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.