In the discipline of anthropology the study of economics becomes very broad. We tend to think of any behavior that results in people sustaining themselves as economic behavior, so modes of subsistence from food foraging to agriculture are considered kinds of economies. Then there’s the classic anthropology of symbolic exchange like gift giving, acquiring social status, and trading political favors – those are also economic behaviors. As contemporary anthropology has grown to take more of the modern world as its subject matter globalization has become one of the defining topics and, of course, that has to include concerns that are more in tune with what you’d get in an economics course.
I have assigned a very short piece, “Trade Liberalization and Economic Development” that touches on some of the most important concerns of our globalizing world. Unfortunately it is written in heiroglyphics. Its so full of jargon you may find yourself reading it multiple times (it doesn’t take long) and its meaning still escaping you. Here I’ll try to walk you through some of the major points.
Does the title of this piece seem odd to you? “Liberalization” is not be a word that you would use in ordinary speech, but it is made up of word parts you should recognize. Those first five letters, ‘liber,’ come from the Latin word for freedom, as in liberty.
Our idea of liberty as a political concept comes out of the Age of Enlightenment and refers to to individual and collective rights that were to be preserved regardless of the will of the king. We in the United States live in a “liberal democracy” and here ‘liber’ refers to a free democracy where citizens elect their leaders. And if you remember your American history then recall that the nation was founded not only on the principles of individual liberties but also “market liberalism.” Here ‘liber’ refers to a market free from taxes and tariffs.
This meaning is closest to the market liberalization in the article’s title, also known as free market capitalism, or neoliberalism. There are other, alternative forms of capitalism. Social capitalism is an economy where resources are redistributed from the most successful to the least. And managed or regulated capitalism is one where the government plays a leading role in directing or restraining certain aspects of the market. Neoliberal capitalism appears to be an economic form that is on the rise. If you keep up with current events you may have heard some of its critics arguing that the current economic crisis is a result of insufficient regulation, while its proponents continue to push for lower taxes and less stringent market regulations.
In the first subheading of the article the authors give a brief overview of Ricardo’s theory of comparative advantage and give an esoteric example referencing a trade deal between England and Portugal from the 1800s. What are they talking about? Let’s consider an example that’s closer to home.
Loggers in the Pacific Northwest – Oregon, Washington – cut down trees. Those trees are then loaded onto huge cargo vessels that cross the Pacific Ocean. In China the trees are unloaded off the ships and taken to mills where Chinese workers process the raw materials into lumber. The finished lumber is loaded back onto cargo vessels that ship them to the United States. Back in the U.S. that finished product is unloaded and delivered to Home Depot and Lowes where you can buy them as 2x4s, or whatever.
As counter-intuitive as it might seem the above transaction is only possible because of comparative advantage. The cost of shipping raw materials from the U.S. to China and back to the U.S. plus the cost of Chinese labor is less than the cost of hiring American workers to turn trees into lumber. The benefit of this arrangement (and these is true for all imports: clothing is a big one, just look at the label of the shirt you’re wearing) is that American consumers can buy less expensive commodities and the companies that sell those commodities gain higher profits. The downside of this arrangement is that all those jobs are now overseas.
Cost of Chinese labor + shipping to and from China < Cost of American labor
=In this example China has a comparative advantage relative to the U.S. for manual labor.
Value added commodities
In the last paragraph on the first page the authors state that there is a fundamental difference between developing economies, such as those in Latin America or Africa, and a developed economy like the United States. These are the very nations that proponents of international trades say they want to help through the lifting of market restrictions. What is the basis of this difference? Typically these developing economies produce “primary products” for export that the developed world can import cheaply and then turn into value added commodities. Let me elaborate.
Think about coffee. How much do you think a farmer growing coffee beans in Colombia makes? Pennies, right. That’s because his beans are green and you can’t make coffee from green beans. So a merchant goes around to all the farms and buys up all the green beans. The merchant can sell these to an exporting company for slightly more. The exporting company loads them on a ship and sails up to New Orleans where the coffee is sold to companies like Proctor and Gambles. P&G takes those tons of green beans, roasts them and grinds them, and puts them in a can. Now you’ve got Folgers and it can be sold in a grocery store for slightly more money. Or Starbucks buys them, processes them and ships them to their retail outlets where you can pay up to five dollars for a cup of coffee.
That’s a value added commodity. In each step of the chain value is added to the commodity’s worth by processing it and making it into a more desirable product that can be sold for more money. What good are green coffee beans if you need to wake up? None, they’re useless. You need a cup of coffee so that product is more valuable. What good is a cow if you’re hungry? None. You need a Big Mac. You need a cow that’s been slaughtered, butchered, ground, made into a patty, cooked and served at McDonald’s. To a hungry person a cow is worthless, an actual hamburger is valuable.
NAFTA as an example of free market capitalism
The North American Free Trade Agreement, negotiated by the first President Bush and signed into law by President Clinton, is a kind of neoliberal trade deal like the ones that the authors in this article are criticizing. Mexico and Canada are the United State’s biggest trading partners and NAFTA has had tremendous impact on all three nation’s economies.
Formerly the Mexican economy was one based on import substitution, which works against comparative advantage. Rather than import cheap commodities, Mexican consumers paid more for domestically produced ones. The result is slower economic growth but with the perception of greater independence stemming from self-sufficiency. (I say “perception” because the Mexican, Canadian, and American economies are all interdependent. We all rely on each other.) In the lumber example above, if the U.S. stopped exporting trees to China and returned to milling lumber in Oregon that would among to import substitution.
In an ideal world NAFTA was supposed to remove this constraint on the Mexican economy and promote economic growth by integrating the three trading partners into the largest trading bloc in the world. Thus liberalizing Mexico would mean not only the growth of liberal democracy (which has occurred, after signing NAFTA, Mexico, for eighty years a one-party state, elected its first opposition party president) but also trade liberalization – the imposition of free market capitalism and the dismantling of import substitution.
This did result an overall rise in the standard of living for Mexicans but it primarily benefited a small segment of Mexican society. Jobs producing goods in Mexico for Mexicans declined because those commodities could now be imported more cheaply. It also dispossessed many Mexican farmers of their land as agriculture in Mexico modernized and became industrial in scale. Neoliberalism and comparative advantage are very good at removing inefficiencies in the interest of producing greater profits – this totally changed the way food is grown in Mexico and exported to the U.S. It’s much more efficient now, so fewer workers are needed.
So where did all those out of work Mexicans go? They came to the United States. One of the biggest demographic trends in America, the rapid growth of Hispanic populations, is directly related to neoliberalism, especially NAFTA which they said was supposed to grow the Mexican economy. While trade liberalization is experienced as a good thing for American consumers (commodities are cheap) and American corporations (profits are high), it is often experienced as an unwelcome and disruptive force in the lives of people who are from countries with developing economies.
As the authors of the article point out on the second page, a study conducted by the World Bank came to a similar conclusion. When it comes to trade liberalization, rich countries stand to gain substantially more than poorer countries. The great irony was that the World Bank and the International Monetary Fund (IMF) are two of the greatest proponents of neoliberalism in the world today. Thus when the World Bank released this report criticizing its own policies it was extremely embarrassing for them and it was quickly swept under the rug.
Thanks for trying to read this article. If anything you should learn to be skeptical of anyone who claims that they’ve got a simple solution to our economic problems. Don’t believe the hype! Economics is hard and the world is complex. It takes hard, complex explanations to make sense of it all.