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https://www.dhakatribune.com/opinion/op-ed/2018/11/18/don-t-worry-about-the-trade-deficit
Don’t worry about the trade deficit
Tim Worstall
All industries are connected Bigstock
We have one because we are importing capital goods to raise productivity and wages
The general view is that we’d like the wages of Bangladeshi workers -- especially those in the garments sector -- to increase. It’s also a general view that there’s something wrong with running a trade deficit, more so if it’s rising.
One of these two general views must be wrong. Not wrong in and of themselves, but we cannot base policy on both of them at the same time. For one of the reasons for, a good reason for, a trade deficit is the way in which we are increasing the workers’ wages.
The recent negotiations about the minimum wage in the garment sector seem to have gone well enough that minimum is now Tk8,000 ($95). That’s better than the earlier Tk5,300 from the workers’ point of view, but we’d all very much prefer that it was higher.
For the obvious reason, we’d like Bangladesh to be a rich country, with people being paid rich country wages, as in the US or Germany. The trick is how we get from here to there.
We also have a report saying that the trade deficit has risen. This is generally viewed as a bad thing, but as Adam Smith pointed out, there’s nothing so ridiculous as worrying about the balance of trade.
If we buy more things made by foreigners, then foreigners must be investing capital in our country, that’s just how it works. Any deficit upon the trade or current accounts is and must be offset by an equal and opposite surplus on the capital account for the balance of payments does always balance.
Note what happens if foreigners are investing in Bangladesh. There’s more capital in the country, and it is capital which increases the productivity of the workers. More productive workers get paid more, that’s just the way the world works.
Thus, our running a trade deficit, as a result of that more capital coming in, is what contributes to wages rising over time. Yes, it’s an oddity, but there’s a truth there all the same.
We shouldn’t be worrying about that trade deficit. But more than that, we can also see what it is that is producing the deficit. We can -- and do -- measure what is being imported.
And at the current time, it’s largely a rise in capital machinery imports leading to that rise in the deficit. Capital goods being the very things that capital buys, which then increases the workers’ wages.
If we try to stitch or cut garments purely by hand, then we’ll produce some number per hour or day. The more machinery we have to do some of the labour, the more we’ll be able to produce in any given timespan. That’s a rise in productivity.
However, there’s something important to understand here. Wages are not, repeat not, determined by how productive an individual worker is, nor even by how one particular industry is doing. Wages are determined in the national labour market, and thus it’s the national level of productivity that matters. This has two implications.
The first is that if productivity increases in just the one industry sector then that will have a smaller, but still valid, effect upon all wages in the country. The garment sector, imagine, increasing productivity has that knock on effect upon wages in salt production, rice, or jute growing.
Equally, and in the other direction, a sector which remains unproductive lowers wages across the economy. We can’t just sit back and try to do everything on the back of just the one sector -- we want and need to increase productivity everywhere.
The reason for this interconnection is that the real determinant of wages in any one job is: What are the wages you can gain by doing some other one? It’s the options available that determine matters.
As an example, a barber does much the same job with much the same tools -- scissors, comb, razor -- in Dhaka as in Denver, the one in Denver is going to be paid very much more. The barber from Denver is getting paid more not because his own productivity is higher, but because wages in all the alternative jobs available are higher.
Raising productivity, increasing wages, is thus something that matters economy-wide, not just in any one industry. Certainly, we’d all like this process to be happening faster, in fact, we’d like for it to have happened 50, 100 years ago as it did in some other places. But we are getting there. Bangladesh is currently growing, at that 7% and 8% a year, about as fast as any place ever has done.
Wages are rising in much the same manner. Yes, wages are still below where we’d like them to be. But we are raising productivity along the way. And while we do so, we shouldn’t worry about the trade deficit on theoretic grounds. And when we look at the details of why we’ve got one -- importing capital goods to raise productivity and wages again -- then we shouldn’t worry about that deficit at all.
It can be a bit of a shock to realize that the right things are being done, that the world really is getting better in leaps and bounds. But it is so.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.
Don’t worry about the trade deficit
Tim Worstall
- Published at 12:34 am November 18th, 2018
All industries are connected Bigstock
We have one because we are importing capital goods to raise productivity and wages
The general view is that we’d like the wages of Bangladeshi workers -- especially those in the garments sector -- to increase. It’s also a general view that there’s something wrong with running a trade deficit, more so if it’s rising.
One of these two general views must be wrong. Not wrong in and of themselves, but we cannot base policy on both of them at the same time. For one of the reasons for, a good reason for, a trade deficit is the way in which we are increasing the workers’ wages.
The recent negotiations about the minimum wage in the garment sector seem to have gone well enough that minimum is now Tk8,000 ($95). That’s better than the earlier Tk5,300 from the workers’ point of view, but we’d all very much prefer that it was higher.
For the obvious reason, we’d like Bangladesh to be a rich country, with people being paid rich country wages, as in the US or Germany. The trick is how we get from here to there.
We also have a report saying that the trade deficit has risen. This is generally viewed as a bad thing, but as Adam Smith pointed out, there’s nothing so ridiculous as worrying about the balance of trade.
If we buy more things made by foreigners, then foreigners must be investing capital in our country, that’s just how it works. Any deficit upon the trade or current accounts is and must be offset by an equal and opposite surplus on the capital account for the balance of payments does always balance.
Note what happens if foreigners are investing in Bangladesh. There’s more capital in the country, and it is capital which increases the productivity of the workers. More productive workers get paid more, that’s just the way the world works.
Thus, our running a trade deficit, as a result of that more capital coming in, is what contributes to wages rising over time. Yes, it’s an oddity, but there’s a truth there all the same.
We shouldn’t be worrying about that trade deficit. But more than that, we can also see what it is that is producing the deficit. We can -- and do -- measure what is being imported.
And at the current time, it’s largely a rise in capital machinery imports leading to that rise in the deficit. Capital goods being the very things that capital buys, which then increases the workers’ wages.
If we try to stitch or cut garments purely by hand, then we’ll produce some number per hour or day. The more machinery we have to do some of the labour, the more we’ll be able to produce in any given timespan. That’s a rise in productivity.
However, there’s something important to understand here. Wages are not, repeat not, determined by how productive an individual worker is, nor even by how one particular industry is doing. Wages are determined in the national labour market, and thus it’s the national level of productivity that matters. This has two implications.
The first is that if productivity increases in just the one industry sector then that will have a smaller, but still valid, effect upon all wages in the country. The garment sector, imagine, increasing productivity has that knock on effect upon wages in salt production, rice, or jute growing.
Equally, and in the other direction, a sector which remains unproductive lowers wages across the economy. We can’t just sit back and try to do everything on the back of just the one sector -- we want and need to increase productivity everywhere.
The reason for this interconnection is that the real determinant of wages in any one job is: What are the wages you can gain by doing some other one? It’s the options available that determine matters.
As an example, a barber does much the same job with much the same tools -- scissors, comb, razor -- in Dhaka as in Denver, the one in Denver is going to be paid very much more. The barber from Denver is getting paid more not because his own productivity is higher, but because wages in all the alternative jobs available are higher.
Raising productivity, increasing wages, is thus something that matters economy-wide, not just in any one industry. Certainly, we’d all like this process to be happening faster, in fact, we’d like for it to have happened 50, 100 years ago as it did in some other places. But we are getting there. Bangladesh is currently growing, at that 7% and 8% a year, about as fast as any place ever has done.
Wages are rising in much the same manner. Yes, wages are still below where we’d like them to be. But we are raising productivity along the way. And while we do so, we shouldn’t worry about the trade deficit on theoretic grounds. And when we look at the details of why we’ve got one -- importing capital goods to raise productivity and wages again -- then we shouldn’t worry about that deficit at all.
It can be a bit of a shock to realize that the right things are being done, that the world really is getting better in leaps and bounds. But it is so.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.
