Applications of God's Principles: Trade and Debt

Philosophos: That was a very productive discussion. Now let’s move from the government’s interaction with other spheres to current controversies within the government. First we will discuss foreign issues and then we will move to domestic concerns. . . . First off let’s discuss trade policy? What do you think is a just trade policy?

Nomodiphas: Well I bet I know what you think is the best policy. I expect you would say something like “the economy is a field distinct from the government and the government should therefore have a ‘hands off’ approach to trade. Free trade may not produce the best results, but government involvement only makes matters worse.”

Philosophos: Judging by your tone I would guess that you would not agree with that statement.

Nomodiphas: I think we should prefer ‘fair trade’ to ‘free trade.’

Philosophos: And what is ‘fair trade?’

Nomodiphas: It is allowing and ensuring that people get paid a fair price for their products.

Philosophos: What is a fair price? Isn’t a fair price simply what the market dictates? I am guessing that you are concerned about developing nations being underpaid and taken advantage of. However, their main advantage is the low price of their labor. If we raise their wages to Western levels they lose their competitive edge and cannot sell their products on the world market. This in turn leads to an economic down turn and a loss of jobs. If manufacturers have to pay the same wages in China as they do in the United States there is no benefit for them of building factories in China. The reason it is profitable to build factories there and create jobs there is because the labor is cheaper there than it is here. China is experiencing unprecedented growth due to its low labor costs. This economic growth is benefiting everyone in their country.

Nomodiphas: But we are to help the poor. Isn’t supporting fair trade a good way to help the poorest of the poor?

Philosophos: Though fair trade policies have good intentions, they are misguided. Let me repeat myself, fair trade policies often have a reverse intended effect. Instead of helping developing nations, fair trade policies keep their economies from outcompeting developed nations. The biggest advantage of developing nations is that they can produce cheaper goods because their cost of labor is low. If the cost of labor is raised they lose their competitive edge and economic growth slows or stops, hurting all. Further the reason why laborers in other countries get paid less is because the cost of living is less. They do not require the income we do to live and therefore the market does not provide the level of income that we receive here.

Nomodiphas: I do not doubt that. In fact I would agree that the fair price is the price that the market dictates. The problem I have is all the non-market forces at work in the economies of developing nations that force wages and prices down.

Philosophos: Give me an example.

Nomodiphas: OK, a common scenario is that a developing nation wants to induce economic growth so it borrows money from a foreign or international institution. It borrows money to finance some sort of development, like a dam or a power plant. The lender wants to capitalize on its investment so it encourages the nation to over-borrow. The project does not generate the revenue that the nation expected (or there is a problem with corruption and the money is not properly used)—whatever the cause the nation goes into debt.

Because it is not generating money and it owes money, often the borrower needs to refinance its loan to pay back the loan, or take out another loan just to pay the interest off the original loan. At this point in time the International Monetary Fund (IMF) agrees to help the borrowing country, but only if the nation makes certain structural adjustments. The developing nation is forced to open itself up to foreign investment and discontinue all forms of economic protectionalism. Further, often times the leaders of these countries will impound private property and turn it into a manufacturing site (for there are always manufacturers who are anxious to invest in countries with low wages). The farmers whose land was unjustly taken now have no livelihood save the new factory built on their former land. They are desperate for jobs and will work for even small amounts of money—for little is better than nothing. This in turn artificially depresses wages.

In addition to this, in order to attract the foreign investment that the country is now reliant upon the leader of that country will do things to drive prices down even further. He will use the military to put down unions and quell strikes, relax restrictions on hours worked, abolish prohibitions on child labor, etc. This creates inhuman working conditions, but it also attracts foreign capital. Plants are taken from our country and moved to these types of places and the consumers here benefit from this injustice in the form of cheaper products.

Philosophos: I do not doubt that this happens, nor will I contend with the assertion that it is grossly unjust. However, how is this result the consequence of free trade and how will ‘fair trade’ somehow fix this injustice?

Nomodiphas: I just explained to you how it was the product of free trade. Banks have an interest in nations over borrowing and constantly paying interest and debt and businesses have an interest in developing nations not being able to pay loans back and being required by the IMF to create conditions beneficial to for business investment. These groups work hand in hand to make developing nations dependent on foreign capital so that they may benefit from the constant repayment of debt and cheap labor that these conditions produce. Fair trade might not fix any problems, but it will mitigate the harm done to the people caught in the middle of this.

Philosophos: I want to reiterate, I complete believe your characterization of most bankers and businessmen regarding third world countries. Like you, when I consider your account I see a lot of injustice. But unlike you I do not believe this injustice is a product of free trade. First off, we are discussing ‘developing nations’ i.e. poor countries. Why are these people in poverty in the first place? I think there are two explanations. The first is that they have a wrong culture. They have views that do not encourage hard work and frugal, disciplined lifestyles. The other cause is an unjust government that does not protect property or that in some other way prevents the people from overcoming poverty. Likely it is some combination of these two factors. Either way it is a result of the people’s actions. They either hold unto false cultural views or have been sloth in defending their liberty and allowing a despotic government to rule over them. I do not hold any credence to the view that the West is somehow responsible for the poverty of the third world because of its former colonization. One need look no further than the United States to see that former colonies are quite capable of prospering.

Nomodiphas: What do you make of Orwell’s explanation?

Philosophos: I discount the Orwellian account for poverty. If I remember correctly Orwell stated that the elites consciously deplete resources through war in order to keep class distinctions (and their position in that hierarchy) intact. The growth of disposable income in the west is a clear refutation of this.

Now getting back to your narrative, you said that the problem of debt begins when an overreaching government involves itself in its economy and attempts to create economic growth by its own power (through borrowing and state sponsored development projects), instead of creating conditions that allow an economy to grow. And as you said there is often corruption within these governmental projects. So developing nations find themselves in debt because their government wrongly involved itself in the economy, and not only that, but managed this involvement poorly, allowing corruption and inefficiency.

Now, instead of trying to fix this problem on their own, these developing nations turn to others for help. You are correct in claiming that many times foreign bankers and organizations often do not have the borrower’s best intentions in mind. They do, to some degree, take advantage of the borrowing nation’s self created disadvantaged position. But isn’t this to be expected? I do not expect my bank or credit card company to have my best interest in mind. They are out to make money! They have that goal in mind. This is a legitimate goal. We are talking about businesses and not charities after all. When I deal with these companies I need to be diligent in looking after my interests, instead of foolishly assuming I can abdicate this responsibility to others. Why should it be any different for nations? Governments are instituted by God to look after their nations well being and they should not imprudently relinquish their power.

After these nations forfeit their sovereignty by relying on the money of others to solver their problems they are often forced to institute reforms. It is true these reforms are favorable to business, but they are often in the best interest of the borrowing nation as well. For example, they often force the nation to run a balanced budget, investigate and halt all governmental corruption, and try to create a national economy that is open and accountable. These nations are foolish to relinquish their sovereignty, but despite making themselves reliant on foreign capital and subject to reform, often these reforms are win-win and benefit borrower and lender alike.

Finally, as far as low wages are concerned you say it is often the result of the government impounding private agricultural property from some and giving it to others to use for manufacturing. I agree that this happens, and again I agree that this is a gross injustice, but this is injustice within the country’s government and is not a product of free trade. The problem as I see it is that the government needs to be reformed according to principles of justice and it seems to me that fair trade will do little to solve this problem. Free trade is not the cause of poverty, the problem is unjust and corrupt governments. It is the responsibility of citizens to reform their governments and make them just. In fact it seems like fair trade could hurt these countries in the long run.

Too often when governments give aid they perpetuate injustice. Going back to your example from before, often times the tyrant ruler of a developing nation can take a farmer’s land and turn it into a factory because that tyrant is insulated from the need to reform by the foreign aid he receives.

By helping out individuals living under an unjust government we create complacency with that government’s policies. There is less need and desire to reform a government if one is well fed and provided for. It is not good for us to encourage people to sacrifice liberty and justice in return for material well being (or at least comfortable living without liberty and justice), but when we give money blindly we do just that. To escape poverty people must take responsibility for their government and reform it according to God’s principles. Often time’s change of this magnitude requires the people to undergo some hardship. By giving foreign nations aid we prevent the people from undergoing hardship, and in turn, prevent them from truly reforming their country in such a way so as to live in freedom and prosperity.

In the same way I doubt that canceling third world debt will do any good because it does nothing to deal with the root problems: unjust governments and ungodly cultures. Canceling debt will only offer a moment of respite. The unjust government would remain in place and further problems would quickly follow. Foreign aid alone does not help poor countries develop. Market reform (and often cultural reform as well) is needed. With foreign aid dictators become entrenched and can survive without reform: their subjects tolerate them because they are well fed.

Respect for law and property creates wealth. These reforms only occur when foreign aid is cut off and a country is forced to reform. If fair trade is to be done at all, it should be done on a local level, as an act of mercy and done by the church. I see no benefit or justification for it to be mandated by the government. As said before it does not solve the root problem, the root problem is unjust governments and there is little our government can do to reform the internal workings of other governments (and I question how much we should do this, even if we could do it effectively).

Nomodiphas: I understand what you are saying, but wouldn’t you agree with me that the government can and should interfere with the market in order to prevent injustice—in order to protect the rights of people.

Philosophos: Of course I would agree with that. We have environmental regulations to prevent poison from going into our water and we require children to be at least twelve before they work to help ensure that they are not forced to work against their will.

Nomodiphas: Then wouldn’t it follow that our government has a duty to interfere in the international economy to prevent injustice and ensure the rights of people?

Philosophos: You have to ask, to whom does a government have responsibility? Does our government have a responsibility to the entire world? Must it protect the liberty and ensure the rights of every living person? This appears to me to be a very dangerous notion of government for it necessitates a one-world global government. A global government may be able to do that, but the mischief it would be capable of would be unbearable. That is why at Babel God divided people into different groups and different places. God recognized the threat that global government posed for liberty so He frustrated man’s plan for it.

Global government is not a solution. Every country on earth is distinct. The citizens of each country have a responsibility to make their government just—the governments of every country have a responsibility to their citizens to promote justice and liberty. These responsibilities do not extend beyond national boarders. Instead of pressuring our government to subvert the policies of other governments to be just, we should focus on discipling the people of the nations and instilling within them a Godly understanding of government so that they will be able to wisely reform their states to be just entities.

As consumers we can boycott products made under inhuman conditions. I suppose our government could do something like tax or ban imports from countries that allow inhumane working conditions. This may encourage them to reform, but it is a very difficult thing to monitor without infringing on the sovereignty of other governments. The best solution is not for us to use our government to force top down reforms, but rather for us as Christians to disciple the peoples of the world so that they may wisely work to reform their governments.

In conclusion, I’ll return to your first thought. I think free trade is best. There may be times when protectionalism is warranted in order to protect infant industries. The government may do this and other things to encourage business so long as it does not cross the line and become directly involved in business (like provide subsidies or protect mature business from foreign competition by means of tariffs). We live in an imperfect world with lots of imperfect people. As in all areas of life, restraining the government in order to give people liberty produces a lot of bad results, but it is far better than having the government take away all our liberty and control all aspects of our lives.