Friday, January 13, 2006

Spreading the good news of free trade

I had a conversation with my barber the other day. We were talking about me buying sandals. Topic shifts to the demise of the footwear industry in Marikina, Manila's shoetown up to the 80s. Then Jun (let's call him that) makes a comment: "If only all Filipinos were to patronize Filipino-made, our country would be rich!" He continues: "See how much the imported goods the rich are buying. All that money could have gone to Filipinos instead."

The free trader in me recoils, but remembers - this is probably the view of the common tao (person). Against this common sense analysis, what to say? I can't very well launch into an analysis of the 2x2 Ricardian example of comparative advantage. I couldn't even go into the long run balance of trade. Let's see, how would the quick-witted free trade evangelist handle this?

ME: Jun, it's really good to patronize your countryman's products. But it often happens, say for shoes, that a local product is more expensive than a very similar product imported from, say China. Which one would you buy?

JUN: Of course, if the difference is too big, I need to survive too, right? But if the difference is small enough I'd go for Filipino-made.

ME: But don't you think that, by buying the foreign shoe, you would be forcing the Filipino producer to match the foreigner's price? It might be that by buying Filipino you are spoiling the Filipino. He has to learn to compete.

JUN: But what if he can't compete. These foreigners have lots of capital. They have cornered the market. We consumers have to balance that.

ME: Why not? But I've seen too many greedy producers just lay back and jack up prices whenever government tries imports from freely competing against them. To me it looks so unfair.

JUN: Okay, suppose he enjoys a higher price. Wouldn't that let him expand his business? And employ more people? And pay higher wages? Isn't that good for our country? We won't get all that if we just import the shoe!

ME: Suppose you open a restaurant. You have a poor brother who is a small rice farmer. In the beginning you buy palay from him. Soon he is charging you a higher price than from the market. Actually you realize he's not good at farming. But he's your brother right, so you keep on helping him. You know that he's got a bachelor's degree in commerce. Soon you realize there's a better way: Ask him to sell his farm, and join your business. You enjoy higher profit from getting cheaper rice, he gets to use his bachelor's degree.

JUN: That's possible.

ME: Happens all the time. You don't need to get something from someone just because he's your relative, or friend, or what-not, when there's a better alternative, business-wise. You get higher profit, and you can use that to help your friend or relative, rather than let them do something they're not really good at.

JUN: Sounds good - but does it really work that way for the Philippines and the other countries?

ME: Yes, of course!

What really happened? Well, I thought this conversation up on my walk home. Actually I quietly changed the subject to politics, where abstract thought is not essentially to carry on an animated conversation. So much for spreading the good news of free trade. Oh well. Next time.


mell ditangco (this is my pseudonym) said...

good stuff... but one big problem in the Philippines is patronage... its not limited to politics you know.

in any rate, i have a post about Marikina shoes, studies by UP and UCLA shows that the Marikina shoe industry did very little to improve itself during the times of high tariffs. sad , sad, and when tariffs were reduced to reasonable, the industry is in dire crisis... tsk!

documentarist said...

Hi! Your blog's pretty good. I hope you dont mind me asking though, are you really an economist or is this just a hobby? (i dont mean anything disrespectful) If you are a graduate of econ or a practicing economist, i need your help. Im doing a documentary on tiangges and the philippine economy for school and I have to get an economist's view on this. I'll appreciate it greatly if you'll give me your email ad so i can ask you some questions there.please! my email is july_1526@yahoo. thanks!

Gapud said...

And another arguement against your barber friend is that, historically, protected Filipino industries did not re-invest their earnings to deliver a better and cheaper product. Why should they? There was no incentive.

If you study the rise and fall of the Sugar Barons, you will see this tragedy clearly. When the money poured in, they built mansions, collected exotic cars, threw money left and right, when they should be investing in technology to make themselves even more efficient. The Payne-Aldrich Act guaranteed their success, isolating them from the pressures of the global market regardless of what they did.

My point is, an industry or business does not voluntarily innovate, it must be challenged into doing so. How would you clearly know which aspect of your business or product needs improvement if there is no competition to threaten you?

Only when faced with extinction will you involve in deep self-analysis, comparing your strengths and weaknesses againt your competitors. Adversity forces adaptation, resulting into a more competitive business entity.

Anonymous said...

Of course, there is the unspoken assumption that a locally owned business would "do more for the Philippines" than a foreign business. Is this really true? I've noticed that a lot of foreign companies who only have sales offices here (hence just imports) are very active in the sponsorship area (support of arts, NGOs) etc.

Econblogger said...

Very interesting gapud. If you know of more formal studies supporting your (correct) diagnosis, I'd be happy to have a look at them.


Corporate social involvement is well and good (Melinda and Bill Gates are not co-winners of Person of the Year for nothing). However the true measure of the worth of the company is how well it does what it is supposed to do - make profit for its owners. Because to do that it has to make sure its got a product that increases the well being of its customers, so much that they buy a lot of it - even as they avoid taking too much resources from the rest of society to make that product (i.e., lower cost of production). A company that can do this over and over in many countries means that it has mastered this art of profit-making within the capitalist system. It's no use wondering why MNCs are so good - might as well wonder why are NBA teams so good, or why are English League teams so good. We are seeing them at the end of a long process of competition and selection.