Duke

Why Are Poor Countries Cheaper?

48 posts in this topic

The argument was made that the level of material comfort for a country's population is directly correlated with a country's freedom. Sweden, although ranked #6, is far from free. I'm not saying living in Sweden is the same as living in Djibouti or Sierra Leone, but the rankings do not support the argument regarding pricing.
I agree with it not being directly related to pricing, but material wealth is definitely correlated with economic freedom. If one ignores some of the oil-rich countries, this relationship is extremely strong.

If one were to rank countries by deciles of per-capita-income/wealth, one would also find that each lower decile has less economic freedom than the one above. I'll grant that at a country-by-country level within each decile, this might not seem so. However, it has more to do with the imprecise way in which "freedom" is measured.

(I realize this is a bit of a digression from the original topic. So, I'll post separately about the original topic, just in case the moderators split this thread at some point.)

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I don't think that the cost of regulation should be underestimated in the price disparities noted by Duke. Take Hong Kong, which is not a basically poor place (certainly wealthier than Thailand), and look at taxi fares compared to New York City (to take a comparison offered earlier.) The NYC fare is astronomical compared to the HK fare, as I understand it. The reason is not that NYC is so far superior to HK; it's that NYC highly regulates and artificially limits taxis, and HK does not. When you add up thousands of such examples, particularly given that the creation of complex services and products involves taxed+regulated intermediate steps, and add to that the constant threat and cost of arbitrary litigation for a host of reasons, and the bottom line is a big hidden tax.

It is also true that the dollar is rapidly becoming less valuable; there is defacto inflation occuring, when looking at the value of the dollar against gold and a host of foreign currencies.

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I agree with it not being directly related to pricing, but material wealth is definitely correlated with economic freedom. If one ignores some of the oil-rich countries, this relationship is extremely strong.

If one were to rank countries by deciles of per-capita-income/wealth, one would also find that each lower decile has less economic freedom than the one above.

I wrote that standard of living is "the level of material comfort for a country's population measured by the level and kind of goods (not just consumables), services and luxuries available". This is not the same thing as indices for per-capita-income. Are you referring to GDP, GNP or another measure?

France's national health insurance system has been running in deficit (a few billion) despite heavy taxation since, I believe, 1985, but this gives a lot more physicians per capita. Merkel et al introduced the new parental money plan, transferring from one taxpayer to another up to 2/3 their most recent net income up to 14 months should a child be born, so there are even padded incentives to procreate. Just two examples I can think up in this moment that show that at this point in time, a high standard of life does not have a positive correlation with, nor is it caused by, freedom.

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This example is in response to the original question of the topic.

Situation 1: Suppose a Thai person who has two employment options:

  • Either, he tills the soil, producing 20MT (20,000kg) of rice each year; or,
  • is a street-hawker selling 20,000 servings of food per year

Clearly, as a street-hawker, he must price his wares so that each serving contains a labor cost equivalent to 1 kg of rice.

Situation 2: Instead, suppose he was able work on a farm that was more capital-intensive. Suppose the capital enabled better irrigation, fertilizer, pesticides, harvesting equipment, and storage facilities. Suppose, by doing this, he could double his output to 40 MT of grain.

We should also assume that the provider of capital requires a return. Assume that the provider of capital takes the equivalent of 15MT of grain, and pays his labor the equivalent of 25MT of grain (to coax the street hawkers to come work for him). Over time, street-hawking becomes less attractive, unless the hawker can price in the equivalent of (25MT/20,000=) 1.25kg. of grain per food-serving.

Summary: Raising the productiveness of a unit of labor in one industry will draw labor to that industry until the wage rates for similar labor are similar across industries. The higher productiveness in one industry does not raise the wages in that industry alone, but in other industries as well.

The effect of money: Using money, instead of "kgs. of rice" shows the same effect. Suppose Thai rice is about $300/MT. So, 20 MT is $6,000. To get $6,000 from selling food, one has to price in a labor cost of ($6000/20000=) $0.30 per serving. The capitalist-farmer in the second example pays his labor ($300/MT x 25MT=) $7,500. Soon enough, street-hawkers need ($7,500/20,000=) $0.38 per serving, to make it worth their while.

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I don't think that the cost of regulation should be underestimated in the price disparities noted by Duke. Take Hong Kong, which is not a basically poor place (certainly wealthier than Thailand), and look at taxi fares compared to New York City (to take a comparison offered earlier.) The NYC fare is astronomical compared to the HK fare, as I understand it. The reason is not that NYC is so far superior to HK; it's that NYC highly regulates and artificially limits taxis, and HK does not. When you add up thousands of such examples, particularly given that the creation of complex services and products involves taxed+regulated intermediate steps, and add to that the constant threat and cost of arbitrary litigation for a host of reasons, and the bottom line is a big hidden tax.

I note that there are many ways prices can be artificially depressed and perceived as 'low' through agreement within or with various government bodies (but which of course need to be recovered or go into deficit elsewhere, which is common). The outcome for the individual paying the artificially depressed price is he does not see the full costs of such regulation. Because such regulation is in effect here and abroad, and the regulation works both in the way you described and mine in terms of effect on pricing, I could not earlier simply agree with the blanket statement that we are less free here than abroad (a highly general statement which can be misinterpreted easily).

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Because such regulation is in effect here and abroad, and the regulation works both in the way you described and mine in terms of effect on pricing, I could not earlier simply agree with the blanket statement that we are less free here than abroad (a highly general statement which can be misinterpreted easily).

Sure, that is true - I do think it's worth keeping in mind though that America is not as free as many think, which has practical consequences that can be highlighted by comparison to places that do not have comparable regulations. But, you and others have made interesting and logical points that I hadn't thought of before.

Not to be Alan Greenspan-like (horrors :D) but it would be interesting to see a simplified computer model of various economies to see how prices evolve as a logical consequence of different parameters over time. Not to be normative, but simply informative.

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... "the level of material comfort for a country's population measured by the level and kind of goods (not just consumables), services and luxuries available". This is not the same thing as indices for per-capita-income.
Yes, I agree that the monetary averages, of wealth, income or production often do not reflect the real wealth and services. However, they are good approximations, when comparing countries, if one understands the margin of error involved.

Neither of your examples are instances where real wealth or real goods and services are increased. If the French government gives people more physicians, it does not create these people out of thin air. Therefore, these are people who would otherwise do something else. Perhaps they would have been Karate instructors. One sees more physicians per capita, but does not see the fewer Karate instructors per capita. If we assume that the existing situation is caused by some government incentive or force, rather than free choice, it implies that there is actually less value to those physicians, as compared to karate instructors. Therefore, overall, French people have less services, not more.

In your second example, the goverment taxes some people and uses the money to give other people an incentive to procreate. Once again, the parents get some goods and services, but the person who is taxed now has less. It's a net negative in terms of real goods and services.

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Neither of your examples are instances where real wealth or real goods and services are increased. ..If we assume that the existing situation is caused by some government incentive or force, rather than free choice, it implies that there is actually less value to those physicians, as compared to karate instructors. Therefore, overall, French people have less services, not more.

In your second example, the goverment taxes some people and uses the money to give other people an incentive to procreate. Once again, the parents get some goods and services, but the person who is taxed now has less. It's a net negative in terms of real goods and services.

I see I should have originally stated that my statement that "the more left-leaning a country's policies, the higher the standard of living (by general definition, it is the mean material comfort level) for its population (propped up over time with convoluted piles of loans of all sorts)" is due to the methods of arriving at the rankings for standard of living such that there is no causative link that exists between standard of living, freedom and price fixing. Yes, absolutely there is in fact a negative in real goods and services, which is why earlier I stated many such schemes run into deficit constantly. That is the inevitable result of their nature. However, it is exactly this sort of so-called "availability" of services in both France and Germany which is used, in part, to rank such EUtopia countries as higher than the US in terms of standard of living and which many Americans wish to emulate. The point in relation to the argument made in this thread is that if standard of living is higher in a freer country, if one accepts the methods used to arrive at a standard of living measurement (as was implicitly done in the argument), then one is not looking at the overall long-term, better functioning of those systems with greater freedom. In bothways - the way you have correctly stated, and in the de facto rankings, "standard of living" is not a cause nor a function of either price fixation or freedom.

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I think this whole currency discussion misses the point: The point is not the particular tokens of wealth with pictures on them with which we pay for things, it is the relative real wealth of the visitor from the U.S. or other prosperous country in which he works, at relatively higher productivity levels, and which is able to pay him for his efforts at that high wage, whatever currency he is paid. The exchange rate is a reflection of that, not the cause. The point is that Duke is a truly wealthy man relative the locals from whom he's buying. Even if the local currency is rock-solidly sound, people there will be getting paid less, in any stable measure of wealth you choose to use, than the prosperous ex-pat.

This is not an artifact of currency or monetary policy, although the latter, if bad, can destroy an otherwise strong economy; it's about wealth.

And that disparity is the result of a successful, relatively freer, more productive society able to pay its productive individuals commensurately more for the greater wealth they produce for their effort.

I’ll try to explain what confuses me about this. If an industry becomes more productive, doesn’t the labor cost go down, which pushes the price of those goods down as well? When comparing one business to another, I would expect the more productive business to have the more competitive prices. This is the paradox that Duke raised when looking at poor countries, where the price of goods appears to be lower than in a wealthier country. Since obviously this isn’t a case of the poorer country being more productive, I assumed the direct price comparison was illusory.

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If an industry becomes more productive, doesn’t the labor cost go down, which pushes the price of those goods down as well? When comparing one business to another, I would expect the more productive business to have the more competitive prices.

I don't see what the paradox is. There have been a few posts to show the price of goods is not a lower ratio of an individual's spending power by any measurement, whether by currency conversion or domestic individual expenses ratio. How does an industry become more productive? Hiring 10 more workers can be more productive than a certain number, but do these workers continue to engage in labour-intensive jobs, even if there is a division of labor? There is no monotonic relationship here - the price of goods is not pushed down simply because an industry or a business is classified as more productive. A more competitive business in terms of price on any timescale is not necessarily more productive, nor is the reverse you have stated necessarily true.

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I don't see what the paradox is. There have been a few posts to show the price of goods is not a lower ratio of an individual's spending power by any measurement, whether by currency conversion or domestic individual expenses ratio.

Well, yes, I recognized that in an earlier post. I understand that the goods are not cheaper for those living there, because they are also not earning what we do. I thought the question was what causes those domestic goods to be worth so much less in Canadian (or American) dollars. There's been discussion about government regulation and subsidies (where you are not seeing the full cost), but what confused me was alann's suggestion that the discrepancy is because Canada is a wealthier country. I think this just may be some fundamental aspect of the market that I don't understand yet.

How does an industry become more productive? Hiring 10 more workers can be more productive than a certain number, but do these workers continue to engage in labour-intensive jobs, even if there is a division of labor? There is no monotonic relationship here - the price of goods is not pushed down simply because an industry or a business is classified as more productive. A more competitive business in terms of price on any timescale is not necessarily more productive, nor is the reverse you have stated necessarily true.

I didn't mean that prices would come down "simply" by virtue of being more productive, but that by being more productive you can produce more at a lower cost and afford to lower the price to win over your competitors. That's why I would expect a free market to have lower, not higher, prices than one regulated by the government.

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"standard of living" is not a cause nor a function of either price fixation or freedom.

What do you think then is the cause of a higher standard of living? How do you explain that the lives of people in Hong Kong are so much better than the lives of people in North Korea?

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CometMaker, You had me sold, until I read the following:

In both ways - the way you have correctly stated, and in the de facto rankings, "standard of living" is not a cause nor a function of either price fixation or freedom.
I understand your argument that governments can intervene in ways that raise certain predetermined standard-of-living measures. Though, I don't think they can do this across the board and for long if they go to extremes -- as in CF's North Korea/HK comparison -- I'll grant that it is easy enough to achieve in a France vs. Sweden vs. USA comparison. So, I agree thus far.

You lost me on the "both", though.

While France might be able to show a higher standard of living, by some arbitrary measure, they cannot actually achieve a high standard of living. They show a higher ranking because they count doctors, but that is only because the measure is flawed in that it does account for Karate instructors or large-screen HD TVs. If one were able to compile a measure of the real standard of living, that reflected all these things, countries that are more free would also score higher on these measures.

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... If one were able to compile a measure of the real standard of living, that reflected all these things, countries that are more free would also score higher on these measures.

Then I suggest that ARI publicize annual Objectivist national and international rankings of standards of living, because the definition of the specific term has no alternate calculation methods, or means of exclusion of certain force-derived services such as the examples I have given.

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I have found that even the most seemingly simple questions in economics often turn out to require a PhD in order to understand the answer. Or at least it requires a PhD to fully explain the answer. I'm no expert in economics, but I've done some investigation into the question of why it is cheaper to purchase products in poorer countries than in richer countries. My basic reference has been Reisman's Capitalism. (Be careful, it's a 14 MB file, so you'd best have a high-speed download connection.) I'd suggest reading the section on The Law of Comparative Advantage on page 350 - 354. I think this may contribute to understanding the original question. If I had to summarize the essence of the answer as best I can, it would be that it is cheaper in poorer countries because the demand for labor is less. The lower demand means wages are lower, which significantly lowers the costs of production.

Of course, there are many competing influences, but I'd suggest reading the chapter yourself to see if it contributes to the answer.

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My understanding is that the poor countries are not capital intensive, they are labour intensive. Take a chap from Canada with a bulldozer, and assume he does the work of 200 labourers from the Far East. Someone has a choice; pay for one bulldozer man, or pay the same amount for the 200 FE workers. Let us assume he tries each of them for two similar jobs.

Now the bulldozer man has 20 grand for a months work, and the 200 FE workers have $100 each. Bull dozer man's buying power outstrips the workers, but the workers live in an economy of folks who are as poor as they are, and the supply and demand prices in that economy reflect that. The purchasing power of bull dozer man gives him an advantage because of capital investment.

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My understanding is that the poor countries are not capital intensive, they are labour intensive. Take a chap from Canada with a bulldozer, and assume he does the work of 200 labourers from the Far East. Someone has a choice; pay for one bulldozer man, or pay the same amount for the 200 FE workers. Let us assume he tries each of them for two similar jobs.

Now the bulldozer man has 20 grand for a months work, and the 200 FE workers have $100 each. Bull dozer man's buying power outstrips the workers, but the workers live in an economy of folks who are as poor as they are, and the supply and demand prices in that economy reflect that. The purchasing power of bull dozer man gives him an advantage because of capital investment.

I'm not sure I get your example. If the costs are identical and the results are the same, why would one pick the bulldozer man over the workers? Also, the bulldozer man may have more money, but it may cost him $10 to go to a movie whereas the workers may only have to pay $0.05 to go to a movie.

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My understanding is that the poor countries are not capital intensive, they are labour intensive. Take a chap from Canada with a bulldozer, and assume he does the work of 200 labourers from the Far East. Someone has a choice; pay for one bulldozer man, or pay the same amount for the 200 FE workers. Let us assume he tries each of them for two similar jobs.

Now the bulldozer man has 20 grand for a months work, and the 200 FE workers have $100 each. Bull dozer man's buying power outstrips the workers, but the workers live in an economy of folks who are as poor as they are, and the supply and demand prices in that economy reflect that. The purchasing power of bull dozer man gives him an advantage because of capital investment.

I'm not sure I get your example. If the costs are identical and the results are the same, why would one pick the bulldozer man over the workers? Also, the bulldozer man may have more money, but it may cost him $10 to go to a movie whereas the workers may only have to pay $0.05 to go to a movie.

However, at least one good result of hiring the bulldozer man is that more bulldozers, and more skilled and knowledeable makers and operators of them will come into demand.

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I'm not sure I get your example. If the costs are identical and the results are the same, why would one pick the bulldozer man over the workers?
True; there would be no incentive to do so. However, consider a modified example, where the buldozer man is paid much more than the muscle-labor, but not 200 times as much (even though man+dozer get 200 times as much done). That is the usual way it works. Someone decides he can buy a bulldozer and undercut the muscle-men, payback his bull-dozer loan, and still end up with more than if he used his muscles.
Also, the bulldozer man may have more money, but it may cost him $10 to go to a movie whereas the workers may only have to pay $0.05 to go to a movie.
Again, true. However, the real movie-price ratio will not be 0.05:10.00 (1/200). If one expresses the goods and services in Thailand in terms of "hours of Thai labor to buy that good or service", then things are very expensive in Thailand, compared to the US.

For instance, a Big Mac in the US probably costs 2 or 3 times what it does in Thailand, but in real terms, is costs less than "one hour of low-skill US labor" but it costs over 3 or 4 hours of Thai low-skill labor.

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I'm not sure I get your example. If the costs are identical and the results are the same, why would one pick the bulldozer man over the workers?
True; there would be no incentive to do so. However, consider a modified example, where the buldozer man is paid much more than the muscle-labor, but not 200 times as much (even though man+dozer get 200 times as much done). That is the usual way it works. Someone decides he can buy a bulldozer and undercut the muscle-men, payback his bull-dozer loan, and still end up with more than if he used his muscles.
Also, the bulldozer man may have more money, but it may cost him $10 to go to a movie whereas the workers may only have to pay $0.05 to go to a movie.
Again, true. However, the real movie-price ratio will not be 0.05:10.00 (1/200). If one expresses the goods and services in Thailand in terms of "hours of Thai labor to buy that good or service", then things are very expensive in Thailand, compared to the US.

For instance, a Big Mac in the US probably costs 2 or 3 times what it does in Thailand, but in real terms, is costs less than "one hour of low-skill US labor" but it costs over 3 or 4 hours of Thai low-skill labor.

OK. But how is that related to the issue of why it is "cheaper" in Thailand than in the US for a meal?

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But how is that related to the issue of why it is "cheaper" in Thailand than in the US for a meal?

Well, it shows that it isn't really cheaper, doesn't it?

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OK. But how is that related to the issue of why it is "cheaper" in Thailand than in the US for a meal?

Cheaper for whom? Not the locals. The market charges what it can bear, and laboures can't bear to pay too much. The local market reflects that.

Bulldozer man is from another market. In his market it would not pay to produce food at the low prices he finds in Thailand. They would make more driving bulldozers. Consequently the food prices rise to a level where it pays to farm, as much as to drive a bulldozer.

Globalization is starting to equalize the differences. The cheap labour of China is reflected in the cost of their goods to us. Canned tuna I buy comes from Thailand. If the whole world was a free trade zone, these regional differences would largely disappear, leaving transport costs the largest factor in differences.

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But how is that related to the issue of why it is "cheaper" in Thailand than in the US for a meal?
Essentially, if one paid the US hawker what one paid a Thai hawker, he would quit and go drive a bulldozer. As capital is deployed across a variety of industries, real output per worker, and real wages per worker rise. These wage rates rise for similar labor, even in industries that have not seen the rise in output-per-labor.

  1. Thai output-per-worker is low
  2. Therefore, Thai wages are low
  3. Therefore, that meal is cheap

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