Monday, November 22, 2010

Third-World Poverty: That Was Easy

There was a story in The NewYork Times a few months ago that startled me. The story was of an American clothing manufacturer with a factory in the Dominican Republic, who decides that he wants to start having a more positive impact on the world. So he starts paying the workers a "living wage," defined in the article as the amount of money needed to adequately feed and shelter a family

This turns out to be about three times the minimum wage in the Dominican Republic, and the results for the lucky workers have been dramatic. The article leads off with the story of a woman who lived with her husband and three children in a windowless shack, sharing an outhouse two doors away. They are now building a new house with two bedrooms and an indoor bathroom. Another woman is planning to send her daughter to college.

OK, so a heartwarming story about a do-gooder, right? And this company can get away with it, because they do a lot of business with colleges, where there are already big anti-sweatshop campaigns organized that can help them do marketing. Not really earth-shaking.

But that wasn't what startled me. Far down in the article you read this: In a T-shirt that retails for $18, the cost of more than tripling the workers' wages is 80 cents.


I started trying to figure out what other costs in the $18 might be affected. The interest cost of holding inventory might go up by whatever fraction eighty cents is of the wholesale price. What else? Shipping: the same as before. Marketing? The same. Retailing? The same. It doesn't appear that the cost of lifting these workers from miserable Third-World poverty to a hopeful Third-World middle-class life is more than five or six percent of the retail cost.

I was mulling this over when I came across another article in the Times. This one was making the unsurprising point that any change in the value of China's currency would affect different U.S. companies differently: if Chinese currency became more expensive ("stronger") relative to the dollar, it would help companies that export to China and  hurt companies that import from China. (That's why the U.S. wants it to happen, after all.)

Again, nothing startling except... The story includes an interview with a Chinese sock manufacturer who makes socks that retail in the U.S. for 2.99 a pair. He sells them for 25 cents a pair. That includes everything, not just labor but material and machinery. At the factory in the Dominican Republic, labor was about 10% of the cost of a shirt before the wage increase. Figure 20% for the socks. That's five cents. Triple that and you've raised the cost by ten cents, or about three percent.

Here's where it gets interesting. Let's say we survey Americans, with this question: "Suppose you could wave a magic wand and ensure that all the clothing imported into this country was made by workers who work in decent conditions and make enough to support a family, and not by workers working in a sweatshop at the minimum wage. But if you wave the wand, the cost of clothing will go up by five percent. Would you do it?" (Ideally, conduct the survey in such a way that the interviewer won't know an individual subject's response.) My guess is that a large majority would say yes.

So what's the problem? First, of course, people usually don't know which kind of T-shirt they're looking at. So you would need a big campaign (though probably quite cheap compared to the scale of the problem) along the lines of the old "Look for the union label" campaign, without, God forbid, mentioning unions. You would need an estimate of a living wage for each country, which some international organizations have taken a stab at, some kind of certifying organization, and an advertising campaign. Maybe George Soros's foundation can come up with a couple hundred million.

The other problem is that people might not actually do it. This is intellectually a trickier problem: even though everyone might want everyone to pay five percent more, strictly speaking it's irrational for anyone to do it. Whatever other people do, my own contribution is going to be too small to make a difference. This is a very familiar problem in political economy.  The same problem exists with installing pollution control equipment on your car, paying for national defense, or voting.

As the example of voting suggests, there are a couple of saving graces here. First, people may get some satisfaction from the activity itself. Second, most people are not rational; try to tell them that their vote's probability of affecting the outcome is essentially zero, and they'll say, "But what if everyone thought like that?" (Yossarian's reply in Catch 22 was, "Then I'd be crazy to think any differently, wouldn't I?") So voluntary action might work better than one would expect.

The examples of pollution-control equipment and national defense suggest what the alternative is: what Garrett Hardin called "mutual coercion mutually agreed upon." That is, we could pass a law saying that imported goods must be produced by workers who are paid a living wage. In principle, even though without the law we might buy the sweatshop stuff, we could unanimously agree to pass a law like that.

In practice, not so much. In general, manufacturers of competing goods and unions would probably support a law like this; importers of inputs would oppose it. Actually, the politics might get quite interesting. While the libertarians over at the Volokh Conspiracy would go through the roof, it might be possible to get liberals to link arms and sing "Kumbaya" with xenophobic opponents of immigration (under the slogan "Keep Them Where They Belong!").

I should mention that I've always thought "living wage" laws were pretty silly. Why is this not silly? If you try to regulate the supply side, by setting a wage rate that local businesses must pay, the businesses will move to the next town over. But if you regulate the demand side, what are businesses going to do? Not sell to us? If you bring those bleeding-hearts in Europe on board, you've got a huge chunk of total world demand.

All right, I haven't got all the details of this worked out. Most people in the Third World are self-employed farmers. Should we ignore them and hope that a rising tide will lift all boats? Would this change lead to a mass migration to cities? Is it legal under World Trade Organization rules?

Hey, implementation is someone else's problem.

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