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Industrialization and Free Trade Are the Way out of Poverty

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Tags Economic FreedomPovertyWorld History

09/02/2020

Progressive politicians repeatedly tell us that capitalism is a system rooted in the wealthy’s exploitation of the poor. To convey this in an emotionally resonant way, they employ images of "sweatshops" in the developing world. While some people labor away in factories, often in terrible conditions, the owners of Walmart and Nike rake in profits, enjoying their luxurious penthouses in Manhattan. Many find this compelling.

Trade and International Markets

However, trade and the intervention of multinational corporations into developing economies have been important instruments in the alleviation of poverty worldwide. A 2010 study, for example, demonstrated that multinational corporations tend to use scarce resources with higher levels of efficiency than more local competitors. Moreover, they train their workers the effectively, raising worker productivity in the process. These benefit are imported by these companies into the developing world. Although wages paid in the developing world are not by any means attractive to the average "First World" citizen, multinationals do often pay their workers above local national averages, and certainly more than state-run companies do.

In Vietnam, Nike pays its workers salaries twice the national average, and three times those in state-run factories, which might truly be called sweatshops. Openness to free trade and the arrival of global business have been an important source of economic growth—hence the dramatic rise of living standards since the Industrial Revolution, by every available metric.

A famous study conducted in 1995 by Jeffrey Sachs and Andrew Warner found that all global poverty can be essentially attributed to three policies: socialism, expropriation and autarky (the attempted redistribution of wealth, the seizure of private property and, importantly, hostility toward free trade). The study specifically emphasized natural resources' lack of importance to economic growth (compare, for example, the living standards of oil-rich Venezuela and resource-scarce South Korea). To get rich quickly—and quicker than it already is—the developing world must remove its barriers to imports. Prices will drop, productivity will increase thanks to the availability of better equipment, wages will rise, and, consequently, poverty will drop.

The places most open to free trade have become some of the richest, such as Hong Kong, whose exports account for 177 percent of its GDP, whereas those most hostile to it, such as much of Africa, remain impoverished and with low growth. While trade allows companies to set up factories in the developing world—the photos of which are used by the Left to feed the anticapitalist sentiment—these "sweatshops" alleviate poverty in the end, and in doing so, reduce child labor and improve working conditions.

The greatest decline in child labor in Vietnam took place during the 1980s, when trade and outsourcing were the greatest. Regulation of cheap labor only prolongs it and potentially exacerbates poverty. During the Industrial Revolution in England, various regulations hindered the extermination of child labor—which had existed long before that time. Regulations limited children's working hours in comparatively high-paying sectors of the economy, and they were forced to seek labor in sectors where working conditions were markedly inferior.1 Countries which have been the poster children of the anti–free trade, anticapitalist movement such as Bangladesh, Kenya and India are, ironically, some of the fastest growing because of the abundance of cheap labor there. Bangladesh sustained a per capita GDP growth rate of over 5 percent in 2018, and it is projected to be 16 percent richer by 2030 (or at least it was before the pandemic).

Business, Labor, and Property Freedom

Free trade itself is not the only important component of growth. More importantly, business, labor, and property freedom must all be permitted to create competition, enhance productivity, and ultimately increase wages. Preventing these, however well intentioned the reasons, will only harm the people it seeks to help. A study conducted by Kevin Hasset, for example, found that a 1 percent increase in the corporate tax rate leads to a 0.5 percent decline in workers' wages. The claim that the developing world is the victim of capitalistic greed is fundamentally misguided. Developing countries often rank very low on the Index of Economic Freedom according to research conducted by the Heritage Foundation. Property rights, business freedom, and labor freedom have all been massively curtailed in Africa, South America, and still most of Asia. High regulations on planning systems have prevented construction, and as a result, slums have expanded. High business regulations have prevented entrepreneurial startups, permitting big corporations to monopolize industries in the first place, reducing competition, which depresses wages. Research conducted by the Fraser Institute has found that a 1 percent increase in red tape leads to a 5 percent decrease in the rate of business startups (especially in the technology sector). Intensive labor regulations have also damaged the operability of enterprises, severely compromising their ability to hire and fire new workers. It is well documented that higher labor regulations cause both higher levels of unemployment, and longer periods of unemployment for those seeking jobs, most comprehensively analysed by a 2011 study.

There is an obvious correlation between economic freedom and economic prosperity. The Heritage Foundation divides its economic freedom index into five different quintiles: free, mostly free, moderately free, mostly unfree and, finally, repressed. The freest countries are obviously the most prosperous, such as Hong Kong, Singapore, Switzerland, New Zealand, Australia, and Ireland, which rank highly in per capita income measurements (adjusted for purchasing power parity) and have exceptionally high living standards. The mostly free countries include Britain, the US, Canada, and Germany. They are still very prosperous, but not as prosperous as the upper quintile. Then come the moderately free nations, which include France, Italy, and Russia. They are rich by global standards but not compared to their rich neighbors. France and Italy, for example, have been slow to cut unemployment since the recession of 2008, with numbers still hovering above 6 percent. Then there are the mostly unfree countries. Most African and South Americans nations are in this quintile. And finally, there are the repressed countries. They include the Democratic Republic of Congo, Iran, and Cuba. You get the idea. The freer a country is, the richer it is—and most poor countries are unfree.

Myths of Colonial Aftermath

Many allege that Africa’s poverty is the aftermath of brutal colonial rule under systems such as those of the British Empire or the Belgian monarchy instead of just poor policy decisions. It is true that colonialism was brutal and wicked. However, destructive rule does not mean that its victims cannot recover and prosper afterward, if they do things right. There are innumerable examples of nations which, through adopting the correct policies, have been able to rebuild themselves after colonial, imperial, and genocidal devastation. Germany had suffered more damage from the Second World War than perhaps any other country in Europe, having lost 20 percent of its housing and with its food production severely damaged. Soon after the war, it ended food rationing, changed its currency, and cut taxes. It experienced a greater economic recovery than many of its neighbors which had suffered less from the war. Another example is Rwanda, which suffered a genocide in 1994 in which it is estimated over five hundred thousand people were murdered. That year its economy contracted by a terrifying 50 percent of GDP, a number which puts even those of coronavirus to shame. Yet after the genocide, the Rwandan economy began to liberalize; it opened to trade, state-run industries were privatized, and regulations were cut. In 2019, according to the Heritage Foundation’s own index, Rwanda was the freest economy in Africa and the thirty-third freest worldwide. As a result, it is one of the fastest growing economies on earth, with an annual growth rate of 8 percent per annum.

Conclusion

Economic liberalization has worked consistently: whether it be in China, India, New Zealand, Ireland, 1700s Scotland, Renaissance Italy, postwar Germany and Japan, Chile, 1990s Sweden, Industrial Era Germany (as well as all the other Nordic countries), or the United States under Bill Clinton. The market has always been successful in raising people's living standards, and the world—especially its poorer parts—need more of it, not less.

  • 1. See Robert Hessen's "The Effects of the Industrial Revolution on Women and Children," in Ayn Rand, Capitalism: The Unknown Ideal (New York: Signet Books, 1967).
Author:

Eben Macdonald

Eben Macdonald is a 15-year-old student, a keen free-marketeer, and he wants a society which is predicated on liberty.

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