Monday, November 14, 2011

Commercial xenophobia.

I have always been something of a Frederic Bastiat fan. The simple and satirical treatment of economic issues by this mid-19th century economist is still relevant and valuable reading for a broad audience, including the barely economic literate.


My favourite is his sketch on the “train that never went”. For those unfamiliar with the story, Bastiat was scoffing at the concept of government creating artificial “growth points” (A bit like our previous decentralisation efforts.) In this case, the idea was to have trains stop at new stations in the French countryside. Passengers would get off and promote trade at the new station. So if a train went from A to B, a new station at C mid-way would create a new economic hub. But then he argued, why not divide the distances again, to have trains stop at D and E …and again…and again. Why not, he asked, have one long stop and have growth points all along the way.

His parable of the broken window is another classic. Here he relates the story of a shopkeeper whose son broke a window pane. In his defence, the son argued that there was a silver lining in the broken pane because it meant more work for the glazier which promoted job creation. This story reminds me of the time that workers at a West-rand mine trashed the surface because they had heard that some of the cleaners were going to be retrenched. Routinely trashing the surface would secure the cleaners’ jobs. Bastiat used his parable to explain his theory on the “seen and unseen” in economics, or the theory of unintended consequences.

Bastiat sees little difference between the window breaker’s logic and calls for government protection of certain industries. To illustrate this he wrote another classic, a petition to the French government from the “Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting”. They wanted the government to block out the sun because it worked under conditions far superior to their own in the production of light and was flooding the domestic market at an incredibly low price. It was blatantly unfair competition, they argued.

In similar vein, he wrote his engaging cameos around Robinson Crusoe and Friday, with Crusoe representing pro-intervention sophistication, and Friday always challenging him with simple logic. In one of the sketches, the pair had worked out that their island was suitable for both hunting and planting, which needed 12 hours of toil a day to ensure sufficient food. One day, a canoe arrived from a foreign island which had plenty of game but no agriculture. The foreigner offered to supply them with all the game they needed in exchange for two baskets of vegetables a day. This meant they would have to spend an additional three hours a day on agriculture, but they no longer needed to hunt for six hours a day – saving three hours of toil a day.

The punch line of the story was that Friday loved the idea, but Crusoe opposed it. If you read the parable at this link, you will be bemused at how familiar Crusoe’s arguments sound today in trade protection circles. In the end, Crusoe insisted on certain guarantees which had the foreigner in uncontrollable mirth as he paddled back to his island. Echoes of Walmart!

Bastiat sums up his opposition to trade protectionism in the following quote: “The sort of dependence that results from exchange, i.e., from commercial transactions, is a reciprocal dependence. We cannot be dependent upon a foreigner without his being dependent on us. Now, this is what constitutes the very essence of society. To sever natural interrelations is not to make oneself independent, but to isolate oneself completely.”

His dock-working countrymen would have done well to heed this advice when, some years ago, they delayed the off-loading in Marseille of foreign fruit long enough to ensure that it was spoilt. This was done to protect French fruit growers against competitive imports.

This is just one illustration of the many degrees of commercial xenophobia that hinders free international trade. These include appeals to patriotism in “buy local” campaigns, exchange rate manipulations, subsidised local production, trade tariffs and of course outright import controls. Using the national flag as an appeal to consumer loyalty may seem harmless enough, but the latest “New Growth Path Local Procurement Accord” has an arm twisting element which could lead to consumers paying some costs towards the 75% local content target.

Of course, Bastiat has many detractors and his theories have to be tempered by the realities of today when laissez faire ideals have all but been abandoned; destroyed by some of its own champions who promoted greed, unbridled self-interest, speculation, immediate self-gratification and profit maximisation as the engine which drove it. We also have the realities of a tit-for-tat foreign trade environment that simply cannot find even-handedness in the Doha rounds of world trade talks.

There’s nothing wrong with informed and level headed consumers basing their buying decisions on more than price and quality. Indeed, South African consumers are arguably a tad too apathetic in using their purchasing power even on those criteria, let alone other social issues such as the environment. We just have to be careful that being caught up in the fervour of “local-is-lekker”, we don’t protect and encourage inefficiencies and lack of competitiveness. The point is that we should be focused more on the needs of customers and consumers, including foreigners, and less on the needs of suppliers, including workers and shareholders.

Domestic trade alone can never sustain us in the long run. Successful economies have always been built on having a world view and being internationally competitive. We should stop seeing the market as a resource to be exploited but rather as a means to be of service to others.

It may be better for us to have a “sell South African” campaign, than a “Buy South African” effort.

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