Wednesday, April 4, 2007

On Infant Industries

Why shouldn't developing economies protect their fledgling industries so that they might develop a comparative advantage over time?


This is the infant industries argument. Africa will never develop a steel industry if foreign steel producers can use their superior technology, infrastructure and capital to undercut African producers.

There are some extremely sophisticated reasons why this might be true. Perhaps I’ll have time to sketch them at the end. The basic intuition, however, is misleading.

Why?

Well because everyone has a comparative advantage. You don’t have to develop a comparative advantage. It comes straight out of the relationship between two countries, communities or people.

So what’s the developing world’s comparative advantage? By and large it’s the cost of living. If you travel to third world you will notice this immediately. Food costs less. Clothing costs less. Shelter costs less. This means that factory workers in the third world can survive on what would be below subsistance wages in the US.

There are some things that US consumers simply couldn’t have if it weren’t for this cost of living difference. An example that comes to mind is those new florescent bulbs, the kind that are made to replace regular incandescent bulbs. Those bulbs are twisted into a little ice cream cone like shape.

It turns out that we haven’t yet figured out how to get a machine to twist glass that way. For all of the great technology, education and capital stock of the United States we can build a machine that can twist glass in just the way it needs to be twisted to make those florescent bulbs.

We could pay a person to do it but it takes a long time to make a perfect twist. Wages and the cost of living are so high that it would make the bulbs outrageously expensive. No one would buy them.

The cost of living in rural China, however, is much lower. There a man can work all day twisting bulbs for cents on the hour and still have enough to feed his family. The man has an advantage over every single worker in the US. That advantage is that he lives in a place where the cost of living is fraction of what it is here.

His comparative advantage gives him and job and gives us those ice cream cone shaped florescent light bulbs. It also gives the man the resources to let his sons and daughters go off to school, rather than spend their adolescence working the farm.

When we look at the countries that have escaped poverty over the last 25 years they have done it by trading more, not less. Typically, at first they produce “cheap” goods with low wage labor. They reinvest the profits, however, into capital and education that helps then produce more sophisticated goods.

The sad thing is that today many poor countries have their natural comparative advantage in agriculture. Yet, trade barriers from Europe and United States prevent them from selling their crops here.

Others suffer from more fundamental problems such as corruption, lack of property right or rampant disease and war. While these problems put those countries at an absolute disadvantage it is hard to image how limits on their ability to trade on their comparative advantage could make matters better.

I hesitate to mention the more sophisticated arguments for fear that I will cause more confusion that clarity. I, however, ask this two part question:

1) Is the marginal product of an input higher in situations where there is a little of it or when there is a lot of it?

2) Do computer programers move to Silicon Valley or away from Silicon Valley?

How can we reconcile the answers to these two questions?

12 comments:

Anonymous said...

Karl,

1)The MPK, MPL, or MP of any other input is higher when there is little of it.

2)Computer programmers move to Silicon Valley.


Wages in Silicon Valley are higher than in other tech regions of the US/World. The MPL of a programmer may be pretty small, but his wage is still pretty high.

Karl, please explain the third part of your question, I'm not sure I understood you correctly.

Karl Smith said...

Shouldn't MPL = Wage

And is the marginal product of computer programmers smaller in Silicon Valley than say Hop Arkansas?

Or is there perhaps something about being around other programmers that makes his MPL higher?

Karl Smith said...

Hope Arkansas

Steamboat Lion said...

Bad example because those twisty bulbs are really ugly :-)

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