Christianity and Capitalism, Part II

A Review of “Rich Christians in an Age of Hunger”, Part I

By

Brent Hardaway

Semi-sparkling Sider

It’s hard to know what to do with a guy like Ron Sider. On the one hand, Sider is a man of deep conviction and compassion for the poor. Of that, there is no doubt. As a college professor, Yale Ph.D. (in history), and fairly well-published author, Sider could have chosen to live a very comfortable lifestyle in some affluent suburb. Instead, he’s chosen a very modest lifestyle, living in Philadelphia’s inner city, and while he insists that he doesn’t live in poverty, he and his wife have practiced a “graduated tithe”, donating much of their excess income to organizations that help the poor in various ways around the world. Despite being labeled as a liberal, he solidly defends orthodox evangelical positions regarding morality at meetings of the very liberal National Council of Churches. He’s been labeled as a socialist, but he has shown that he is most interested in what will lift the poor out of poverty, regardless of what school of thought that the means comes out of. And by all accounts, he’s a really nice guy, and is quite gracious to those with whom he disagrees. And one does find value in Sider’s work. His call for Christians to live more simply, to not succumb to our culture of materialism, to find the joy in giving are very biblical and cannot be faulted He sounds like just the type of guy that’s perfect to intellectually fence with, agree to disagree with, and even learn a few things from. (Click here for a mini-bio).

But, on the other hand, reading Sider can be exasperating at times, and unfortunately, Sider’s deep compassion can be his undoing. Poverty bothers him greatly, and to him there MUST be something that we can do to end it. And because we can do something, it means that since the problem now exists, YOU (meaning Westerners, more specifically Americans, and most specifically American Christians) obviously don’t care. Because if you did, the problem would be solved. This leads to a constant scolding tone throughout his work. And even as Sider credibly insists that he’s not trying to create a false sense of guilt, it is clear that he is convinced, and tries to convince you as well, that the guilt lies with you. Of course, various faults of the West can be pointed out. Yes, Western trade policies are not always fair. Yes, multinational corporations (MNC’s) do not always act in an ethical manner. But somehow, he seems to think that if these wrongs were righted, along with a generous redistribution of the world’s wealth, the picture would change considerably. But for a multitude of reasons that we shall examine in due course, this thesis is untrue.

Then there are the inconsistencies. Sider serves up more waffles than a brunch buffet, and he zig-zags, jukes and spins so much that when you’re reading him, you may feel like you’re watching a tape of Barry Sanders slicing and dicing up NFL defenses circa 1997. It’s exasperating to be told that you don’t care, but to be given an incoherent vision of what the world is supposed to look like, just adds to the annoyance. And while he sometimes makes impressive runs towards the end zone, he’s already run so far in the wrong direction that he can’t get there, or if he makes it in, he just keeps running, like Forrest Gump would have done if the cheering section hadn’t yelled “Stop! Forrest! Stop!” More specifically, he correctly decries rampant consumerism and materialism in the U.S., but then he goes on to ridiculously overstate U.S. levels of consumption.

What’s the result? A look at the glowing reviews of Rich Christians at amazon.com includes the usual praise, but a few of these complain that Sider’s book is a difficult and challenging read, that it gets too bogged down in statistics (God forbid that we should have to use THOSE in dealing with economic issues), etc. This is troubling, because it indicates that a number of those who read and follow Sider aren’t going to read anything else on the topic, and they’re convinced that they’ve actually read a very serious work on global economics.

In reality, the quality of the book is quite uneven, sometimes making good points and accurate observations, but a number of claims are flatly ridiculous and irresponsible. There’s little excuse for this, given Sider’s level of education, research skills, and ability to balance two points of view (demonstrated in Just Generosity). So while we will give credit where credit is due, we will have some fun tracking Sider’s breathtaking movements around the intellectual gridiron. J The next essay, which reviews Just Generosity, will take a less polemical tack, as it’s a much better effort.

The Great Divide

Chapter 2 of Sider’s book, “The Affluent Minority” starts off with some keen observations about advertising (p. 21-24). Yes, some advertising makes empty promises of happiness if you buy this or that product, and he rightly objects to that.

Touchdown! He keeps running!

He then passes on a recommendation from one John Taylor who urges Christian families to say “Who are you kidding?” whenever a commercial comes across the TV. Now, I can understand if it’s an auto commercial telling me that a certain car provides “fuel for the soul” or something, but if it’s a commercial about my local dealer having 1.9% financing, and if my current car is about to die, then that’s pretty darn useful information.

Anyway, the following pages tell of the difference in income between the world’s developed and less developed nations. The gap continues to grow, with countries classified as “middle” and “poor” growing, but at a slower rate. The poorest countries are hardly growing at all. The tone makes you begin to suspect that you’re about to be charged with a crime. This feeling intensifies as Sider declares,

“The facts are clear. North Americans, Europeans, and Japanese devour an incredibly unequal share of the world’s available resources.” (p. 30)

Then he correctly notes that some middle-class Americans absurdly complain that they live in poverty. He says,

“To the vast majority of the world’s people such statements would be unintelligible or dishonest.” [Ibid, 31]

He’s right. Most Americans don’t truly appreciate what they have.

Touchdown! He keeps running!

“To be sure, we really do need $30,000, $50,000 or even more each year if we insist on having two cars, an expensively furnished, sprawling suburban home, a $300,000 life insurance policy, new clothes each time fashions change, the most recent ‘labor saving devices’ for home and garden, an annual three-week vacation, and so on.” [Ibid]

You can afford all of THIS on $30K-$50K a year?

The feeling of incrimination grows even more as he asks, “How generous are we?” Not very, considering that the percentage of our GDP that goes to foreign aid is quite small (even though there is no mention, at least at this point in the book, how little foreign aid has accomplished. Neither is their any mention of volunteer time or private donations, which totaled $34 billion in 2001. [NCPA.ATG]. (Over half of that amount comes from immigrants who send money home, benefiting from a fairly liberal immigration policy that allows those from poorer nations to have opportunities that they would not have elsewhere.) He complains that the developed nations spend ten times the amount on our militaries than they do on foreign aid. Then he asks,

“Is that the way we want to spend our abundance?” [Sid.RC.32]

Well, let’s think about it. What type of expenditure has done more to keep poverty at bay? Why is South Korea an advanced, prosperous, and industrialized country today and not part of the miserable gulag that is North Korea? It wasn’t because of foreign aid. Or let’s try the Kurds in northern Iraq, where the number of schools and hospitals have tripled since the recently defunct no-fly zones were established in 1991. Did foreign aid keep a certain recently deposed Middle Eastern dictator from seizing a big chunk of the world’s oil supply, and avert a disaster like the 1973 OPEC oil embargo, which damaged just about every country in the world, especially the poorest? Or how has the Bosnian economy improved since billions of dollars in foreign aid have poured into the country? Nada. Military expenditures at least kept the folks there from being slaughtered by the Serbs. Full disclosure: Sider is a pacifist in the Anabaptist tradition. Oddly enough, in both Rich Christians and Just Generosity, he quotes scriptures like Psalm 72 and Romans 13, which speak of those who govern as “agents of wrath” who “hold terror for those who do wrong” and are to “crush the oppressor”. He sees these passages as largely economic in focus, and uses them as a springboard for supporting high taxes, redistribution of wealth and the like. This I find interesting, since I’ve noticed that when a member of Sider’s camp is presented with these verses as support for capital punishment or military force, these phrases seem to become very ambiguous. J But before we get to far off on this tangent…..

Now he have a section headed “Rationalizing our affluence”. Here we have three rationalizations. One is from a guy named Garrett Hardin, who believes that the poor people of the world should be allowed to starve, because only then will the poorer countries learn to stop populating the earth. The next is from Robert Schueller of Crystal Cathedral fame, who justifies his gaudy palace on the basis that it impresses wealthy successful people and thus serves an evangelistic purpose. Then we have a friend of Sider’s, who buys Jaguars so he can keep people employed.

So Sider lists an extremist view that isn’t held by anyone else I know of, and then two of the most egregious examples of indulgence presented as typical. Well, this isn’t MY affluence, Ron, and it isn’t for the vast majority of Christians, who are far more likely to drive Hondas and Fords, as well as attend a church where the tacky orange carpet hasn’t been updated since it was installed in the seventies.

But, in his passage regarding Hardin, at least we do get what we’ve been suspecting all along.

“Another omission in Hardin’s thesis is even more astonishing. He totally ignores the fact that the ever-increasing affluence among the rich minority is one of the fundamental causes of the crisis. It is false to suggest that there is not enough food to feed everyone. There is enough - if it is fairly distributed.” [Ibid, 34]

Whoa there. Hold on just a minute. Where did you get this idea? I wasn’t aware that the standard of living of the prosperous nations was causing the starvation in the rest of the world. In fact, on page 25, he presents a graph that shows increasing GDP in the developed nations, coinciding with growth in all but the poorest nations, whose growth rate has been flat. When the developed world was less affluent, there was far more starvation.

He spins! He’s running for daylight!!!

“Some people are eager to work but lack the proper tools and knowledge. Because they do not have the seeds or implements, their agricultural production is too low to provide enough food.” [Ibid, 128]

Good job! He’s on track here. Low food production is why poor countries are starving. This, of course, has absolutely nothing to do with the prosperous nations. .

He jukes! He cuts! He’s running the wrong way!!!

“We dare not continue destroying the world’s soil, water, and forests. Northern capital-intensive farming, for instance, is not a model to promote in developing nations. Our aid should promote appropriate technology and a labor-intensive approach that is sensitive to preserving a sound global ecosystem.” [Ibid, 261]

Labor-intensive farming = continued low food production, starvation, malnutrition, and misery. And now he doesn’t want to implement the solution.

He slashes! He dashes!

“The problem of long-term decline of relative prices of some commodities must also be faced squarely….When the manufactured imports they buy from us cost more and more relative to the primary products they sell us, they have a big problem…The only lasting solution is to assist poor nations severely affected by declining prices to move into the production of other goods.” [Ibid, 247]

Oh, how very true this is. Declining commodity prices = continually lower GDP, with poverty and misery continuing. The problem is that Sider’s labor intensive approach to agriculture keeps these countries’ labor tied up in the production of commodities.

It’s a quick kick! He punts!

After reviewing the arguments, pro and con, as to whether modern farming technology is destroying the world’s soil, Sider offers,

“The final verdict? Non-specialists like you and me cannot be sure.” [Ibid, 165]

So the reasons why we can’t implement the solution may not even be true? Round and round and round and round it goes…..

The Real Reason

In a nutshell, Sider sees the problem as a lack of resources and assets necessary to foster economic growth and believes that redistribution must occur in order for it to happen.

“The most glaring problem is that at least one quarter of the world’s people lack the capital to participate in any major way in the global market economy….if we start with the present division of wealth, the outcome of the market will be ghastly injustice. Only if redistribution occurs-through both private and public measures-will the poorest obtain the capital to earn a decent living in the global market.” [Ibid, 141, 143]

But this isn’t the problem. Here’s why.

In the first essay, we followed the path of Ted, a hypothetical entrepreneur living in the United States. Let’s take Ted and put him in a typical underdeveloped country (and it could be in Latin America, the former Soviet states, Africa, or the Middle East).

Ted raised his initial capital by taking out a second mortgage on his home. But now, he can’t do that. Ted owns a modest home, but he doesn’t have title to it. He built the house on some state- owned land. For him to get title upon construction, he would have had to go through a labyrinthine maze of bureaucratic regulations and agencies. That process could take years.

So he went ahead and built his house anyway. He can live in it, the people living around him know and accept that it belongs to him, but he cannot go to the bank and take out a loan on it because he cannot provide legal proof that he owns it.

Still more obstacles confront him if he wants to start his own business, the capital of which will probably come from very meager savings. He faces another labyrinthine maze of bureaucracy and regulation that could take years to complete. Now, he might be able to get around a few of these obstacles if he had money to bribe the bureaucrats, or if he was a member of an elite clique of people, but he’s just an average guy. Contrast this with the United States, where he could get a business license by filling out a few forms, paying some modest fees, and just waiting a few days.

So what happens is that Ted sets up a small, one-person micro business that operates outside of the legal sector. He can sell to people he knows, and even strangers who pay cash, but he cannot expand his business by extending credit to strangers, since they too are likely to earn a living outside the legal sector and have no credit histories. He can’t tell if they are likely to pay or not, and even if he extended credit, he could not go to court to defend his rights under a given contract, because he doesn’t operate a legal business. And even if he did, the court systems are also likely to be corrupt, too. (Here, the average American might say, “So what? Our courts and various levels of government are corrupt.” The difference is in the levels. Compared to Third World countries, corruption in the U.S., or the rest of the developed world, is very slight and not a significant factor in disrupting commercial activity.)

The result of all this is that:

1) Ted cannot create as many jobs, if he is able to create any at all.

2) Ted cannot realize the various economies of scale (like an efficient division of labor, bulk prices for raw materials, capital investments that would increase productivity).

3) Ted cannot attract capital from other investors and turn his business into a publicly traded corporation, prohibiting further expansion and efficiencies.

Thus poverty continues in these countries.

These problems with obtaining legal representations and protections of property are fairly well-known. What has not been known previously is the enormity of the potential that could be unleashed if all of this informal activity could be converted from extralegal to legal. This is laid out in the book The Mystery of Capital by the Peruvian economist Hernando de Soto. De Soto’s staff decided to try and see what it would take to get a license for a small garments workshop in Lima, Peru. De Soto describes what the process was like;

“The team then began filling out the forms, standing in the lines, and making the bus trips to central Lima to get all the certifications required to operate, according to the letter of the law, a small business in Peru. They spent six hours a day at it and finally registered the business-289 days later. Although the garment workshop was geared to operating with only one worker, the cost of legal registration was $1,231- thirty-one times the monthly minimum wage.” [DeS.TMC.19-20]

To get the permits and authorization to build a house on state land (much land in the Third World is state owned) takes almost seven years, and 728 bureaucratic steps through 52 government agencies. In the Philippines, there were 168 steps through 53 difference agencies, taking between 13 and 25 years. Take it anywhere you want to go in the developing world, you will find similar problems.

But could the houses that the world’s poor occupy really provide sufficient capital for them?

Initially, it wouldn’t seem like much. From the shanties in Haiti, to the more decent but still substandard houses in Cairo, those in developed countries see pieces of property that are worth little. But if you calculate how much it would cost to replace these structures in materials and labor, these properties are respectively worth about $500 and $5,000.

De Soto and his staff spent years estimating the value of extra-legal buildings in the Third World. When added together, the value of these buildings is substantial indeed. In Haiti, it all adds up to $5.2 billion dollars. This amounts to a staggering 158 times the amount of foreign investment in Haiti’s history up until 1995. In Peru, it totals $74 billion, 14 times the amount of all foreign investment. Ditto for the Philippines, where the assets total $133 billion. In Egypt, it is $240 billion, 55 times the amount of all foreign investment. All told, the extralegal assets in these countries total (are you sitting down?): 9.3 trillion dollars!!!

[DeS.TMC.33-35]

De Soto goes on to add,

“This is a number worth pondering: $9.3 trillion is about twice as much as the total circulating U.S. money supply. It is very nearly as much as the total value of all the companies listed on the main stock exchanges of the world’s twenty most developed countries: New York, Tokyo, London, Frankfurt, Toronto, Paris, Milan, the NASDAQ, and a dozen others. It is more than twenty times the total direct foreign investment into all Third World and former communist countries in the ten years after 1989, forty-six times as much as all the World Bank loans of the past three decades, and ninety-three times as much as all the developmental assistance from all advanced countries to the Third World in the same period.” [Ibid, 35]

Sider, who favors redistribution through private donations and foreign aid, presents one story in his preface that shows what can happen when even a little bit of capital can do in a developing country. Heck, it’s so beautiful we might as well just as well quote the whole thing.

“I’ll never forget Mrs. Kumar’s joyous, confident smile. She lives in a tiny one-room house in a poor village in South India near Bangalore. A couple of years ago, the Bridge Foundation (a Christian micro-loan organization founded by Indian evangelical leaders Vinay and Colleen Samuel) gave her and her husband, Vijay, a small loan of $219. They purchased a small, inexpensive sound system and a bicycle. With this equipment, the Kumars are able to provide the sound system for weddings, funerals, and other celebrations for poor villages in several surrounding communities. They now own three sound systems and hire a couple of employees. Mrs. Kumar proudly showed me the new lighting equipment, and the bicycle loaded down with their third sound system. Their little one-room cement house with a thatched roof has no indoor plumbing, but I could see many improvements. Family income had grown significantly. Most importantly, the Kumars had new dignity, hope, and confidence.” [Sid.RC.xv]

This is a great story, and it shows that contributions of this type are well worth doing. However, without the correct legal structures, the Kumars or any other family will run into a ceiling after which family income could not grow any more, and thus the various economies of scale cannot be realized. What’s more, these amounts of capital are still less than could be obtained by mortgaging their homes. Also, nearly every family becomes a business owner. This is a problem, because only a small minority of people have the proper skill and temperament for that undertaking. In the West, someone who doesn’t have that temperament typically winds up learning a vocational skill, and then goes to work for someone else, where they not only earn more for themselves, but mix with co-workers and the proper capital equipment to produce more for the society than they could on their own. But in the developing world micro-businesses don’t grow large enough to hire more than a few employees, if that (and of course, educational opportunities are limited, so skilled labor is in very short supply, anyway). So unqualified people are forced into their own micro-businesses (which are undercapitalized to begin with) where they earn meager incomes.

And this is a very important cause of Third World poverty. And this has absolutely nothing to do with the affluent nations, and there is little that they can do to change this, other than provide mindpower for those countries that are ready to get their act together.

It isn’t that Sider isn’t aware of these problems. He even mentions them, not in any sort of detail or anything, just in a few paragraphs as kind of afterthought, like “oh, yeah, and this needs to happen, too.” But then he quickly slithers back into how the developed world needs to provide capital. But that’s exactly the problem. Without the legal structures, there isn’t much worth investing in, because the capacity to provide returns on that capital is limited. Capital cannot be multiplied much, and may even end up being consumed. When the legal structures are there, there will be commercial ventures worth investing in. And when that happens, capital always shows up. When the legal structures are present, for-profit investors and lenders will be there, pockets open. It has never failed to happen. There are no impoverished nations that have free markets and adequate legal structures.

Indcidentally, DeSoto notes [DeS.MC.93-103] that these conditions of exclusive commercial recognition are very similar to those that existed in Europe during the mercantilist period. That dinosaur still rears its ugly head.

And Communism Isn’t Dead, Either

Sider’s preface begins,

“Communism has collapsed. Expanding market economies and new technologies have reduced poverty. “Democratic capitalism” has won the major economic/political debate of the twentieth century. Communism’s state ownership and central planning have proven not to work; they are inefficient and totalitarian.” [Sid.RC.xiii]

Well, yes, communism has proven not to work. But communism still exists.

China

Because of the increase in export-oriented manufacturing done in China, it has become common to think of China more as a capitalist country that happens to be run by a communist party. This is not quite accurate, as the U.S. State Department reports that through state-owned enterprises, the communist party controls two-thirds of GDP and urban employment [HF.IEF.China]

While manufacturing jobs have brought better living conditions to urban and coastal areas, China’s interior continues to be poverty-stricken. The countries’ GDP per capita is still an anemic $876. [Ibid]. China has 1.3 billion people, and is still transitioning into a more market-oriented economy. But they have a very long way to go, and thus many of its citizens, who are among the world’s poorest, are stuck with the carnage of communism for some time.

North Korea

Kim Jong-Il retains an iron grip on the country and the economy is still a centrally-planned and poverty-stricken Marxist state. At least a couple of million people starved to death during the late nineties as the government built up the military and pursued nuclear weapons. There is no intention to reform.

Cuba

Fidel Castro remains in power, and communism remains in place. Foreign companies that want to employ Cubans to manufacture goods must rent them from the government, which skims a lot of the rental price off of the top. Castro still remains dear to the heart of his western supporters, who praise the fact that the shanties that are found in most Latin American countries aren’t found in Cuba. What is forgotten is that Cuba before Castro was a relatively wealthy country, nearly on the level of the European countries, and after forty years of Marxism, most Cubans live at a sustenance level.. Some like to blame this on the continued U.S. embargo, but even if this were dropped, Castro would still skim much of this money off the top so he can live in opulence.

Libya and Laos

State-owned enterprises, shortages of basic goods, inefficient allocation of resources, everything that a “workers paradise” has to offer.

Iran

Granted, it’s not a Marxist state officially, but most of the economy is state-owned, including its’ all-important oil industry. Like Cuba, it once was one of the most advanced economies in its region before the 1979 Islamic revolution.

And the Rest

It’s also worth noting that many developing countries have only recently begun to move from statist economies to a more privatized path. This includes much of sub-Saharan Africa, Mexico, Syria, Vietnam, and the former Soviet states. This contributed to the state that they are in now, and it will be a long time before they are out of the hole.

So it isn’t just that the world’s poorest lack the basic capital to participate in the global market economy. Many don’t participate in market economies, period. And until they do, they will continue to be impoverished, regardless of what the West does.

Dealing with Despots

And then, there are the oppressive rulers of these and other countries. Sider acknowledges that this is a cause of poverty (but he blames the West for their existence, too - a point to which we will return). But this can be dealt with. He just glibly describes how we might be able to free people from these oppressive yokes. In his view, if the developed nations would just use their diplomatic and economic power, put pressure on these leaders, and if we all just encourage non-violent means of social change in these countries, it is all going to go away. [Sid.RC.229-231]

This method can has worked in removing dictators, but oppressive rulers have a nasty tendency to stay in power as long as they have enough loyalists in the military, police, and intelligence services to protect them. When they realize that they are outnumbered, they may well step down. But, if they have enough guns, these protest movements end up in the pavement (example: Tiananmen Square, 1989). The Islamofacist regime in Iran, for example, may well fall in the way that Sider proscribes, but in Iraq, this would not have been possible anytime in the foreseeable future. The Soviet Union crumbled in this fashion, but it took nearly three-quarters of a century, tens of millions were slaughtered before it happened, and nearly everyone had to become disenchanted with the dream before it happened. And of course, democracy does not automatically equal egalitarianism, freedom, and free markets if the people living in said democracy don’t hold these as values. Thus, in a country like Saudi Arabia, a democracy could potentially be even more repressive than the kleptocracy that is currently in power.

In Angola, the Congo (formerly Zaire), Rwanda, Burundi, Niger, and Sierra Leone, a fragile peace exists after brutal political/ethnic violence, all of which could restart at anytime. In countries like the Central African Republic, Sudan, Somalia, and Afghanistan (hopefully, the interim government there will eventually be able to secure the whole country) anarchy reigns in many parts as warlords and tribal leaders control much territory. They control what people have, and as we have learned in the past decade, they will prevent humanitarian aid from reaching their people. Sider’s pacifism prohibits him from proscribing lethal military force to neutralize these elements, and he is free to do so, but not doing so means that the desperately poor in these countries will continue to starve and suffer for a very long time, if not until the second Advent. Thus, their suffering continues not because “rich folk like you and me have ignored the Bible’s clear teaching that God measures the integrity of out faith by how we respond to the poor” [Ibid, p. xvii]”, but because their oppressors prohibit us from helping them.

And once again, Sider acknowledges this, but after giving an account of some of these conditions, he jukes right back in to the rhetoric about poverty being the fault of the developed world. [Ibid, 180-183] Thus, it’s not surprising that he starts the epilogue for his book in the following manner,

“We live at one of the greatest turning points in history. The present division of the world’s resources must not continue. And it cannot. Either generous Christians will persuade their affluent neighbors to transform today’s market economies so that everyone can share the earth’s good bounty, or growing divisions between rich and poor will lead not only to more starvation and death but also to increasing civil strife and war.” [Ibid, p. 271]

If only it were that simple. There are numerous other scenarios that can happen, but the most likely runs something like this;

Generous Christians will make a difference in the lives of some people And as De Soto’s work gets more of a hearing in the developing world, we will see some of these countries get the necessary legal structures in place, and some bright spots will probably emerge, having a far more reaching effect. But some, or even many, will not. Some of the nations that have become more democratic over the last decade or so will return to totalitarianism (A democratic Germany elected Adolph Hitler), with sub-Saharan Africa and most of the former Soviet states being the most susceptible. And despite the overwhelming evidence that free markets work, many people don’t learn anything from history, and socialism will always be capable of mass appeal. And some countries may well return to it and the economic malaise that it brings. Thus the present division of the world’s resources certainly can continue, as tragic as it may be.

This takes care of Sider’s central theme, but there are still details that merit attention.

Of Swooshes and Sweatshops

One of the recent global trends has been that of MNC’s moving manufacturing operations to developing countries. Sider is generally supportive of this trend;

“International trade also tends to increase real wages in developing countries. Wages in export-oriented firms are very low in comparison to wages in developed nations. (That, after all, is a major part of a poor nation’s comparative advantage.) But these ‘low wages’ are usually substantially higher - especially when trade unions have basic freedom-than the average wages in the country. Thus when international trading patterns use the comparative advantage of low wages in poor nations, two beneficial things can result: poor people receive higher wages and all of us pay lower prices for the products.” [Sid.RC.141]

Sider is correct here, although he is clear that not everything is right with this picture. He mentions such issues as working conditions, child labor, and wages that are sometimes too low.

Sider is pretty much on target here, and if he just left it at that, we could conclude that this trend is on balance a pretty good thing, but there are some things that need to be corrected. But if you thought that you were going to get out of this one without being scolded, you’re wrong….

He twists! He turns it down field!

“Unless you have retreated to some isolated valley and grow or make everything you use, you participate in unjust structures that contribute directly to the desperate poverty of some of our one billion suffering neighbors.” [Ibid, 181]

But by doing that, you would be doing FAR MORE to contribute to the desperate poverty of the poor by not buying the products they produce!

He turns! He cranks it up field!

“Although colonialism ended decades ago, industrialized nations have continued , over the past several decades, to manipulate international trade by imposing restrictive tariffs and import quotas to keep out many of the goods (especially processed and manufactured goods) produced in the less-developed countries. Tariff structures and import quotas affecting the poor nations are in fact one fundamental aspect of systemic injustice today.” [Ibid, 147-48]

So, it’s a sin to buy products from poorer nations, and also a sin for developed nations to keep their citizens from buying them. Got it.

These issues, once again, are legitimate. And they were a common theme among Western anti-globalization activists during the 1990s. The complaints were aimed at various targets - The Gap Stores, Wal-Mart, Kathy Lee Gifford’s apparel line, and especially, Nike. The picture painted was one of dark, sinister corporations moving into poor countries with fewer protections of worker’s rights so they could fulfill their insatiable desire to mistreat workers. But, once again, the oppression results far more from the cultures of these poor nations than MNC’s. Sometimes there isn‘t that much that can be done, and sometimes there aren’t any good options.

Journalist Daniel Litvin offers an account [Lit.CCC.227-47] of the Nike situation which shows how deep and complex the problems really are. A big part of the problem is that Nike and other western MNC’s usually don’t own the production facilities that produce their products. They are contracted out to local firms who are run by local managers. And in these countries, verbal/physical abuse of workers and poor working conditions are a way of life. The activist will reply that MNC’s still have great leverage and thus are still responsible for the condition of their workers. And that is partially true, but there are still problems. In Nike’s case, they hired a 30-member labor compliance staff. However, there are over 700 factories in Asia employing 500,000 workers. Making sure, on an everyday basis, that supervisors aren’t abusing their subordinates, that they are complying with safety standards, and that managers aren’t hiring mercenaries to beat up those who are trying organize unions is a Herculean task. And this is just the task of monitoring the manufacturing process of the finished product from a number of components. What about the supply chain that is stretched out among 6-10 different countries and contains 50 or so components come from a variety of sources?

Also complex is the problem of child labor. In response to a 1996 Life magazine photo showing a 12-year-old making a Nike football in the town of Sialkot, Pakistan, Nike announced that it would only purchase footballs from one contractor who could promise that no child labor would be used. But as Litvin notes, this has “produced ethically ambiguous results.”

The problem is that child labor is a way of life in these countries, as parents seldom make enough to feed their families. This is very similar the United States of 125 years ago. So when these children lost their jobs making footballs or shoes, they simply went to go work somewhere else, usually in much worse conditions. So Nike ordered its contractors to pay for the education of any child found working in their factories. However, the quality of teaching found in these countries is poor, and so children still ended up dropping out and going back to work, often in worse conditions than they had been in before.

“’I discovered the children were being employed in much worse industries,’ wrote Sue Lloyd-Roberts, a BBC journalist of a visit to Sialkot in 1998, ‘I visited this foul tannery where children were treating the hides of animals using quite dangerous chemicals in appalling working conditions…another industry they were working in…was making medical equipment, scissors, and steel equipment, etc. with a flare flaring out all over the place - without any eye protection at all - tiny children aged six.’” [Ibid, 244-5]

This story here from Indonesia re-emphasizes the point. It tells about the lives of children who end up working on jermals (rickety off-shore fishing platforms) for $9 a month, unless they are among the more than 30 percent who never get paid. The conditions are so bad that children risk drowning in order to escape. And young girls in these countries may well turn to prostitution.

Another bad, unintended consequence of this activism is evident from the closure of the Sialkot facility. While that factory had been open, many women had been able to escape from abusive home lives or provide for themselves if they were widowed. All of this ended to shield western consumers from the guilt of having their products made by children. Having children work in these factories is not a good choice, but right now, there are no good choices available.

Wages of Sin?

The wages of those who work in these workshops typically make between 10 and 50 cents an hour. This sounds appallingly low at first. However, the cost of living in these countries is also drastically lower than in the developed world, and as we have noted, they are substantially higher than the going wage rate in these countries. The children working in Indonesia’s offshore jermals work 12 hours a day, 7 days a week. At $9 a month, that comes out to about 2.5 cents per hour - if they get paid at all.

Still, Western activists have complained that these wages are still exploitive and not enough to support a family at a decent level. Is this true?

One factor that is usually not taken into account is that the productivity of these workers is typically very low compared with workers in developed countries. Not because they don’t work very hard - they do. However, they are not working with the same technology.

A 2001 Business Week article [Ber.LSJ] illustrates the point.

“Stroll through New Balance Athletic Shoe Inc.'s factory in Norridgewock, Me., and you will see workers using high-tech skills to make a low-tech product. Well-trained, $ 14-an-hour employees work in small teams, perform a half-dozen jobs, and switch tasks every few minutes. Some operate computerized equipment with up to 20 sewing-machine heads running at once. Others control an automated stitcher guided by cameras, which allows one operator to do the work of six using ordinary sewing machines.

Now, visit a Chinese subcontractor's factory that makes the same shoe for New Balance. You might think you had traveled back in time 100 years. In the factories that manufacture shoes for New Balance, Nike, Reebok International, and other U.S.-based athletic-footwear companies, hundreds of women hunch over sewing

machines much like ones used in their grandmothers' time.”

The result is that in the Maine facility, one person can turn out 1 shoe every 24 minutes, while in China it takes over three hours. The labor cost in the former is $4 per shoe, verses $1.30 in the latter. However, New Balance owner Jim Davis says that this cost difference is made by the fact that he is able to fill store orders more and being able to retool for style changes much faster. Thus, he can maintain market share while spending less on advertising than his competitors, who manufacture exclusively outside the U.S. Not mentioned in the article, but also relevant, is that New Balance doesn’t have to pay import duties and shipping costs.

This is not to say that there are no legitimate gripes about wages that need to be addressed. It is proper to encourage MNC’s to review their wages periodically to make sure that the wages are fair and to allow unions to bargain freely. However, it all needs to be put in the proper context. What the productivity of the worker is should be taken into consideration. If exploitation is defined as paying wages that are so low that a substantial raise could be given while still sustaining a competitive return on investment, then yes, some wages can be called exploitive. However, they are not as exploitive as they look at first glance.

The bottom line on jobs exported to developing countries is that they provide substantially better opportunities to workers in poor countries, even if they are not quite as good as we would like. Some of these families may still be having to send their children to work, but the need to do so is less than before. Sider proposes that these issues be addressed when the U.S. negotiates trade agreements [Sid.RC.229-30] and that sanctions might be applied against countries that don‘t comply [Ibid, 323]. This is understandable. However, sanctions have proven to be ineffective in getting Third World nations to change their internal policies, and even if they agree to a set of standards, there is no guarantee that the government will enforce them, or will be able to enforce them. In the meantime, sanctions can prevent these prospective workers from getting better jobs for a long time. For example, China does not allow unions. But not trading with China on that basis would hurt the people that we are trying to help the most.

It is important to address these issues and do what can be done to correct them, but on the whole this facet of globalization is definitely a positive step in the right direction. It must be remembered that Japan, South Korea, Taiwan, and Hong Kong all had those same issues half a century ago. And a century ago, so did the United States, which is the richest nation on earth today (Child labor was gradually regulated beginning in 1904 and then outlawed on a Federal level in 1938, but by then labor productivity and the resulting higher wages had made it unnecessary, anyway.). But because their governments implemented the correct legal structures and made investments in education, wages, productivity, working conditions, and demand for workers rose substantially. In the end, that is the ultimate solution to protecting workers from low wages and poor working conditions. Unions and lobbying companies to pay more may be necessary and appropriate, but they are only attempts to make up for the fact that the proceeding factors are not present..

All of this should underscore once again just how much of the misery of many of the world’s poor is a product of their own cultures and governments. Sider, to his credit, acknowledges this, albeit weakly and reluctantly;

“As we saw in Chapter 7, North Americans and Europeans are not to blame for all the poverty in the world today. Sin is not just a White European phenomenon.” [Sid.RC.228] (No, just primarily!)

This certainly deserves a nomination for the understatement of the previous millennium.

Before we go on, we’ll just make one more point. Although Sider supports jobs moving overseas, he does express concern about the effects of this on U.S. workers. [Ibid, 141] Those opposing free trade complained about “a race to the bottom” in wages as high-paying jobs went overseas Indeed, Ross Perot made this a primary theme of his two presidential campaigns, talking about a “giant sucking sound” as jobs went south to Mexico under NAFTA.

However, these fears turned out to be misguided, as Dartmouth economist Douglas Irwin’s examination of the issue [Ir.FTUF.97-103] shows. The jobs that have gone overseas recently have been in industries like textiles and apparel. The jobs lost there typically weren’t good, well-paying jobs, but bad, low-paying, low skill jobs. He cites two studies that show that workers in these industries either dropped out of the labor force (mostly older women), or if they remained, it took them only slightly longer to find new employment, a factor explained by the fact that they were mostly women, who usually take more time off before taking a new job. And because their wages were already low, they found wages at about the same level.

On the other hand, free trade stimulated demand for U.S. manufactured goods like industrial machines and aircraft. These industries employ skilled workers and pay above average wages, so the overall effect of trade liberalization was that wages in the U.S. went up.

MNC Miscellaneous

Sider concedes that MNC’s do some good in developing countries. However, he charges them with doing a great deal of damage. He isn’t sure what the net effect is, but he says that for the purposes of his book, he says that it is enough to know that they inflict significant damage. It is certainly true that some charges are justly laid at the charge of some MNC’s. Among them are: 1) being thoroughly involved in the bribery and corruption that permeates the Third World

2) Acting as accomplices in the suppression of labor union activity, which should be a basic civil right.

3) Intentionally marketing luxury products, like perfume or soft drinks, to the poor who can’t afford them (However, we should note that the poor person is generally responsible for their actions)

4) Marketing products to the poor Third Worlders that they cannot use properly. Here Sider mentions the Nestle corporation, who has aggressively marketed their baby formula in Third World countries. The big problem here is that the mothers can’t afford enough of it, so they may try to dilute it too weakly so it will last longer. And the water that they use is contaminated. The result is serious malnutrition.

Because of this issues, the image of MNC’s that is frequently promoted by activists is one of wholly malevolent, dark and sinister predators. But the serious abusers should not be allowed to let critics paint such a broad brush. They are, after all, just a handful among the tens of thousands of MNCs doing business.

But some of the charges that Sider lists are simply unfounded (On the first two he follows the lead of Oxford economist Donald Hay).

“First, MNCs do not really contribute the amount of capital they usually profess to. Instead, they borrow heavily from the banks in host countries, thereby reducing the funds available to local entrepreneurs and diminishing the level of indigenous business involvement.” [Ibid, 172]

This is sort of a hypothetical argument. Even those who make the argument often qualify it by saying that it “might be happening.” There isn’t much empirical evidence to support it. If it were true, then we could plausibly expect that countries with little MNC involvement would have better levels of local entrepreneurial activity. But the opposite is true. MNC activity has been concentrated in Asia and Latin America, where both living standards and local entrepreneurial activity are better than Africa and the Middle East, where MNC’s rarely go. And, once again, most people can’t get loans because they lack property rights. If they had them, money to borrow would show up, as it always does.

Put yourself in the shoes of an MNC Chief Financial Officer. What would you do if you had a choice between financing overseas operations by

A) Exchanging dollars and euros for a currency that is fairly susceptible to devaluation, possibly at catastrophic rates.

B) Borrowing locally and investing the dollars or euros somewhere in the developed world.

Well, if you chose A), let’s just say that if you worked for the master in the parable of the talents (Matt. 25), you’d be thrown to the outer darkness and the servant who buried his talent in the field would get an apology.

“They also bring along capital-intensive, labor-saving technology inappropriate for poor countries with vast numbers of unemployed.” [Ibid, 173]

Not bringing in this equipment would bring more jobs in the short term, but in the long term this would stunt development. When this equipment is brought in, local workers must be trained in the use and maintenance of it. The more that this happens, the faster the work force becomes skilled and productive.

“By threatening to leave and thereby throwing a dependant economy into chaos, MNCs can sometimes extort one-sided agreements on such issues as tax concessions, profit-repatriation limits, indigenous training requirements, and so on. Once MNCs are established, they become pressure groups “lobbying” for preferred treatment for foreign firms. They can divert government spending away from developing projects for the poor and toward expenditures on roads, harbors, and subsidies for high technology, to develop the infrastructure to support profitable private investment.” [Ibid, 174]

Without individual case studies, one can’t say that these really are one-sided or hurt the developing country. If a company was able to get a new port or system of roads built while only offering 200 jobs, then that is probably a one-sided deal which the government shouldn’t accept. Now, if it brings 50,000 new jobs, that’s a different story. It would lessen the need for social services to the poor and also bring in tax revenue from the worker’s pay by a factor of 250 over the other scenario. This makes the offer more attractive to the government in question, and so they are more willing to invest this kind of money. Low taxes, for example, are what brought companies to Hong Kong in the beginning of their boom The residents saved money and began other businesses.

But the one example that Sider gives reveals that his definition of “one-sided” needs to be adjusted.

“In March 1974, several Central American banana-producing countries agreed to demand a one-dollar tax on every case of bananas exported. Banana prices for producers had not increased in the previous twenty inflation-ridden years, but the costs for manufactured goods had constantly escalated….When the exporting countries demanded this one-dollar tax on bananas, the North American banana companies adamantly refused to pay. Since three large companies (United Brands, Castle and Cooke, and Del Monte) controlled 90 percent of the marketing and distribution of bananas, they had powerful leverage. In Panama, the fruit company abruptly stopped cutting bananas, and in Honduras, the banana company allowed 145,000 crates of fruit to rot at the docks.”

“One after another the poor countries gave in. Costa Rica finally settled for twenty-five cents a crate, Panama for thirty-five cents, and Honduras agreed to a thirty-cent tax.”

[Ibid, 181]

Hmmm, I just bought some bananas yesterday…think I still have the receipt in my wallet here…just a sec….oh, THERE it is. Ok, I paid $.69 a pound. Based on the price index for bananas I found here , we can determine that it would have cost me around $.15/pound in March of 1974. Now a crate varies in weight, but about 50 pounds per crate is close to the average. So that’s $7.50 per crate retail in 1974. That makes the tax equal to 13.33% of what the SUPERMARKETS, not what the banana companies would have sold it for. And how much were the companies making at the time? A whopping thirty to fifty cents a crate. (Roc.IBT.45) So the tax was equal to 200% to 300% of the profit margin! Even Former United Fruit executive Thomas McCann, whose memoir exposes some of the company’s shadier activities and can hardly be called an apologist for it, calls the tax “disastrously high” and suggests that the Central American countries were taking their lead from the example set by the OPEC embargo. [McC.AC.214]

The companies, then, had two options: 1. Lose their shirts or 2. Jack up prices. Since even the first grader who sets up a lemonade stand knows that the first choice is not an acceptable option, that leaves 2. Raising prices causes demand to drop, so the price would have to go up enough to cover both the extra tax expense AND the lower sales volume. The result would have been bananas rotting on the trees instead of on ships, and agricultural laborers laid off. A tax of twenty-five to thirty-five cents could have been absorbed by a more reasonable price increase.

The tax was one-sided. It was grossly unfair to them, and the leverage of the banana companies had nothing to do with it. If a hundred companies all had an equal share of the market, they would have all done the same thing. It is one thing to demand that companies operate ethically, it is quite another to ask them to operate as non-profits, especially when, as is the case here, that the one-dollar tax would have gone to corrupt, repressive governments, not well-meaning civil servants who simply wanted to help their people. Yes, Sider does note that United Brands bribed a top Honduran official to lower the rate, but it kinda makes you wonder just how much of that money would have benefited those needing help anyway. If tax breaks or whatever are truly one-sided, then there’s a good chance a bribe is somehow involved. And if that’s the case, the country has a lot bigger problems than the MNC.

This argument has been in each edition of Rich Christians. Has Sider ever bothered to ask questions like this? Or does he simply think in terms of “country A is poor, company B is from rich country C, so company B should yield to any and every demand that country A gives, because any demand that a poor country makes is reasonable because they are poor.” The lesson from this is NOT that MNCs have too much bargaining power, but that absurdly high taxes will kill your economy, because people don’t want to lose money on their investments, and they will withdrawal their investments if you try to take all, or even a big chunk, of their profits.

Do MNC’s have good or bad effects overall? As we have seen, those that aren’t serious abusers bring substantial benefits, and they are in the majority. MNC’s are run by sinful human beings, so we can expect ethical lapses to occur. But the image of MNC’s as largely malevolent, dark and sinister is an unfair caricature, and even in the case of the worst abusers, it isn’t always clear that their overall behavior was a net plus or minus for the countries that they operated in. The United Fruit/Brands Company prior to 1975 is perhaps the most notable poster child for appalling abuses. Indeed, they had many, including extensive bribing of Central American government officials, exploiting monopolistic privileges that came as a result of those bribes, moving operations whenever local workers began to organize unions to address poor working conditions, and lobbying the U.S. government to overthrow the democratically elected Jacobo Arbenz in Guatemala in 1954 on the grounds that he was a communist (he was actually a moderate leftist who allowed communists to participate in the government, but in that era of extreme paranoia, that distinction was lost on the American government and the public in general). However, they also provided schools for their employees’ children, established the Pan American School of Agriculture in Honduras, provided scholarships for many Latin American students to attend there, and brought high-quality medical care to a region that had very little. (See Litvin’s account, [Lit.CCC.113-141])

The Wheat and the Tariffs

“Less stark but also striking is the fact that in recent decades developing nations with large numbers of malnourished and even starving people nevertheless have exported substantial amounts of food to wealthy nations. In 1992, poor nations sent rich nations 16.4 billion dollars more food than they received….the reason that countries with many hungry people willingly export food to wealthy nations is that the poor people in those nations do not have the money to pay for food, and we do” [Ibid, 167]

He zigs! He zags!

“The U.S. used its economic muscle in 1955, threatening to withdrawal from GATT

(General Agreement on Tariffs and Trade - first international trade treaty after WWII) if it did not receive a special ‘temporary’ exemption so it could use import quotas on agriculture imports to protect U.S. farmers. That exemption remains in effect forty years later.” [Ibid, 149]

The U.S. buys too much food from poor countries, and it doesn’t buy enough. No way out of Sider’s web!

Sider goes on to detail how plantations from colonial days were oriented to export to the mother countries, and new owners, whether wealthy elites or MNC’s still own the fields. He also mentions the issue of beef exports in Central America, and El Salvador, go to provide “cheap hamburgers” for Americans. He notes that in El Salvador, after the first USDA approved packing plant appeared in 1957, the amount of locally produced beef consumed by Salvadorans went from nearly all to about half in 1980. The net result is that since the sixties, beef consumption in Central America has declined by 20 percent. The poor could no longer afford it. Lower supply, higher prices. As he puts it, “the market’s mechanism of supply and demand is blind to the distinction between basic necessities (even minimal food needed to avoid starvation) and luxuries for the wealthy.” [Ibid, 142]

But a number of nations, including the U.S., Australia, New Zealand, and Argentina export beef. Why didn’t someone notice the rise of prices in El Salvador and realize that it was a potentially profitable market, and therefore increase the supply? Answer: sky-high tariffs, both in the past and now. Furthermore, they tend to be highest on agricultural products!

In 1995, the World Trade Organization reported that most Latin American countries had tariffs on beef imports of between 15% and 50%. In Honduras, importing beef from South America is outright prohibited. [HF.IEF.Honduras] And then, there are other non-tariff barriers to entry. Thus, in this circumstance, it is the absence of free market conditions, not the presence of them that is responsible for the problem, causing the poor to suffer.

Now, one important point. I don’t totally blame all Third World countries for having these tariffs. Often they exist to protect local farmers from government subsidized agriculture in the developed world. Not every developing country has the feudal-like structure that exists in Central America. In some countries, there are subsistence farmers who may have a little surplus to sell for extra income, and these days, developing countries are less likely to have severe food shortages, so they can afford to export. But they cannot compete with subsidized farmers who can sell their produce at below market rates. This harms both developing and developed countries, the former because agricultural products are often the only thing that they can produce and export, the latter because they are investing resources into agriculture on products that can be produced elsewhere.

But, the bottom line is that when a developing country has a developing food shortage or famine, they need to lower tariffs.

To Be Continued….

Reference Notes

[Ber.LSJ] Bernstein, Aaron. “Low Skilled Jobs: Do They Have to Move?” Business Week. February 26, 2001, pp. 92-93

[DeS.TMC] DeSoto, Hernando. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books, 2000.

[HF.IEF.China, Honduras] Heritage Foundation. 2003 Index of Economic Freedom.

The latest edition usually comes out in December of each year can be found here

[Ir.FTUF] Irwin, Douglas Free Trade Under Fire. Princeton, NJ. Princeton University Press, 2002

[Lit.EP.] Litvin, Daniel. Empires of Profit: Commerce, Conquest, and Corporate Responsibility. New York. Texere, 2003

[McC.AC] McCann, Thomas P. An American Company: The Tragedy of United Fruit. New York, Crown. 1976

[NCPA.ATG]. National Center for Policy Analysis. America the Generous. Daily Policy Digest, August 21, 2002.

[Roc.IBT] Roche, Julian. The International Banana Trade. Boca Raton, FL. CRC Press,

1998

[Sid.RC] Sider, Ron. Rich Christians in an Age of Hunger. Nashville. W Publishing Group, 1997