Samwick writes,
In the current environment, I would expect to see capital going south across the border with Mexico, drawn by the high returns available due to the large amount of low-wage labor. But that's not what we are seeing. We are seeing the labor cross the border--at considerable personal cost--to take the low-wage jobs and then send remittances back to Mexico.
In many ways this is much more natural. I think a lot of economists are still look at world through the lens of Solow Convergence. They believe that low wage countries countries will naturally grow faster than high wage countries because capital earns a higher return. Yet, this leaves open entirely the question of why some countries are low wage to begin with.
Shouldn't we expect that low wage countries are low wage for a reason? That for some reason technology is not employed, capital is accumulated or education is retarded. A priori, I don't think there is any reason to presume that investment will earn a higher return in low wage countries than in high wage countries.
5 comments:
I would agree, but I don't know how useful this assertion is. The reason why you can't say a low-wage country would be better than a high-wage country for investment is the fact that there is no reason to believe that capital has not saturated low-wage countries to the optimal degree. Still, this conception of the low-wage environment is dependent on the market properly accessing the level of profitable investment.
This may be the case in Mexico now, but it has not been the case in the past for many of these low wage countries.
There is more than low wages or a dearth of capital to consider when opening up shop somewhere:
Inability to profit from sweatshops in Namibia
The problem is that it's still costly to manufacture in Africa. The headaches across much of the continent include red tape, corruption, political instability, unreliable electricity and ports, and an inexperienced labor force that leads to low productivity and quality. The anti-sweatshop movement isn't a prime obstacle, but it's one more reason not to manufacture in Africa.
What I find amusing/sad is the commentary to the article. Doesn't anyone know how to read anymore? "Elana" seems to think that the author is missing that ending bribery would help, but that is covered in the partial list I quoted above, namely "corruption". It is also not clear to me how multinationals are supposed to go about ending bribery anyway. Seems like a local problem that can only be solved locally.
But remember that in Solow convergence is conditional - given same technology, saving rates, etc. You relax that assumption you can easily explain why returns to capital in poor countries are low. Of course the trick is to explain what "technology" is exactly - ideas, institutions, social norms, etc.
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