clear at this point that I am not against the principle of free trade in toto. What I am questioning is its positioning as the development mechanism of the future. Anything that disregards the fundamental skewing of the world economy, where a minority of the population controls the vast majority of the wealth is suspect, in my opinion. Whether or not bits and pieces of it work is irrelevant. The danger of the free trade evangelistic call is that it ignores inequalities, or worse, it exacerbates the inequalities that already exist. With free trade, it becomes possible for some people in every country to become very rich; but it usually simply changes the distribution and the employment patterns of the poor, perhaps moving them from the fields to the factories (or the hotels), but not honestly empowering them at all.

Rick Lowe

Hello Nicolette:
How would you define empowering people?
Maybe that is where the real difference of opinion is?
Rick.

Ralph Massey

Bahamas Pundit in a posting dated November 4th stated that my comments dated October 28th did not “prove [her] position is erroneous; rather, they seem to reinforce it.”
This is an amazing conclusion and warrants further comment.
1.) “In pure theory Communism is as democratic as the American electoral system.” (Bahama Pundit)
This comparison is so narrow that it is without substance. The valid comparison is 72-years of Communism in Russia versus 229-years of Democracy in the United States.
“The catastrophe of Communism included the creation of a totalitarian state; the reintroduction of slave labor on an epic scale; and politically induced famines and government created poverty of unprecedented proportions; political purges and mass executions resulting in the deaths of an estimated 100 million people.” The absolute horror of the Russian experience can be grasped in the work of Aleksander Solzhenitsyn or in the callous statement attributed to Josef Stalin “The death of one person was tragic, the death of a million a mere ‘statistic’.”
According to its founders, Communism was a state where all classes were absorbed into the “proletariat” and the state withered away. It was the utopia envisaged by Karl Marx that historically followed from Capitalism and Socialism. This utopia proved to be an illusion that unfortunately captivated liberals of the West for decades; in practice the state did not wither away; and after 72 years Communism failed completely.
Pundit’s statement ignores this history and trivializes both the Communist and American experiences.
2.) “If your economy is not a producer [of computers, telephones, satellites and programmes] you have begun at a disadvantage, and your trade can’t be free.” (Bahama Pundit)
This statement has two dimensions: the conditions for growth and the wisdom of free trade. With regard to the first, my original statement contended that Ireland was a good example of what is possible for a small underdeveloped country.
Ireland is a small island country that experienced poverty and starvation on a massive scale in the mid 19th century and achieved independence in 1922 after a 3-year guerilla war with Great Britain. After 1960 it reformed its education system. At that time Ireland did not provide universal secondary education and its tertiary system was limited. In the 1970s it aggressively courted foreign investment in high tech companies in Ireland. It provided them with a unique investment environment that included one of the best educated populations in Europe. It succeeded admirably; it got a high-tech light manufacturing base; and it became the center for financial services in the European Union. In the 1980s Ireland also conquered a crippling tendency to fiscal irresponsibility. In one generation it went from the poorest country in the European Union to the most prosperous.
This seems to support the proposition that, for the Bahamas, Ireland is one good example of what is possible.
Ghana & South Korea. One can also find clues about the “conditions for growth” by looking at pairs of countries. With a real sense of drama one can contrast “resource rich” Argentina and “resource poor” Japan after World War II.
Samuel Huntington, a Political Scientist from Harvard, uses two countries that had similar natural resource endowments:
“In the early 1990s, I happened to come across economic data on Ghana and South Korea in the early 1960s, and I was astonished to see how similar their economies were then. These two countries had roughly comparable levels of per capita GNP; similar divisions of their economy among primary products, manufacturing, and services; and overwhelmingly primary product exports, with South Korea producing a few manufactured goods. Also, they were receiving comparable levels of economic aid.
“Thirty years later, South Korea had become an industrial giant with the fourteenth largest economy in the world, multinational corporations, major exports of automobiles, electronic equipment, and other sophisticated manufacturers, and a per capita income approximating that of Greece. Moreover, it was on its way to the consolidation of democratic institutions. No such changes had occurred in Ghana, whose per capita GNP was now about one-fifteenth that of
South Korea’s.
“How could this extraordinary difference in development be explained? Undoubtedly, many factors played a role, but it seemed to me that culture had to be a large part of the explanation. South Koreans valued thrift, investment, hard work, education, organization, and discipline. Ghanaians had different values.
∑ Samuel Huntington concludes “In short, cultures count.”
∑ Thomas Friedman, the New York Times journalist, claims that these elements cannot be defined; he simply calls them “the intangible things.”
∑ Orlando Patterson, a Harvard University Sociologist, states that “Culture is a repertoire of socially transmitted and intra-generationally generated ideas about how to live and make judgments, both in general terms and in regard to specific domains of life.”
The point is that these basic factors facilitate constructive societal change and should be discussed and highlighted.
3.) “To compete, we make other nations richer, because we don’t control the basic materials and objects (and…skills, and attitudes, though we have more control over them) needed to become competitive.” (Bahama Pundit)
This statement in part is based on the fallacy that, when two parties exchange goods and/or services, it is not likely to be a win-win exchange for both parties since one is inevitably more “powerful.” For the Pundit this takes even greater meaning if one of the parties is a foreign-owned corporation, hence the conclusion that trade makes “other nations richer.” This is an “accepted” and “popular” assertion that has its roots in the economics of Karl Marx and not Adam Smith and his successors. Pundit does not provide evidence to support the assertion whereas the undersigned did so with an “Alternate History of Free Trade.”
Furthermore, the underdeveloped nation can “control” its intangibles if it has the national will.
The World Bank’s Latin American and Caribbean Studies Group in a recent study “Closing the Gap in Education and Technology” builds on the concept of “Human Capital”, these are investments in human resources that improve productivity. The Group develops the theory that there is a strong interaction between Human Capital (the quantity and quality of the knowledge base) and a society’s ability to absorb foreign technology; to adapt and modify that technology; and then to create new technologies.
The success of this process is a key ingredient to economic growth. Taking refuge in “popular” assertions only diverts attention and energy from the more important tasks at hand.
References:
David Horowitz, Unholy Alliance, Regnery, 2004, page 55.
Martin Amis, Koba The Dread: Laughter And The Twenty Million, Talk Miramax Books, New York, 2002.
The MIT Dictionary of Modern Economics, The MIT Press, 1999, page 69.
Samuel P. Huntington, “Cultures Count”, in Culture Matters: How Values Shape Human Progress, Edited by Lawrence E. Harrison and Samuel P. Huntington, Basic Books, 2003, page xiii.
Thomas L Friedman, The World Is Flat: A Brief History of the Twenty-First Century, Farrar, Strauss and Giroux, 2005, p. 330.
Orlando Patterson, “Taking Culture Seriously: A Framework and an Afro–American Illustration”, page 208, in Culture Matters.
David De Ferranti et all, “Closing the Gap in Education and Technology”, The World Bank Latin American and Caribbean Studies Group, Washington, D.C., 2003, page 1.

Ralph J Massey
The Nassau Institute
November 10, 2005

Christopher Lowe

My understanding of free trade is that it depends on the very imbalance of the distribution of the worlds resources whether natural or man made. If all were equally distributed globally, free trade or otherwise would be unnecessary. The theoretical ideal of communism would be defacto, achieved. we as people however might not have what we want or in comparison to our neighbours what we think we deserve. Ideology aside, no system will reign forever as human nature will not allow it.
Like it or not, in the words of Adam Smith(I believe), "the desire of man is to improve his condition" often at the expense of others. government intervention most often has alterior motives and rarely is for the common good by cause or effect. As our society continues to break down in all regards, philosophical disscussion will get more and more abstract as we move further and further from the common (moral)ground most stood on in their day. self improvement for themselves and their community. The factor most missing today is loyalty.
To self, to family, to country.

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