Why Soviet Economics Failed (Part 2 of 2)

It is now recognized that one of the biggest blunders committed by the Western intelligence agencies was the fact that they continually misread the Soviet Economy through most of the Twentieth Century. They never realized that the Soviet Union was failing economically and they missed the opportunity to learn the valuable lessons that were begging to be learned.

Those lessons could have come handy at this time and they could have been of use to the ill-advised Americans who mindlessly follow the steps of the old Soviet Union not realizing what they are doing to their economy or where they are taking their country.

The most damaging aspect of Soviet economics was not that it was centrally planned, though this was a factor, but that the Soviets planned the wrong things. To give credit where credit is due, they did well building and erecting big projects such as the power plants, railroads, steel mills, tanks, missiles and ships but they proved to be myopic when it came to the consumer side of the equation which they neglected woefully.

What is wrong with this approach to economics is that without an industry to produce the goods and services that the ordinary people are eager to buy, there is little to sponge the money paid to the workers. In fact, the Soviet workers could not buy or own the projects they were building and so they spent the money on the few items they found in the stores such as the food, the clothing and the everyday necessities of life.

But then nothing remained on the shelves to motivate the people to want more or want better things. Indeed, nothing was left to the imagination to inspire them to work hard in order to get.

And numerous stories surfaced about life in the communist countries, stories that illustrate the lack of ambition the system induced in the population. They were dispirited people who went home at the end of the day, slumped in their seats to review what had gone on throughout the day and if nothing terrible was pointed out, considered themselves lucky and prayed that tomorrow will be as uneventful as today.

All the while, the Soviet government was forced to control all aspects of the economic life including the wages and the prices. And despite the fact that the people had little money to spend on anything, the inflationary pressures were always present because the people had even less goods and services on which to spend the money. Still, the people found a number of items on which to throw some money, items such as the contraband goods that sold at inflated prices.

These items were found on the black market of what was considered luxury goods smuggled into the communist countries from the outside. Sold at exorbitant prices, the goods caused the emergence of a myriad of unsavory practices adopted by the smugglers. In turn, the practices prompted the authorities to take measures that were no more elegant than those of the smugglers.

The spectacle made the system look like a failure in the eyes of its own citizens and the impact was best expressed by the joke that the communists circulated about themselves. It went something like this: "We pretend to work and they pretend to pay us." In other words the system had fallen into a sea of lethargy and because they were powerless to do anything about it, the people willingly rode the wave of apathy.

After decades of this sort of experiment, the Eastern Europeans who lived nearest to the borders of the Western countries realized that the West had more to offer to its citizens than their regime could ever provide for them, and they began to grumble. The contagion spread to Russia itself and before long the communist empire was beginning to crumble.

Yet, had the Soviets employed a fraction of their workforce to produce enough consumer goods to satisfy the population, the regime would still be alive today and the communist economies would be looking like that of China. But none of this happened and the result was that the Soviet empire was overturned and Russia, together with her satellites, was forced to change for ever.

And here we are today faced with an America where some people are dismantling the once vibrant system of the country in an apparent effort to make it operate like the Soviet system of old. The way these people implement their plan is to create a climate of paranoia which they inject into the country’s politico-cultural body. This mobilizes the country’s resources, the control of which they grab and put in the service of their hidden agenda.

The result is that in the same way the communists feared the outside world, the Americans are being scared by the repeated assertions that the world is hostile to their values and is out to destroy their country. This creates a culture where the mega projects are encouraged at the expense of the smaller ones in the mistaken belief that America’s security will be better served when the low tech consumer products are made by the emerging nations while America frees herself to build a high tech military industrial complex.

What is wrong with this idea is that while money is being pumped into beefing up a high tech industry, the country is gradually producing less of the low tech parts and components that feed into the weapon systems. Such parts and components are now imported from outside the country, placing America in a situation where she can be cut off at the whim of the foreign suppliers. For this reason, the calls went out to start manufacturing those parts and components locally.

And there are two ways to do this. Either you produce just enough parts to satisfy your needs or you mass produce them and have more than you need. In the first instance the cost per part will be prohibitive; in the second you will look for customers who would buy the extra parts. But since the country does not have the low tech civilian industries that can absorb such parts, you go with the first option which is the recipe for ruining the economy.

This was the choice that the Soviets made when they traded a functioning economy for an impressive military, and this is where America is being dragged today. Choosing guns over butter did not work for the Soviets and will not work for the Americans. It is now obvious that when you are defeated economically it does not matter how impressive your military is because nobody will take you seriously.

Moreover, the reason why the Soviets were able to become a military superpower in the first place was that they lived off the inheritance left to them by previous regimes. But after 70 years of surviving on past achievements, the Soviets had depleted their inheritance and were forced to expose the bankruptcy of their system.

Likewise, the Americans are now living on the inheritance left to them by their forefathers which will soon be depleted. And this inheritance is nothing more than the country’s good name against which America is borrowing trillions of dollars to buy the products that are no longer made locally. And however powerful America’s military may look today, it will become as useless as the Soviet military when the rest of the economy will cease to function.

And you will know the economy has ceased to function when the country will find it difficult to borrow money on the international markets. Unable to buy from abroad the goods and services that are not made locally, a contraband industry will flourish where the smuggled goods will trade at exorbitant prices. And America will come to look like a Third World country.

What get you into a situation like this are the subtle attacks by people who pretend to be your friends and the protectors of your values. But in fact these people have a hidden agenda, and they can only stand on the ashes of your values. To succeed in implementing their agenda they reverse the reality as to who is your friend and who is your enemy. This done, they get you to reverse the policies that brought glory to your country under the tutelage of your forefathers.

It is now evident that the Marxists who destroyed the Russian empire from within have imported the same wrongheaded policies into America perhaps to get their sweet revenge for the real and imagined injuries caused by the events of the McCarthy era. And they are mobilizing the gullible and the naïve among the locals to support them into recreating the conditions which caused the demise of the Soviet Empire.

The way out of this muddle is to know who your real enemies are and who your friends are, a job that the Western intelligence agencies must now undertake to redeem themselves. What is clear is that Karl Marx was never an Arab and if he were alive today he would be a rabid anti-Arab. Consequently, America must not be afraid of the World and must rebuild her industrial base to become a diversified economy again.

The supposedly new conservatives who call themselves neocons have turned coat not because they believed in the conservative values of the Liberal Democracies but because they retain the values of the Bolshevik Social Democracies that failed so miserably in Russia and in Eastern Europe. In plain English these people still cherish the old communist movement and they remain as deadly as ever except that now they have their claws stuck well into the politico-cultural body of America.

It would be more appropriate to refer to these characters as the neo-coms rather than neo-cons.

Why Soviet Economics Failed (Part 1of 2)

Most people are familiar with the saying: “guns and butter.” It came about when someone suggested that you can conduct a major war and still have enough resources to give the population a decent standard of living. But I know of a story that leads to a different conclusion, one that sat deep in my memory for about fifty years and now seems ready to be told. It is the story not of guns that were pitted against butter but a Sputnik that was pitted against soap.

There was no television where I lived fifty years ago but radio was there and it was doing a lot of drama which, I must say, was good drama in most part. I lived in Egypt when the Russians launched their Sputnik into space and I was so taken by the event, I never tired listening to news and to stories about it. I suppose the only way I would be moved as much today is if intelligent life was detected on another planet.

Fifty years ago I listened to a drama that was broadcast out of France called: “l’Oeil de Moscou” which translates into: Moscow’s Eye. It was the story of an American expedition going to the moon and discovering that the Russians have been there already and where they built an impressive base. The Russians set up a telescope inside the base which they used to spy on the Earth, including the United States of America. The telescope was named Moscow’s Eye by the Americans, which was also the title given to the drama by its author.

A discussion followed the radio play among a number of pundits who were picked from a variety of fields. During the talk, the point was repeatedly made that the Russians were ahead of the Americans by several years if not several decades. And the reason why this situation developed, said the pundits, was that the two countries started out with different priorities. The pundits explained that the Russians were interested in technological and scientific advances which is why they chose the heavy industries over light manufacturing.

By contrast, continued the pundits, the Americans were more interested in perfecting their light industries for consumer products such as the chewing gums and the soaps. And it was predicted that the Russians will get still further ahead of the Americans as time goes by, and will beat them in every field of human endeavor including the overall economy. And the reason why this will happen, opined the pundits, was that a steel mill adds more to the gross national product of a country than a bar of soap or a factory of chewing gum.

We know now how wrong those pundits were and we have the luxury of hindsight to figure out why. They were wrong because an economy runs on money and motivation, something that the Soviets seemed to ignore. By contrast, the American Henry Ford figured out the role that money and motivation play in the economy at just about the same time that the Bolshevik revolution was brewing in Russia. And Henry Ford put his knowledge to good use.

What the man did was to pay his workers enough money so as to give them the purchasing power to buy the cars they were making. So ingenious was this decision that the workers responded by producing the cars in a climate of high morale, working hard as if they owned the company even though they knew they did not.

Standing in opposition to those ideas were the Bolsheviks of Russia who were under the spell of Karl Marx, a thinker of German Jewish descent. This man advocated handing the tools of production to the workers and he inspired the Bolshevik leaders who adopted his mantra. The ideas encouraged the collective to grab the economy and run the show and this is what happened when the revolution succeeded and the Bolsheviks came to power in Russia.

In time, the leaders of the revolution completed the takeover of the tools of production and they came to own and run the economy. Had the Marxist predictions been correct, the leaders should have been able to establish a climate of high morale in the factories since the workers were made to own the companies in which they worked. And the latter should have been motivated to work hard and work happy so as to produce the goods with more zeal and high spirits than the Ford workers in America. In so doing, they should have been able to create enough wealth for their society to swim in money and bathe in luxury.

In fact, the newsreels that came out of Soviet Russia and the other communist countries depicted the happiest of workers producing an abundance of goods. But as we know now, all this was a big lie. The reality was the opposite of that, as the communist dream had failed and was replaced with a fantasy on celluloid. The workers did own the tools of production, at least in theory, but they acted as if they did not. And so the questions were asked: Why did it come to this? And what is it that went so wrong with the Soviet system of economics?

What got in the way of creating a communist Nirvana is encapsulated in another saying: “Everybody’s business is nobody’s business.” This happens all the time because when people own something collectively, nobody feels they work for themselves but everyone feels they work for the collective. And the problem is that the collective soon becomes an abstract notion with which the people cannot bond or develop an affinity.

Under these circumstances the motivation disappears, the zeal and the high spirits deflate, the wealth ceases to be created and the money is not made because the goods are not produced in abundance or if they are, they are produced sloppily. And all these troubles can be traced to the fact that the collective has always failed to take the place of self-interest which is something that is written into our DNA and something that is destined never to be erased with words or removed with theatrics.

Nonetheless, as the Russians have shown, you can still develop some form of pride in the collective and substitute that for self interest. However, as recent history has shown, the effect of this trick will only last for a short period of time as it did in Russia following the launch of Sputnik. But sooner or later the individual will come around to asking the most ancient and most pertinent of all questions: ‘What’s in it for me?”

The question was asked in Russia and this is when the Soviet empire began to erode. The empire then collapsed while Sputnik remained high up in the history books as the first artificial satellite to go into orbit around the Earth. But with the passage of time the Russian pride was transformed into a human pride and a heritage that belongs to all the races. Now, Sputnik is no longer discussed as a Russian triumph and no longer viewed as a Russian exclusive.

And to answer the question: “What’s in it for me?” various attempts were made to show that anything good done for the collective was something good done for every member of the collective. But every philosophical point made in this regard produced a counterpoint that rebutted it effectively and in the end, the clash of ideas always came to a draw.

The back and forth discussions went on until such time that the proof as to which side had the more effective economics came with the proverbial pudding, and the news was bad for the communists. When the puddings were distributed and the tasting began, the Soviet pudding proved not to have a heavenly taste as promised but something closer to a hellish aroma.

The communist soufflé started to deflate as the Soviet Union started to collapse. And it all happened not because of an ill wind that blew from outside the country as originally feared but because of the bad economics that the Soviet regime was pursuing.

The lesson to be learned here is that the Russians were not able to have their version of the guns and butter because they concentrated on the guns, believing that the butter will follow automatically. They neglected to produce both the Sputniks and the goods that consumers crave, and their shortsightedness proved fatal.

By contrast, the Americans concentrated on the butter and this made it possible for the guns to follow. They produced the chewing gums and the soaps but also the powerful military machine that still exists today.

However, the American approach is now coming under strain and the problem is that the Western intelligence agencies which failed to detect the impending demise of the Soviet system are doing very little to help America avoid the same fate as the Soviets.

This last point and a few others will be discussed in Part 2 of this series.

Don’t Know What, Who Or Why

Something happened, I am not sure what, but suddenly talk filled the airwaves a while ago with regard to the latest census in Canada, the result of which apparently revealed that half of Toronto is made of visible minorities. And the commentators were almost unanimous in wondering if we should not be teaching somebody - I am not sure who but probably the minorities - something about our history and system of governance. But none of the commentators revealed why they were prompted to say this.

As someone who spent most of my life teaching, I have a few observations to make in this regard. I believe that in the same way we need to learn how to think in order to produce useful thoughts, we need to learn how and what to learn in order to make our endeavor a useful one. So let me begin from the beginning.

Teachers exist to teach but the students are so varied and they can be so single minded in their approaches to learning that no teacher may go through the experience without learning a thing or two from them. In this regard, the one thing that impressed me most about some of the students was the way that they believed they could learn. Even though some were in their twenties, they believed they could learn just by listening to the lecture in class and by owning the books without ever opening them.

I remember having a comparable attitude myself but with a difference since I was around three years of age when it happened to me. I asked my mother to teach me to read and write; she said I must learn the alphabet first which she set out to teach me. I do not know how long it took me to learn the thing but one day I discovered I had memorized all twenty eight letters that make up the Arabic Alphabet.

The moment I succeeded in reciting the whole thing I pounced on the pen and tried to write something but could not. Disappointed, I turned to my mother and asked why. To my chagrin and to her amused astonishment she replied that I have yet to learn how to write the letters I just recited. Well, I suppose I displayed no more naïveté than the students who believed they could learn the content of a book they never opened.

Now that I am not three years old and not even young enough to return to my old profession, I see something comparable happening all around me. We have in this culture several levels of legislatures that churn out new laws and regulations almost everyday. We also have several levels of courts that churn out new precedents every hour of the day. And yet we never encounter someone thinking aloud or talking about the best way to comply with the laws and regulations, be that on the air or off the air.

On the contrary, we are exposed at every turn to the news and to advertisements that tell how the lawyers and the accountants of this country navigate their clients around the law to get away with murder and to save on taxes. In a climate where the example is the thing, you cannot blame ordinary people, including some members of the visible minorities, for taking the attitude of who needs to open the law books when the officers of the court and the chartered accountants are thrashing them left and right!

What come out of this are two lessons. First, we do not go through life knowing all there is to know about the things on which we base our decisions; therefore most of the decisions are imperfect. Second, more often than not we tend to build a system of beliefs based on false premises, a reality that determines how we live our lives and how we interact with each other. This happens not because we lack access to knowledge but because we are too lazy to access that knowledge.

Looking at our current human condition - which is probably what the commentators were trying to tackle on the air - we profess to cherish the notion that we have a system of laws and not a system of men in this country. But the fact is that we are as illiterate about the system by which we govern ourselves as a three year old who has yet to learn how to write the letters of the alphabet.

And the reality we refuse to acknowledge is that a book of laws written by special interest in the middle of the night, now sitting on the shelf of a lawyer or an accountant, does not make a system of laws. And since democracy is supposed to flow out of this system, democracy itself has ceased to flow despite the fact that it is the religion to which we must all adhere, being the common language that is supposed to bind us together.

Having pulled down the curtain on the real thing, we find ourselves compelled to put on a make-believe show to give the impression we have a functioning democracy. But when something is created for a purpose and the purpose is forgotten yet the people act out the thing, we call this a ritual. Therefore, what we now have is the ritual of a democracy through which we make the correct moves but seldom practice what we pretend to be.

Rituals have existed for a long time. They were invented to replace the religious demands that were beyond the ability of some people to perform. And because there is a resemblance between religious beliefs and political beliefs, a few things were equated between the two and transferred from one to the other. This being the case, we can do a test on the religious side of the equation to see how it might apply to political governance.

For example, if we need to measure how strong someone’s belief is, we may ask how far that someone would go to invoke or to affirm their belief. And the best real-life example to illustrate this point is the legend surrounding the American actor John Wayne who was the quintessential blue-blooded all-American shoot-them-up swaggering extreme right wing cowboy on the screen.

The story is that contrary to the character he played, John Wayne was never certain he was doing the right thing. He was concerned that he might have sinned all his life being so extreme in his views, and he was afraid to die and go to Hell. So he converted to Catholicism on his deathbed and asked to be baptized right there and then. He did this because he heard that in Catholicism all sins are wiped clean when someone submits to the ritual of the baptism. Thus, to force God to take him in Heaven, John Wayne did what he thought would fool God for eternity in the same way that he fooled his fans and audiences during his lifetime.

The question now is this: Do we believe in our democratic fantasy like a fanatic who would die for his religion or do we believe in it the same utilitarian way that John Wayne believed in Catholicism? Whatever the answer, I have a few more questions. What sort of civic education those commentators thought was needed? And who would they teach it to? The lawyers? The accountants? The visible minorities? The invisible majority? Or the commentators themselves?

And what would happen if we are shown that our knowledge of the system we adhere to does not exceed the knowledge of the students who never opened their books? Or the knowledge of a three year old who has yet to learn how to read and write? Do we then import teachers from where the visible minorities came the same way that we imported their priests when we realized we had lost our moral and religious compasses?

When I think of these questions I am reminded of what happened ten years after I learned to recite the alphabet. I was so eager to say things before I thought them through; a teacher felt compelled to give me advice. He said I should engage my brain before I open my mouth. And this is the advice I now give to the commentators who would say something just because the least informed among them said it first.

Whether born here or born elsewhere, most of the minorities that the commentators wonder about are likely to be better informed about the history and the civics of this country than anyone else. And there are a couple of reasons for this, they chose to be a part of this country and they know how to be responsible citizens. Can the commentators say the same thing about themselves?

Measuring Household Happiness

In modern parlance the expression Quality of Life refers to the desire for a way of life that is pleasant and sustainable; in other words the expression has come to mean happiness. But if money does not buy happiness as the old saying goes it cannot buy a life of high quality. Thus the need to pose the questions: Is there something we can do that will lead to a life which is both sustainable and of high quality? If yes, how do we recognize that thing and when we do, how do we measure the happiness it is supposed to yield?

Having no answer to these questions, most people hang on to the old notion that the level of income in a household is a good indicator as to the quality of life in it and therefore to its level of happiness. And so they quip that money may not buy happiness but it sure makes life easier and, to most of them, this is the sort of happiness they can live with and one they will seek relentlessly come what may.

While this sort of discussion takes place somewhat tongue-in-cheek among the general public, more serious discussions take place among the planners in many places around the world. And the motivation behind the latter discussions is nothing less than the deep concern that the planners have for the survival of the human race and the need to become better stewards of the planet and its resources.

This preoccupation with the health of the Earth is generated by the demands that modern living makes on the planet’s capacity to provide for a human population that keeps on growing and where everyone strives to take their place at the banquet table. In some sense, the question of how to sustain a livable condition on Earth has replaced the question that the ancient philosophers used to ask: Who are we and why are we here?

And while this is going on among one group of people, another group is debating the fate of Western Civilization where the birthrate is going against the trend and is falling. Since economic strength is viewed as being proportional to the size of the population, this group is alarmed by the prospect of the West being overwhelmed by the other cultures. And while the group does not deny that the resources of the planet are strained, it fears for the future of Western Civilization enough to want its population to grow even if this happens at the expense of the planet.

Abstract notions and potential scenarios are put forward by the various groups to advance arguments on all sides of the issue. But when all is said and done, we are confronted with the reality that we, who live in the West, compete against people who live everywhere else on much less than we do yet seem happier than we are. So the question is asked as to whether or not we can scale down our lifestyle and still function normally if not be happier.

The answers that are advanced begin with the recognition that we are a people to which having more money means being happier than having less. To wit, winning a windfall will change someone’s mood in an instant. But there is a silver lining in this observation because if claiming the winning comes with a condition, the amount won is weighed against the condition. This says that to most of us money is not an end in itself but a means to an end. And this leads to the hopeful question: Is there another way to get to that end?

To answer the question we look at the example of two households having the same annual income of 60,000 dollars. The first household is occupied by two parents and one child for a total of 3 people; the second is occupied by two parents and four children for a total of 6 people. The numbers are so chosen as to make one household twice the size of the other.

Given that the per capita income in the first household is 20,000 dollars and the second is 10,000 dollars, we ask: Can it be inferred that the individuals in the first household are happier than those in the second? If yes, are they twice as happy?

Not many people will make that inference but when the debate begins, a number of interesting arguments are generated on both sides of the issue. On close examination, the ideas expressed can be separated into two groups, the financial type and the social type.

In the financial realm, it is said that because the people in the first household earn 20,000 dollars each, they have the option to spend 10,000 dollars and stop here or they can go on and spend more if they so wish. Thus, they can be as happy as the folks who are limited to the 10,000 level or they can buy misery if this is what spending more money will get them…but it will be their choice to make. And having this choice is in itself a form of happiness. The conclusion is that 3 people earning 60,000 dollars between them are happier than 6 people earning the same amount between them.

The opposite argument says that while the above logic seems flawless on the surface, it does not reflect the full reality of the situation. This is because there are two components to the expenses of a household; there are the fixed expenses which are obligatory and common to both households and there are the discretionary purchases which are paid for with what remains to each individual.

To see how this plays out we do an experiment. We limit the allowable expenses in each household to 10,000 dollars per individual. If now we set the fixed expenses such as paying the mortgage, taxes, insurance, hydro, water, telephone, cable, furniture, appliances and so on at 18,000 dollars a year, the 3 people in the small household will each have to contribute 6,000 dollars for the fixed expenses and thus be left with 4,000 for the expenses called discretionary.

By contrast, the 6 people in the larger household will each contribute 3,000 dollars for the fixed expenses and be left with 7,000 dollars for all the other expenses. The conclusion is that they will be better off than their counterparts in the smaller household because they will enjoy the same comfort yet have more money to spend on the discretionary items.

And the fact is that in order for the people in the smaller household to have 7,000 dollars each to spend on discretionary items and still have the 6,000 dollars to contribute toward the fixed expenses and buy the level of comfort to which they have grown accustomed, they will have to earn 13,000 dollars each, not 10,000.

The folks on the other side of the argument reject this presentation because it assumes that the fixed expenses are unaffected by the size of the household. Instead, they assert that more money is required to pay for the fixed expenses when you have to raise four children in a large household than is required when you raise one child in a small household.

Yes, respond their counterparts but having three extra children in the house does not double the fixed expenses. To be sure the extra children require a little more expenses but they do not double them. For example, you may need a larger refrigerator but not two of them. Also, one oven, one washing machine and one dryer serve the large household just as well as the smaller one. In fact, aside from the refrigerator that runs all the time, these appliances sit idle 90% of the time.

In short, having children in a household does not raise the fixed expenses in proportion to their numbers. The people who argue this side of the question offer the opinion that this fact alone contributes a great deal as to the reason why people in the developing countries live on a smaller income without diminishing their level of comfort. We may have more appliances, furniture and home entertainment units per person but when the numbers are compared on a per household basis, they do not look so lopsided.

The financial arguments thus flushed out, the social arguments begin with the question as to whether or not having children in the house brings happiness. Different people have different views on this subject but they all agree that the money spent on leisure and entertainment varies greatly between the households and thus the types of happiness and their levels will vary from household to household.

And then, a view is advanced to the effect that perhaps the people in the developing countries are happier because they have each other to rely on for support, companionship and amusement. Perhaps, it is said, they feel they are blessed having this style of life more than they would be if each had a car, a refrigerator, a washing machine and a dryer all to themselves with no one to share it with.

Can we, here in the West, adopt this lifestyle and help save the planet?

An Industrial Strategy For Ontario

Being an industrial province, Ontario is suffering from the effects of Globalization that have come to it in the form of competition from the developing countries. Ontario is not alone in this regard but is, in fact, a microcosm of what is happening throughout the industrialized world. Thus, the insight that is generated by discussing this Canadian province may apply to the other places as well.

Ontario has a diversified portfolio of high end industries operating side by side with the mining and logging industries which, by contrast, add little value to the raw material they extract. Thus, what is missing in Ontario’s industrial portfolio are the mid-range value-added industries such as textile, leather, furniture, home entertainment and appliances, and these happen to be the industries where competition from the developing world is fiercest. The auto industry is being challenged at the edges at this time and may soon join the list of the endangered industries.

For several decades, however, these were the industries that thrived in Ontario and throughout the developed countries. But then the poor countries began to industrialize and they supplanted their rich counterparts as suppliers of those products to the world. And that world included the developed countries which came to the conclusion that they have no choice but to leave the field and did so gradually as if dying a slow death.

This outcome was predicted twenty or thirty years ago, and the prophecy was fulfilled exactly as imagined. But did it have to be this way? Could something else have been imagined that would have led to a different outcome? In other words, was this outcome inevitable or was it the result of an ill-advised judgment made by the collective intelligentsia in the developed countries?

If the answer is to the effect that the outcome was not preordained, then there must have been another possible outcome which we missed out on. But what would it have been? Surprisingly enough we don’t have to go too far looking for the answer because the textile industries in the United States have taken steps to adapt to the new economic environment, and they provide some clues as to what the alternative might have looked like.

What these industries do now is buy the raw material locally or from abroad, produce the fabric in the United States inside factories that are capital intensive, and ship the textile to the emerging countries where it is made into garments inside factories that are labor intensive. The garments are then shipped back to the United States and elsewhere around the world where they are sold at competitive prices.

This is an approach that all industries in Ontario and the developed countries could have taken a generation ago but never did. The captains of these industries wasted valuable time because they relied on the predictions which said America and the West will no longer need to produce goods at the low end of the manufacturing industries.

Those who made such predictions believed that everyone who wants to work in the future will find a job at the high end of manufacturing and make tons of money. They thought this was going to happen because the workers in the developing countries will toil in sweat shops to supply the world with the fruits of the loom at the low end of manufacturing, and that they will not develop ambitions beyond this level for a long time.

Well, the predictions proved to be wrong when it was discovered that you still need someone to flip hamburgers in the developed countries and that a number of people flipped over to fill these positions. Young people and a few older ones were hired for the purpose but a number of them quickly got tired of the dead end jobs and flocked to the manufacturing positions in the lowly industries. In fact, some of the factories in America and in Ontario received as many as 50 applications for every job opening they advertised.

Seeing that the world had not turned upside down as predicted, the textile industries breathed a sigh of relief and responded by reinventing themselves upon which they found a good supply of workers in America willing to join their team. Textile returned to the country looking not as it did before but more in tune with the new economic realities.

We must recognize this turn of the events as representing Globalization at its best but we must also view it as being the beginning of a process. Similar approaches can and must be taken with regard to the other industries, and there is no doubt that the private sector will try do so where it can. However, many of these industries have been wiped out already in places like Ontario, and the question is whether or not there is a role for government to play both with regard to reviving those that died and to shoring up those that face a similar fate.

The short answer is that there is a role for government to play. But before we get into this, we should understand that at the basis of our thinking must be the search for strategies that will respond appropriately to the strategies adopted by the developing countries. The aim will be to work with those countries harmoniously so as to complement each other and not try to supplant one another.

What the American textiles did was to identify those parts of the process that were best suited to be handled locally and those that were suited to be handled in the developing countries, and they shared the work. Until we find a better model to work with, this example must be the one to follow because it was tested and has proved to work.

The government of Ontario should now pave the way for similar processes to happen reasonably quickly and not wait for them to evolve because it may take a generation or two for this to happen. The private sector will muddle along as it always does but the government can help in two ways. First, it can provide incentives via the tax code for sharing the work with the developing countries; second, it can coordinate the efforts with foreign governments based of the following principles:

The development of the countries that were left behind need not take place under conditions that look like a wrestling match, a combat or a war between two worlds. Rather, the exercise should look like a wedding between the two groups and be that in practice. What must be understood is that the aim of the developing countries is to industrialize as quickly as possible and become like the developed countries. It must also be understood that the latter want the developing countries to succeed and they are willing to help.

Thus, instead of working at cross purposes, each side doing something that may be detrimental to the interest of the other, let the two sides coordinate their efforts so that the development of the lagging countries progresses in a way that is beneficial to both sides. To this end, the work in every industry should be dissected into parts, those that are capital intensive and those that are labor intensive. At first, the developing countries will do the labor intensive parts while the developed countries do the capital intensive parts.

But as the developing countries progress, they will gradually get more of the capital intensive parts of the job while the developed countries get more of the labor intensive parts. Eventually there will come a time when the two sides will have the same mix of jobs, and the goal of achieving industrial equality between the nations will have been reached.

As an incentive for the developing countries to go along with this plan, the advanced countries will agree to come to the negotiating table as soon as a developing country feels it is ready for the transfer of technology. The two sides will negotiate the manner and sequence in which this will be done and then explore how the developing country may reciprocate.

One way to reciprocate that is beneficial to both sides, for example, will be for the developing countries to open their markets ever wider for more goods, services and investments to flow from the developed world.

The Double Faced Economy

People in the developed countries read and hear stories about societies where some individuals live on less than one US dollar a day and wonder how this can be. They say they can understand how a society of primitives who never came into contact with civilization could live like this in the jungle but not the urban poor in a developing country that has skyscrapers and highways, cellular telephones and air travel.

This puzzlement is understandable given that the mythology is propagated by people of distinction who should know better than to write in prestigious publications or get on radio and television where they repeat nonsense they hear from someone else but are unsure what it means. They are people who do the public a great disservice and must therefore be educated along with their editors and publishers who allow this sort of shoddy work to go unchecked.

As for myself, when asked a question on the subject I respond by telling the questioner that I am not aware the country they talk about has adopted the US dollar as their currency. Oh no, say the questioner, the country has its own currency. So I reply, in this case tell me how much of their currency those individuals earn and how much it costs to live where they reside but do not tell me how many US dollars they do not make because it is irrelevant to them as it is to me and to the discussion. But if you do not have such information, consider what else you know to be trash and stop repeating it. And here is the reason why it is trash:

All economies are double faced as they have been since the first time a border was drawn between two societies. And all economies shall remain double faced for a long time to come because economies follow one set of rules to control their internal commerce and another set to control their external commerce.

To a large extent this dual character determines how economies work but this fact is often overlooked in the public discourses. And the time has come to give the matter a high profile because there is insight to be gained in doing so and because the insight can illuminate as well as answer many of the often asked questions.

What may change a situation that has been the norm since the beginning of time is the emergence of an economy whose citizens are allowed to trade with the other countries free of any restriction. However, if this were to happen to one country, the act itself will not produce a complete reversal of the situation because the citizens of the country will still have to obey the rules of the foreign countries they trade with.

A complete reversal of the situation will come only when two or more countries drop all the rules governing the commerce between them and adopt an identical set of rules at home to govern their internal commerce. When this happens the countries will behave like one market and thus create the single faced economy.

In the meantime, the obligatory prerequisite that two or more countries must achieve before shooting for the single faced economy is to adopt one and the same currency for all. Members of the European Union did this, and Europe is on its way to realizing the dream. When the work is completed, Europe’s achievement will have surpassed that of Canada where it is more difficult to trade between the provinces than with a foreign country even though all the provinces use the same currency.

But what is it that feeds the mythology of people living on less than a dollar a day? The following example provides the answer: Imagine a fictitious scenario unfolding between two countries: America which is developed and Vietnam which is developing. America wants to have unrestricted free trade between the two countries thus requiring the removal of all the rules regulating trade between them. Vietnam, on the other hand, wants to see some rules in place.

To the American way of thinking, Vietnam is a place that is full of untapped natural resources and a population that is yearning to improve its lot. Consequently, American businesses should be allowed to go into Vietnam, extract the resources there and manufacture them either locally, in America or anywhere else depending on the needs of business.

Not so fast, say the Vietnamese, because when you carry on in this manner the few Vietnamese individuals who will be hired to work for the American companies will be paid a lot more than their compatriots. This will boost the rate of inflation to a considerable height and cause the rich to get fabulously richer and the poor to get exceedingly poorer. And the seeds will have been planted for two Vietnams to emerge and be locked in class warfare.

To reconcile the two visions, American and Vietnamese teams start to negotiate a trade protocol, each coming to the table with a set of ideas. The Americans negotiate on behalf of the corporations whose agenda is to do what is good for the shareholders. That is, they want the flexibility to open, to close or to relocate any business facility inside or outside the country. And they want the freedom to hire, to fire or to relocate any employee in accordance with the needs of the business.

The Vietnamese on the other hand want to develop their country and render it as advanced as America in the shortest period of time. To this end, they want their workers to earn as high a salary as they will negotiate for them but they do not want all the money to go to the workers lest the inflationary forces be let loose as mentioned before.

Instead, the Vietnamese negotiators want to set up a pay structure whereby the workers will receive a good salary by Vietnamese standard but one that remains competitive with the other emerging economies. In return for the concessions, the negotiators want to see money go into programs that benefit the Vietnamese society as a whole. These programs will be supervised by the Vietnamese government and financed with money collected from the American companies in the form of signing bonuses, royalty payments, taxes et cetera.

The net result is that the Vietnamese will save a large portion of their national income and achieve a high rate of growth which they will sustain year after year as most of the savings will go to improve the infrastructure and perhaps buy a share of the companies that set up in their country. They will also accumulate considerable foreign reserves and show a negligible foreign debt. Consequently, the balance sheet will say that the country is economically comfortable if not wealthy but because consumer spending remains low, the people will look poor. And this is a sign that the country is enduring hard conditions now to build a better future.

The tools that these people use to realize their goal are not mysterious creations but are the familiar exchange rate, tax and interest rates as well as the other economic tools. To understand what the Vietnamese do with these tools, we visualize a fictitious situation whereby two sets of accounting books are set up. Each set mirrors a different economy yet both are meant to reflect the same one.

To see what goes into the first set of books, we imagine transporting the Vietnamese workforce to America and paying the workers American wages and salaries. To this end, I take the most conservative figures available and work out the math. Vietnam has a young population of 80 million people where the participation rate is 30% indicating a workforce of 24 million. The lowest paying job in America being 7 dollars an hour means that, working 2,000 hours a year, the workforce will earn a grand total of 336 billion dollars during the year. I call this the inferred GDP.

This sum represents two thirds of the actual GDP which comes to 504 billion dollars. When it is divided by the population, it yields the per capita income of 6,300 dollars a year or $17.26 a day. And this is a far cry from saying some people in Vietnam live on less than a dollar a day. But there is more to the math because the average wage and salary is in reality at least twice the minimum wage if not more considering the sort of industries they have in Vietnam. So you do the math yourself and figure out what it all means.

So far so good but what is there in the second set of books? Well, this is actually the set that was used before the drive to industrialize had begun. It was a time when a large percentage of the people were subsistence farmers and they spent much of their income to buy the minimum requirement of 2,700 calories of food per day per person.

The country had little that could be exported and there was virtually no demand for its currency. Thus, the amount of Vietnamese money that bought 2,700 calories worth of food on the local market was exchangeable for less than one US dollar even though the same food would have cost 10 dollars or more to buy in America.

But when the country began to industrialize, foreign money was injected into the system and the local currency began to appreciate. Serious distortions resulted in the marketplace and the government intervened to prevent the lucky few from becoming fabulously rich at the expense of the rest who were becoming exceedingly poor. That intervention consisted of separating the internal commerce from the external one, something that necessitated the keeping of two sets of books which in turn gave the economy its two distinct faces.

In taking these measures, the government avoided the emergence of two Vietnams and the inevitable class warfare such as happened in Latin America during the Nineteen Seventies and Eighties. This was a time when a small class of people became fabulously wealthy by aligning themselves with the West against the majority of their compatriots who remained desperately poor. And this was the reason why many in Latin America turned bitter against US values and remained so to this day.

In sum, what goes on with the second set of Vietnamese books is that the internal commerce is treated as if the country had not started to industrialize. Coupled with this is the fact that the government artificially maintains the currency at a worthless level to smooth out the market distortions and maintain social tranquility. It also happens that these measures discourage the imports and encourage the exports, which suits the government just fine.

But the GDP and the per capita income are expressed in terms of the local currency, and those policies make them look small when the currency is converted into dollars. In fact, the conversion says that some people in Vietnam live on less than a dollar a day which we know to be false because the people have the wherewithal to buy more than 2,700 calories a day with half what they earn. Consequently, how do you explain this, ye Vietnamese officials? We don’t explain anything, ye idiotic pundits because your ignorance was never our problem, comes the response.

If anything, this says that when a set up is artificial, the conversion of the currency is a meaningless exercise because it is worse than comparing apples and oranges or comparing one face of the coin with the other face when the two were made differently by design. And this is why a system called Purchasing Power Parity (PPP) was invented to help make a more intelligent comparison between different economies.

There is a way to use that system but the way is not sacrosanct because the system is known to be deficient. Thus, I prefer to use an approach that takes into account the size of the labor force and the kind of industries the country is engaged in. I am convinced this approach paints a better picture of reality than the PPP and hope I succeeded in showing this when calculating the inferred GDP as I did earlier.

In conclusion, it must be resolved that the habit of trying to look smart by being dumb - which is what the mindless repetition of idiotic statements amounts to - shall be abandoned by the writers and the audio-visual talking heads because it screams to the world on behalf of its authors: I am ignorant and so are my editors and publishers.

The Socio-Industrial Strategy For Development

A number of countries in Asia, North Africa and the Middle East have developed and are still developing at a pace that is unprecedented in human history. Understandably this change has stirred up a great deal of emotions ranging from high excitement to bitter consternation both in those countries and in the rest of the World.

Some people in the developing countries are happy for the progress they are making but others are fearful of losing the familiar lifestyle they grew up with. As for the rest of the World, some people see expanded opportunity for trade and commerce while others see a potentially damaging competition rising to challenge them. And the question now is this: How do these countries do it anyway?

Much has been written about the bolts and nuts of the industrial plan that each country has adopted but little was said about the social impact that the phenomenon of rapid industrialization is having on the ordinary people. Even less was said about the three-way interplay between the society, the government and the phenomenon. I try to touch on some aspects of that interplay in this discussion.

When a program of industrialization is adopted in a country and the economy begins to improve, a well documented trend is seen to develop; infant mortality drops, people live longer and all this leads to families becoming larger. Although these are welcome vital signs, the phenomenon itself hurts the economy in two ways. First, it eats up the savings of the family and thus reduces the level of investment. Second, it swells the population of the country and thus keeps the per capita income from rising as high as it can.

Sooner or later the government realizes that the economy has the potential to grow at an annual rate of 10% or more but that the high rate of birth is moderating the growth; and the idea of initiating a program of family planning is studied seriously. This happens when the big wigs in the government are forced to come to grips with the tough choices they have to make.

They see that they could enact a one child policy like it was done in China or they could encourage the practice of vasectomy like it was done in India. However, both of these methods are intrusive measures that quickly became unpopular in those two countries, and they were too difficult to police anyway. Not many big wigs dwelt on these ideas for long.

And because measures such as these are unthinkable in most other countries, especially in the Middle East and North Africa, an alternative crept into the system almost imperceptibly. Here, the economic factor became a method of family planning. All indications are that this alternative did not come by design but came by a process of natural evolution made inevitable by the force of necessity.

The economic factor came out of the notion that when young men and women turn optimistic about the future, they tend to get married and have children early in life. What materialized in response to this trend was a disincentive that reversed the trend. It did so by encouraging the young to put off marriage to a later date. Thus, the young were encouraged to do something against their grain not because the law of the land nudged them to do so but because the law of economics nudged them to do it.

Governments contributed to the achievement of that goal by preventing the wages and salaries from growing fast enough even when the economy improved considerably. Thus, most of the growth in the economy that would have gone toward consumption was collected as taxes and the money utilized to improve the infrastructure of the country.

These measures were relatively easy to implement because they only involved the local scene. But since those emerging economies are not isolated from the rest of the World, other measures were taken with regard to foreign trade. To this end the governments wanted to keep the exchange rate stable and the value of the currency relatively low for as long as possible given that it was inevitable the currency will be taken on a rollercoaster ride.

This movement of the currency happens because when a country begins to export, the currency firms up. But as the middle class begins to form and the people gain confidence that the good times are here to stay, they want to consume some of the goods they do not yet make locally. They import such goods from abroad and when this is added to the demand for machinery and for raw materials, it causes the local currency to drop.

Eventually a point is reached when the country exports more than it imports and the situation is reversed causing the currency to appreciate again. But when this is seen to crimp the export capabilities of the country, the government intervenes to keep the value of the currency low so as to encourage export.

Eventually a set of regulations is put in place to control the situation but the government also takes into account what happens on another front. It is that when the local people become savvy enough to set up businesses that can trade with the rest of the World, the government wants to protect them from competition. But as the businesses grow strong enough to hold their own, the government eases up the support to let foreign competition force an improvement in local productivity and the quality of the products.

In view of all that, the question is this: What does the mix of policies look like that accomplishes those goals? Of course, every country is different from the other and every phase in each country’s development is different from the previous. Thus, there will be variations on the policies that are adopted at various times and various places but they will all have a few things in common as discussed below.

First, whereas the compensation package for labor in the developed countries reaches two thirds of the national income, it scarcely surpasses a quarter of the national income in the developing countries. The difference between the two levels is the sum of money that is utilized to build the infrastructure of the country and to launch the big projects.

Here, the word infrastructure stands for two sets of things. It is the hard structure such as the roads, bridges, hydro and telephone lines, even new cities, and it is the soft structure such as the training of teachers, business managers, engineers and the like. Many of these people are sent abroad to get trained on the most up to date methods of doing things, and many more are trained at home by local teachers and by foreigners who are invited into the country for the job.

Second, the setting up of industries that have the tendency to foster consumerism is at first discouraged in favor of producing the parts and components for such industries. The most notable candidate in this category is the auto industry. The developing countries avoid it at the beginning because cars use too much raw material when they are made and too much energy after they are made.

But the auto industry is so large worldwide that you cannot avoid getting into it if you want to prosper as a nation. Therefore, those countries get into the business of producing parts and components for the industry to use as spare parts locally and to export the rest. This allows the countries to be part of the industry while putting off the assembly of cars until such time they are ready to let the economy grow more by internal consumption than by export.

Third, except for the mortgage lending institutions whose establishment is encouraged especially in the countries where the resources for building material are plentiful, the consumer lending institutions are discouraged from setting up shop. The net effect is that towns which look every bit like an industrial town in the developed World are inhabited by people who must save all the money they will need to buy a big ticket item.

Also, any sense of a foreign insurance company setting up shop in those countries is strongly resisted by the governments because insurance is seen as making money off the fears and misery of the people without contributing one iota to the industrial development of the country.

But when these countries evolve far enough to want an indigenous insurance industry that stands on sound modern practices, they allow a select number of foreign insurance companies to set up shop on their territory. The purpose here is to give their own people the opportunity to acquire hands on experience in the field, something they will use at a later date to expand their nascent industry.

Only then does the capacity of the insurance companies to provide the marketplace with liquidity for investment and for the expansion of the economy is recognized. In the meantime, however, the people go without the protection that a vibrant insurance industry can provide and remain content with whatever protection the government can provide if any.

Fourth, as the economy develops and its requirements evolve in terms of the machinery it needs to continue developing, the country gets into the production of these machines or parts thereof. The government does it by negotiating with the foreign suppliers a deal whereby the technology is transferred and the licenses are granted to the developing country so as to enable it to participate in the production of what it consumes. The same sort of deal is also negotiated where large quantities of consumer items are used by the citizens of the developing country.

In sum, what took the developed countries two centuries to accomplish, the developing countries aim to accomplish in a quarter of the time. A number of them have had such brilliant successes already that no doubt exists the other countries will do as well. And the best thing we can do in the West apart from learning a thing or two from them is to behave in such a way as to be invited to the party when they celebrate.

What We Can Do For Africa

Some people say that the developed countries should give in cash the equivalent of 0.7% of their GDP to the underdeveloped countries. Doing the math for the share of the United States whose GDP approaches 14 trillion dollars, the amount comes to 98 billion dollars. If you add to that the share of the other countries in the developed World, the amount comes close to a quarter of a trillion dollars. And guess what, this is the price of all the food at the farm level that is produced in North America, Europe and Australia put together.

But what else can we do with all that money, anyway? Well, it all depends on what the question means. If you mean to ask what good can we do for the poor people of the World, the answer is nothing because nothing good can come out of a scheme like this. Most of the money will go to the White charlatans who will stand between the treasurers of the donor nations and the Colored charlatans in the recipient nations, and the rest of the money will go to the colored charlatans themselves.

If you are serious about helping sub-Saharan Africa and wish to see it to develop and become like East Asia or North Africa, there is a much better way to approach the task. Tell those countries to come up with a long term plan for development by looking at the plans that were successfully implemented elsewhere, and by adapting them to their own situation. If need be, assist them to draw up the plans or tell them to seek assistance from the United Nations or elsewhere. Plenty of good people around the World will do this sort of work for the sheer pleasure of doing it. It is a creative sort of work and it yields a tremendous amount of satisfaction.

At the same time, form a consortium of the donor countries and assess the capabilities of each country to help in the implementation of those plans. Create a kind of Clearing House whose task will be to match up each project in Africa with a company or an institution in the donor countries that is best suited to carry out the project. And then let it all happen; it is a simple as that.

When China began the drive to industrialize three decades ago, 500 million people participated in the move and the ride has been breathtaking. The other 800 million waited until now to participate and their move, when it comes, will not be less breathtaking. Well, there are 500 million people in sub-Saharan Africa who could benefit from a similar move down there. And if you liked doing business with China, you will love doing business with Africa not for any sentimental reason but for many practical reasons.

First of all, Africa has a lot more natural resources than China; you will not have to run around looking for these resources and bring them to Africa. Second, you will participate directly in the implementation of the projects without having to wait for the Chinese bureaucracy to issue a permit or give the green light or whatever. Third, the money that will be invested to carry out the projects in Africa will be mostly invested in the donor countries, especially during the out years. At the beginning, some cash will go to Africa to launch the process but the little that will go there will do a lot of good because it will pay the local simple folks who will work on the projects.

This is a much better approach than spending nearly 250 billion dollars a year every year for an indefinite period on something that has not worked in the past and will not work in the future because it is a plan that was designed to fail. In fact, nobody who comes up with a plan like this has altruistic motives; these people only work for themselves.

They are people whose hearts bleed for their own bank accounts and whose props are images of the suffering that goes on anywhere. They want to see the suffering continue because replenishing their bank accounts continues to be their only mission. They rip off the World on account of every suffering in the same way that they ripped off the American treasury on account of the Katrina tragedy. If they can do it to their own people and congratulate themselves for being so smart at being so heartless and get away with it, they will do it to anyone anywhere in the World and congratulate themselves no less.

And if they must, these people will use some of the money they rip off their victims to foster unrest, foment revolutions, and start civil and cross-border wars so as to keep the misery going and the cash flowing into their wallets.

My submission, therefore, is to the effect that if you start with Africa on the right footing, there will be no need to help that Continent until it becomes like Dubai. All you need to do is start the process of development, educate enough local people to take over the work as soon as possible and then see your creation sustain itself from that point on. Thus, instead of spending 250 billion dollars every year going nowhere, you will spend 25 billion a year for 10 years and score a brilliant success that will be permanent and become a monument to your generosity.

And that is all it will take to pull sub-Saharan Africa out of its eternal slump. Just consider this, when a country is as poor as these countries are, you can create a super excellent job by local standard with only 5,000 dollars. Thus, in the first year of operation 25 billion dollars will create 5 million jobs that will sustain 5 million families at a level they could not dream of before. This is almost 6% of the total population and almost 15% of the desperately poor in those countries.

These people will work on the infrastructure and on the development of the agricultural and mineral resources that will pay their wages and salaries the following years as they move into the next phase which will be their industrial development. That phase will consist of the installation and the starting up of the industries which will export goods and services made in Africa for payments from the rest of the World not in response to a request for aid but in response to a commercial invoice.

All the work and the raw materials to establish those industries will be supplied by and from local sources but the machinery will be donated by the donor countries. Year after year more sophisticated industries will be established; and after ten years of this sort of effort, most of the countries in sub-Saharan Africa will have reached the point when they will no longer need any assistant.

But the work will not be finished because the sky is still the limit. It is only that the limit will now be one that the Africans themselves will aim for by the power of their imagination and the sweat of their forehead.