If we can answer the question: Why is it that a shoeshine
boy, a carpenter or a physician from Bangladesh settling in America instantly
earns 40 times as much as before, we can begin to solve a problem that is
slated to remain with planet Earth for perhaps another three generations. The
problem is that of industries leaving the advanced economies to relocate in the
emerging ones, thus creating a class that gets wealthier in each economy, and a
class that gets poorer in each of them.
At the core of the problem is an exchange rate of the
currencies that is supposed to reflect the level of development the two
economies have attained. But this may be a distortion of reality rather than a
reflection of it because – like everything else – the exchange rate depends on
supply and demand where the supply of money depends on the central banks of the
two countries; and the demand for it depends on what a small group of consumers
desire and what they go for.
If, for example, without fundamentally altering either
economy, something extraneous happens to cause the exchange dealers to trade 1
American dollar for 2 Bangladeshi takas instead of the dollar for 80 takas, the
income of the shoeshine boys, the carpenters and the physicians in the two
countries will look comparable. The situation will last as long as the
extraneous circumstances will persist. But this is not happening because if it
did, there will come a point when the Bangladeshi economy will start to
collapse, and the economic life of a large population will come close to a
screeching halt. In fact, something serious will begin to happen at the start
of the taka's rise, and there will be upheaval even before the exchange rate
has reached the level of 2 takas per dollar.
Why is that? It is because those in Bangladesh who have more money than
they need to subsist, will spend the extra they have on luxury items imported
from abroad. Instead of investing the money in the development of the country –
thus creating opportunities for their countrymen to participate in the effort,
and share in the fruits – they will maintain their lifestyle of imported
luxury, relying on the extraneous circumstances to help them bankroll it. Some
of these people may even send money abroad where they will keep it in secret
accounts so that if things turn sour in their country, they will go abroad and
live the high life there.
But what could be the extraneous circumstances that would
trigger a scenario of this sort? Well, we may look at two examples, each of
which can teach a different lesson. There is the island of Cyprus Cyprus and the necessity for a
bailout from the European Union and world financial institutions.
However, the Cypriots may get lucky because another
extraneous circumstance may come to the rescue. This would be the large deposit
of natural gas that is said to exist off the shores of their island. If this
materializes, Cyprus
will be able to export some of the gas, thus earn the foreign currency it will
need to develop its industries and have a real economy. In fact, this leads us
to the second example which is that of Dubai ,
an emirate of the United Arab Emirates (UAE). Like the rest of the Emirates as
well as the Arab nations of Qatar ,
Kuwait and Bahrain – these
small nations are using their oil wealth to develop industries they will rely
on when the hydrocarbons they possess will have been depleted.
The lesson to be learned here is that if you are a nation
with a small population, you may get away for a time relying solely on the
inflow of hot money blowing your way. When that stops, you will find yourself
in trouble. The same thing will happen if you possess natural resources that
get depleted before you develop your economy enough to live well without the
resources. But if you are a nation with a large population, the only thing you
can do is develop your economy the old fashioned way – to use a cliché. And
there lies the difficulty because the old way is to mimic the Industrial
Revolution that happened centuries ago but missed your nation. The countries
that participated in that Revolution are the developed economies of today with
whom you maintain a reverse sort of symmetry; one that you must try to redress.
Reverse symmetry can be explained this way: Business people
want to produce the best possible products – be they goods or services – at the
lowest cost. The way to achieve this is to team up with entrepreneurs in the
underdeveloped economies and employ local labor to produce the breakthroughs
that were made in the advanced economies. Most of the time the local workers
will require training to acquire skills for which they will receive wages that
are higher than those enjoyed by the rest of the population. The net effect
will be that the entrepreneurs and the workers who deal with foreigners will
have more money to spend than the rest of the population. They will drive
prices up, and this will make the other people poorer. As the gap between the
two keeps widening, the response will be to pay everyone else more money. But
when this happens, it will help devalue the local currency; and this will
further deteriorate the rates of exchange.
How to solve this problem? Rather than wait three
generations for the problem to resolve itself when the planet will have been
fully industrialized, we should now recognize that there will always be people
of all sorts in every society – advanced or underdeveloped. Those who fall
behind in the advanced economies will have to be helped while those in the
developing economies who get ahead will be required to share some of their good
fortune with the rest of society. These two objectives can be attained while at
the same time redressing the imbalance that exists in the economic symmetry.
To this end, a worldwide agreement can be had whereby the
wages of those who fall behind in the advanced economies will be subsidized by
the government. For example, the minimum wage will be kept at a level that will
not kill the job market, but will be supplemented by a government payout to
bring it up to a living wage. As to those who get lucky in the developing
economies working with foreign enterprises, they will get paid just a little
less than their counterparts in the advanced economies but also just a little
more than the local population. For example if a carpenter is paid 20 dollars
an hour in America, and the equivalent of 0.5 dollar in Bangladesh, he will be
paid say, 15 dollars by a foreign company but will take home the equivalent of
only 1 dollar. The difference of 14 dollars will be paid to the government to
use in the development of the country, thus help advance the rest of society.
Some kind of worldwide mechanism will have to be developed
to see to it that the system is functioning as well as it should. This will be
necessary to make sure that the developed economies are not over-subsidizing,
and that the underdeveloped economies are not misusing the money paid out to
them.