FT.com / World / Americas - US economy threatens Dominican Republic

Trade based on comparative advantage… the theory originally articulated by Adam Smith, later fine-tuned by David Ricardo, the theory that suggests that if each nation specializes its economic activity on the products for which it faces the lowest opportunity cost, then trades with its neighbors, total world output and efficiency can be maximized: today this theory represents the philosophical underpinning of all free trade agreements signed between and among the nations of the world.

Through trade, countries can exchange their extra output with other nations for the goods specialized in by others, enabling all nations to enjoy a level of consumption beyond what they’d be able to achieve if they tried to produce all goods domestically.

For many developing countries, with their abundance of either land or labor, comparative advantages tend to lie in either agricultural goods or low-skilled manufactured goods. Since global prices for food are highly unstable and dependency on healthy harvests, good weather, and stable rainfall are all highly risky endeavors for a poor country, developing nations prefer to foster the growth of manufacturing sectors in their path towards economic development.

Strategies for economic growth available to developing nations include export-oriented and inward-oriented growth. A country like the Dominican Republic, the largest economy in the Caribbean, has pursued a predominantly export-oriented growth strategy, promoting through “free zones” the growth of a textile industry aimed at producing goods for consumers in developed countries, primarily the US.

To the Domincans, producing textiles for export to America has successfully given the people of this poor nation a grip on a rung of the ladder towards economic development. The import of capital has taken previously unproductive workers out of agriculture and put them into an industry where productivity, thus income, has risen, leading to improvements in living standards. Export-led growth, however, runs some serious risks of its own, as is being realized by the people of the Dominican Republic today.

It had been clear for some time that Luis Caraballo’s textile factory, in one of the Dominican Republic’s largest “free zones”, was struggling.

Finally, last December, he closed the factory gates for the last time: cut-throat competition from China and Vietnam, a weakening US dollar and unsustainable costs had become too much.

Once a hot destination for American companies looking for a cheap place to “off-shore” production of labor intensive textiles, the Dominican Republic today faces new competition, and is finding its comparative advantage slip slowly away from textiles…

The Dominican Republic depends heavily on the US, which is the destination of more than 85 per cent of exports. But textile exports – these days accounting for less than a third of total exports – fell by 32 per cent over 2007.

Although other countries in the Caribbean are also suffering from Asian competition – with Chinese textile exports to the US tripling between 2000 and 2005, while Vietnam’s multiplied almost 117 times – the Dominican Republic has been worst hit.

Here’s the thing: a nation’s comparative advantage may shift over time (from land to labor to capital intensive goods) as the structure of the global economy evolves. Once an economy like the Dominican Republic’s has undergone a period of structural adjustment, away from agriculture and towards industry, the flow of low wage workers from farm to factory begins to slow to a trickle, leading to rising wages and increased competition from countries with more abundant supplies of cheap labor.

The challenge for policy makers is to manage the structural changes as they come, minimizing the deleterious impact such global shifts of productive resources has on the citizens of a country like the D.R. Clearly, it is in the country’s interest to prepare its citizens for a “new economy”, one in which skilled labor will play a larger role. The problem is, this requires a solid education system, which the D.R., it turns out, does not yet have:

There is widespread acceptance of the need to develop a better-educated workforce, but so far education spending has been inadequate.

“The government simply doesn’t have enough resources,” said Mr Montás. About 40 per cent of its budget goes on debt obligations and another 15 per cent is dished out through subsidies. Just 1.5 per cent goes towards education.

It also turns out that this is a balance of payments story:

Mr Montás calculated that for every percentage point the US economy contracted, the Dominican Republic’s GDP would shrink by 0.4 per cent.

Not only will exporters be hit, but also the huge tourism sector and remittance flows…

One possible result of the decline in exports and flows of remittances from the US will be a depreciation of the D.R. peso, as demand for pesos by Americans falls. A weaker peso might make the country’s exports attractive once again, assuming the exchange rate is allowed to adjust on foreign exchange markets. A weaker peso should help slow the decline in the D.R.’s exports to the US, at least until new competition emerges, perhaps elsewhere in Asia, maybe even from Africa or other Latin American countries.

In all likelihood, given the increased competition from Asian textile manufacturers, continued economic growth in the Dominican Republic will depend on the country’s ability to educate and train its workforce to adapt to a more capital, technology and information-based economy, which, if successful, will eventually lead to rising incomes and higher standards of living for the people of the this rising Caribbean nation.

Comparative advantages evolve with the emergence of new competition among developing and developed countries. The negative impacts this evolution has on a particular economy can be managed if wise policy actions are taken to assure a country’s workforce is educated and trained to participate in tomorrow’s economy, rather than yesterday’s or today’s.

Shanghai American School AquaEagles - World Swim Against Malaria

Students, teacher, parents, readers… here’s a good opportunity to spread good will and support students who truly care and want to make a difference in the world. The SAS swim team has organized a “World Swim Against Malaria” swimathon on Friday, April 18. The Aqua Eagle have set up a website where anyone can go and make a donation, small or large, $1 to $100, anything you can offer is welcome!

The money raised will go straight towards buying mosquito nets for residents of sub-Saharan African countries. A mosquito net costs $5 US, or roughly 7 days wages for a Malawian worker. One to three million die of malaria each, year, 70% of whom are children under five. Today alone, seven jumbo jets could be filled with the corpses of malaria victims.

Malaria is a disease of those in poverty. The simple solution to this disease is providing access to the simplest of technologies: a mesh bed net.

For each $100 the swim team raises, 20 nets will end up over the heads and beds of children in Africa. $100 could potentially save 20 lives right now. If you want to help out, follow the link above and make your donation now!

In recent years coffee consumers may have noticed more and more cafes are offering “fair trade” coffee as an option. Usually, for an extra 10 or 20 cents per cup, you can get a beverage made from beans that were grown by farmers earning living wages and working in safe and sustainable environments. In some cases, “fair trade” coffee is of higher standards, representing a higher quality product. The premium paid by consumers, in theory, will eventually result in better standards of living for coffee farmers and their families.

Mike Munger, chair of Duke University’s economics department, argues that “fair trade” products, while they may represent good intentions, probably don’t do much to help poor farmers. While the full podcast offers even more reasons, the clip below presents one clear explanation of why “fair trade” may actually make poor farmers worse off.

 

 Munger on fair trade [6:50m]: Play Now | Play in Popup | Download

Another interesting point Munger goes on to make relates to one of the models of economic growth we have been studying in IB Economics: the Lewis dual-sector model of structural change. According to the model, the path towards economic growth, which should create conditions that lead to economic development, requires the transition of workers from the low-productivity agricultural sector to the capital-intensive, high productivity manufacturing sector.

China, in its own economic growth, has demonstrated the success of this model, which involved rural to urban migration, employment of surplus labor from the farming sector in the industrial sector, giving workers access to capital, increasing productivity, output, income, saving, and investment, putting an economy on a path towards growth and development.

According to Munger, “fair trade” premiums paid to poor farmers create a disincentive for a farmer to migrate to the higher productivity industrial sector that may be emerging in his country. In essence, coffee drinkers in the rich world are offering a subsidy to farmers in the poor world aimed at keeping them poor. If the path to wealth and prosperity requires the transition to a capital-intensive industrial economy, then subsidies to poor farmers are only reducing the likelihood that they’ll achieve significant increases in income and savings.

Munger’s views are compelling, if a bit hard for a socially conscious, well-intentioned coffee lover like myself to swallow. I like to think that I’m helping farmers in the developing world when I drink “fair trade” coffee. If anything, Munger has at least made me think a bit harder about the true impact of the premium I pay when I choose “fair trade” next time I walk into Starbucks.

For the full podcast, click here: Munger on Fair Trade and Free Trade - EconTalk with Russ Roberts

Bill Gates Issues Call For Kinder Capitalism - WSJ.com

“We could make market forces work better for the poor if we could develop a more creative capitalism…” - Bill Gates at the 2007 Harvard commencement address

Is capitalism capable of lifting the world’s 4 billion poor people out of poverty? Bill Gates, the world’s greatest beneficiary of capitalist markets, thinks the system that forms the foundation of our market economy requires some re-thinking. Gates is calling for “creative capitalism” in which firms respond to incentives aimed at developing technologies that serve the world’s poor.

Gates first expressed his interest in a capitalist system with a focus on helping the poor in his Harvard commencement address last year, and reiterated his vision last week at the World Economic Forum in Davos, Switzerland. Gates envisions a future where profits will motivate industies to create goods and services not just for the top 20% of the world’s income earners, those in the rich countries of the OECD (the “country club of the UN” as Hans Rosling calls it), but by developing products that are meant to benefit the world’s poorest people, those in the bottom 20%, who suffer most from poverty.

Watch the videos below and discuss the prospects of Gate’s vision becoming a reality.

June 2007 at Harvard

and January 2008 at Davos

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Gapminder - Home

Hans Rosling, a Swedish professor of international health, has created a presentation that I would describe as the “Inconvenient Truth” of global poverty. Using software he developed to analyze data on human development called “Gapminder”, Rosling gives a mind-blowing presentation on the trends in economic and human welfare over the last thirty years, debunking several myths believed true by many in the first world about development and poverty.

The first video is from the 2006 TED Conference in Monteray, California. The second video is from 2007’s TED. Both have been viewed hundreds of thousands of times on the web. Watch and discuss…

2006 TED Conference:

2007 TED Conference:

Today in IB Economics, as part of our unit on Economic Development, our class had an interesting discussion about the barriers developing countries face in improving the lives of the average citizen.

One obstacle persistent in many poor countries is the average citizen’s lack of access to a dependable banking system. Entrepreneurs interested in getting financing for a business endeavor may find themselves unable to access credit, as domestic banks may be unwilling to loan small amounts of money to individuals without a credit history or even any formal education or training. Meanwhile, international banks operating in developing countries are often there only to serve international investors and corporations that want to open up shop in the country. These banks may not even allow a common citizen of the developing country through its doors, much less consider giving them a loan.

Marco, a student in my class, mentioned an organization he’d heard of that allowed citizens from the developed world to log in and make loans directly to entrepreneurs in the developing world. The very concept of this variety of micro-lending seemed so straightforward and ingenious that I had to fine out more. Luckily, Marco found the website and this video about the organization, which goes by the name Kiva.org. From their website:

Kiva lets you connect with and loan money to unique small businesses in the developing world. By choosing a business on Kiva.org, you can “sponsor a business” and help the world’s working poor make great strides towards economic independence. Throughout the course of the loan (usually 6-12 months), you can receive email journal updates from the business you’ve sponsored. As loans are repaid, you get your loan money back.

Discussion Questions:

1. Why is investment necessary for economic development to occur?
2. What institutional factors exist that prevent improvements in human capital in some developing countries?
3. I micro-lending in general and Kiva.org in particular a realistic solution to the problem of poverty in developing countries?

Grinding poverty defies China’s boom - International Herald Tribune

Here at SAS my year two IB Econ students have started off the new year with a new unit: Economic Development. So far in the semester we’ve learned about what makes economic development different than economic growth. While gross domestic product may offer an indication of a country’s level of economic activity and output, it says little about the reality of life for the common person of developing countries.

To offer a more rounded figure for determining the level of economic development, the United Nations Development Program has created an alternative to GDP, the Human Development Index. The HDI accounts for the GDP per capita, the average level of primary and secondary education attained, literacy rates, and the life expectancy of citizens, to offer a glimpse into the reality of not just material wealth, but health and education in developing countries.

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The Nano comes with its own moral dilemma. - By Anne Applebaum - Slate Magazine

Tata Motors of India recently launched the world’s cheapest automobile, the Nano.

“…meet the Nano, possibly the most significant new car of the decade. Small, cute, and snub-nosed, it fits four people and a duffel bag, has a single windshield wiper, travels at 60 mph, and it’s all yours for the princely sum of $2,500…”

Tata plans to build and sell 250,000 Nanos this year in India, spreading production to Africa, South America, and Southeast Asia. Clearly the company is targeting not the traditional auto markets of Europe and North America, rather the regions traditionally thought of as poor and thus not associated with auto sales.

What is the meaning of this “car for the masses”? At first glance, it looks like the perfect solution for bringing millions of the world’s poor (if not super-poor) closer to the dream of achieving a quality of life previously only accessible by the world’s middle class and rich. Great,  so what could possible be bad about fulfilling the dreams of so many of the world’s poor? The answer? Externalities…

“Though the small Nano uses less gasoline than many larger cars, the enormous potential numbers could mean an equally enormous environmental impact. Since it will be a long time before Nano drivers will be able to afford the $20,000-plus hybrids now on the market, let alone a Honda FCX Clarity, the prototype experimental hydrogen car thought to be worth as much as $10 million apiece, that means an exponential rise in carbon emissions as well as other kinds of pollutants. The United Nations’ top climate scientist, Indian economist Rajendra Pachauri—chair of the Intergovernmental Panel on Climate Change, which shared the Nobel Peace Prize with Al Gore—has said he is already “having nightmares” about precisely this scenario.”

Herein lies the moral dilemma of the Nano: where does society’s desire to improve the lot of the world’s poor come into conflict with society’s desire to to improve the environment and minimize the impact global warming?

What do you think? Do the social benefits of a $2,500 car exceed the social costs it will likely impose? Does the Nano’s $2,500 price incorporate the full costs that its existence places on society and the environment? Should we jump for joy at the thought of millions upon millions of the world’s poor finally having access to the convenience of automobile transport? Or should we pause with uncertainty to contemplate the effect on the environment and the social costs that millions of cheap cars will impose on the world?

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Shanghai Daily, Oct 22, 2007: How happy are we?-Let’s measure Gross National Happiness

When I first talked to Mr.Welker about a writing a blog entry about an alternative measurement of well-being to GDP and GNP, called the Gross National Happiness quotient, he gave me one those “looks”. I perceived the look to mean, “you are like a peace loving, hippy dippy gal from the East Coast, Ms. Close… this is economics we are doing here!” Of course, Mr. Welker would never admit that was what he was thinking because he is far too nice for that. But, I am happy to say that I am finally writing this entry because I finally have Oxford University and Cambridge University in England to back me up on this, Happiness Research.

These famous educational institution have their economists developing new ways to measure well being from an holistic economic perspective. Economists and sociologists all over the world, especially those interested in international development models are seeking to, “establish scientific methods for finding our what makes us happy and why”.

Happiness and well-being are complicated. Researchers cite many factors, like education, nutrition, freedom from fear and violence, gender equality, and perhaps most important, having choices, write Authur Max and Toby Sterling.

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Meet Jasper. Jasper is a resident of Saint Dominic Village, a Habitat for Humanity community made up of 65 houses (eventually 92), one as of yet un-staffed community center, 200 children (the average family has about six kids), one playground with a few rusty swings and a teeter totter.

Among the 200 children in Saint Dominic Village, only a handful attend school regularly. Almost all of the younger children live on their own for most of their days, as their parents head to the city to find work. Teenagers in the village attend school sporadically, often choosing to hang out in the village smoking pot, or to find work in the city to supplement their family income.

A typical family in Saint Dominic village will earn between 3 and 6 dollars a day, but only when there is work to be found. Some of the common jobs here include “tricycle” driver (these are motorcycles with side cars used as taxis in this part of the Philippines), jeepney driver, charcoal salesman, seamstress, laundry service, handicrafts, and the odd factory job (although these are scarce in this area as there is very little capital investment). Continue Reading »