The Lethal Lemons on the Road to Bangladesh

wrote yesterday about the “control frauds” (in which the person controlling a seemingly legitimate entity uses it as a “weapon” to defraud) that target purchasers of bad quality goods (“lemons”) and employees.  The example I used to explain these concepts was the collapse of the building housing garment factories in Bangladesh.

As I write, there are terrible reports indicating that the death toll is far greater than currently reported.  Again, the initial reports from a disaster often prove inaccurate in important ways so I urge caution and the need to confirm whether the newer reports are accurate.

The higher death toll is not what prompts this article.  I write to discuss the intersection of control fraud, austerity, globalization, labor “reform,” and economic development.

The Road to Bangladesh

The most interesting event I have participated in is the Kilkenomics Festival in Kilkenny, Ireland held in early November.  It is an economics festival in which people with expertise in finance (dressed in jeans) partner with professional comics (dressed in suits) to discuss serious economic issues.  The organizers sell roughly 3,000 seats to non-wonks from Ireland and Europe.  The comedians keep us honest and minimize the jargon.

I appeared in six or seven events last November, including interviews with the BBC and Ireland’s Pat Kenny on RTE.  One of the subjects we discussed repeatedly was the intersection of austerity, “free trade,” and labor “reforms.”  I made the point that the EU had a single game plan for the Eurozone’s southern periphery.  They inflicted austerity, forcing the Eurozone into a gratuitous second recession and the southern periphery into an überDepression with unemployment rates significantly worse than the largest European economies generally suffered during the Great Depression.  (Cynically, and the EU is a past master in cynicism, the EU refers to the result as a “mild recession.”  It also avoids the word “austerity” like the plague and calls it “pro-growth.”)

What is far less well known in the United States is that Berlin has also demanded (successfully) that the “troika” (European Commission, the European Central Bank (ECB), and the IMF) insist that the nations of the periphery engage in labor “reforms.”  “Reform” is a word chosen for its positive connotations and its generality.  There is certainly some variant of a labor “reform” that would be desirable in any nation.  Unfortunately, what the troika means by labor “reform” is sharply lower working class wages.

The excuse for forcing lower working class wages is that doing so is essential to increase exports.  The troika’s recipe for the periphery’s recovery is for every nation of the periphery to become a significant net exporter.

A nation with a sovereign currency can use three strategies to speed its recovery from a recession or a depression.  The three strategies are not mutually exclusive.  The nation can adopt fiscal stimulus, an aggressive expansion of the money supply, and it can devalue its currency (which makes it far easier to become a net exporter).  A nation that adopts the euro, however, must give up its sovereign currency and its ability to employ any of these recovery strategies.  It cannot employ a significant stimulus program because doing so would violate the (oxymoronic) “Stability and Growth” pact.  It cannot expand the money supply because the ECB is controlled by German principles, which are based on the assumption that hyper-inflation lurks behind every corner.  It cannot devalue its currency because it no longer has a sovereign currency.

The only strategy left in the tool chest for a nation that adopts the euro and is mired in recession or depression, therefore, is to become a substantial net exporter.  There are two obvious problems with this sole remaining strategy.  One, not all nations can be net exporters.  One nation’s export is the other nation’s import.  The more Germany is a net exporter the harder it is for other euro nations to be net exporters.

Two, the way for a nation to gain a competitive advantage in exports and increase its chances of becoming a net exporter is either to have a far more skilled workforce producing high value exports or to slash working class wages.  Northern Italy can export luxury goods created by skilled craftsmen and designers.  Spain, Ireland, Portugal, Southern Italy, and Greece have to out-compete poorer nations with far lower working class wages.  The troika is actively encouraging each of these nations to lower working class wages.  The problem I pointed out when I was in Kilkenny is that Ireland is trying to cut working class wages enough to out-compete Italy, but Italy is trying to cut working class wages to out-compete Spain, which is trying to out-compete Portugal, which is trying to out-compete Greece, which is trying to cut wages to out-compete Turkey.  I argued that slashing working class incomes makes recessions worse, that it was impossible for everyone to be a net-exporter, and that this “race to the bottom” of working class wages would produce grotesque inequality and poverty in what used to be the developed world.  I called the race to the bottom strategy the “Road to Bangladesh.”

But, wearing my criminology “hat,” I added that encouraging the “Road to Bangladesh” is criminogenic.  As firms are forced by “free trade” to force lower wages on their workers if they wish to stay competitive with their competitors who manufacture goods in nations like Bangladesh and as firms in Bangladesh engage in the same competition to constrain wages the result can be murderous.  The least ethical firms that are most willing to steal from their employees (e.g., by failing to pay overtime) and place their lives and safety at risk in the workplace gain market share can produce a “Gresham’s dynamic” in which bad ethics drives good ethics out of the workplace.  As I explained in yesterday’s article, they will also degrade the professions, regulators, and elected officials by suborning them to overlook the unsafe plants and the thefts from workers.

But here’s the sting in the tail of my story about Kilkenomics.  When I criticized the “Road to Bangladesh” strategy the conservative economists I was appearing with rushed to praise Bangladesh as the model for successful economic growth through exceptionally low wages.  They responded that if Portugal was in fact on the Road to Bangladesh it was actually on the road to success.  Neo-classical economic dogma is intensely criminogenic.

This piece is cross-posted from New Economic Perspectives with permission.