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November 05, 2007
Romer transcript
Russell Roberts
An edited transcript of my podcast with Paul Romer is now up at the Library of Economics and Liberty. Paul has a lot of fascinating things to say. Check it out. One of my favorite parts is where he explains the benefits of multinationals in poor countries:
Russ Roberts: What's the mechanism? Does Nike improve the life of that worker out of kindness or does competition force them to?
Paul Romer: Oh, I think it's overwhelmingly competition. There's sometimes a little bit of pressure which makes them do what is basically charitable giving. But look at China right now or India right now. Why are foreign firms that are operating in China and India or Vietnam—why are they paying workers more than they used to?
What happened was that it wasn't just Nike that came in. The government let in a lot of other firms. All of those firms started to compete for the best talent there in the nation, and that process of competition started to drive up wages. You don't want to use the Indian strategy of saying, "Okay, we'll let in one big firm and then we're pulling up the drawbridges and, you know, you can do whatever you want." What you want to do is open it up and say, "Hey, any firm that wants to come in, go for it. Compete as hard as you can to get our best workers."
And that'll reward the workers who have the best skills. It'll give incentives for those other workers to acquire skills and it'll give them opportunities to do things with their skills that they couldn't have otherwise done.
Russ Roberts: In what sense are those workers using the knowledge that that multinational has? I love that idea. What do you mean exactly?
Paul Romer: Nike's discovered a recipe for taking rubber and cloth and a few other things and then creating something that people value in the United States for a price of, say, $100. They can take raw materials worth probably pennies and create something that I might go to the store and pay $100 for.
To create that additional value, they have to go out and find somebody who does the rearranging according to their recipe. If they could get somebody at an extremely low wage to do that rearranging, then they'd pay that low wage. But over time what they find is they're competing with other employers. They have to pay higher and higher wages to get people to do that rearranging.
Now if there are lots of people like Nike trying to find workers to do high-value rearranging tasks, they'll be willing to pay quite a bit as they compete with each other. But imagine that Nike only had ideas that could produce things that were worth, say, $10. Nike could never afford to pay—and its competitors could never afford to pay—very high wages to get people to rearrange something to make something worth $10.
But when they're making something that's worth $100, they'll compete and ultimately start to pay higher and higher wages. So the fact that they've got an idea, a recipe, that can create quite a bit of value means that they'll pay quite a bit to have somebody follow that recipe.
There's lots of people out there with good recipes competing for workers. They'll bid up those wages and, in a sense, part of the value that Nike creates will in some sense be taken away by those workers, and taken in a way that we feel is good for the world as a whole. It's good that workers throughout the world will have higher wages in the future than they have now.
Posted by Russell Roberts in Podcast, Property Rights, Standard of Living | Permalink
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Comments
The Nike example kinda fails when you consider the $14.98 Starbury, a high top version of which is worn by several NBA stars (Stephon Marbury, Ben Wallace). The way NIke makes that $100ish price point work is by churning its styles and for the high end sneaker market, releasing limited edition kicks that are interesting to serious sneakerheads. Others like Adidas and Puma try that game with limited success. The Starbury phenomenon shows what materials and labor are worth and how much room there is in the margin on athletic shoes and sneakers for style.
Posted by: Brad | Nov 5, 2007 7:52:19 PM
Longtime reader, never posted. I am in China right now working with a client's suppliers. Just yesterday the supplier was complaining about how they raised monthly wages by over 20% for medium-skilled workers. This still amounts to only about $200 per month, but the increasing wages are real and profound. Other firms are entering the marketplace and taking this supplier's workers away from them, forcing our supplier to react.
It will be interesting to see whether multinationals begin to move to other, lower cost countries. If China can offer more than just cheap labor - ie, develop more sophisticated business practices coupled with relatively cheap labor - it will bode well for them.
Posted by: SJS | Nov 5, 2007 8:23:32 PM
Interestingly, it's been pointed out that Nike and others aren't pay workers out of the kindness of their hearts but rather are using an opportunity cost analysis. Yet to say that wages will automatically keep rising is dubious as the companies wouldn't have outsourced the work to India in the first place. Likewise as the way Indian workers' pay is going it seems that the companies are starting to consider outsourcing their work to cheaper places again:
http://www.news.com/2100-1022-5180589.html
Posted by: Gil | Nov 5, 2007 9:05:42 PM
I loved the recent econtalk podcast with Barry Weingast. When he was talking about limited access orders, I was thinking about China. The implication to me is that they will be facing a stagnation at $6-8,000 per capita GDP until something revolutionary happens to free the economy & its major players from political influence. I'm no expert, but I assume there will be much pressure to keep failing industries on life-support where party officials have an interest in their continued operation. At some point all this recent development is going to be ready for some churning.
Posted by: kebko | Nov 5, 2007 10:34:49 PM
"Yet to say that wages will automatically keep rising is dubious as the companies wouldn't have outsourced the work to India in the first place. Likewise as the way Indian workers' pay is going it seems that the companies are starting to consider outsourcing their work to cheaper places again:"
Wages are rising in the US so if wages in India, even if they are rising to, start at a lower level then they can save by outsourcing for at least a significant period of time (Indian wages would have to grow faster than US wages for an extended period).
Firms like Nike are outsourcing their outsourcing again because wages in places like India have risen. Indian workers will not refuse to work for less than x and so force all the foreign firms away and starve. They will work for the maximum they can. If they can make more working for Microsoft than they can for Nike, they will do so, and Nike may need to seek cheaper labour elsewhere.
Posted by: Simon Clark | Nov 6, 2007 4:53:15 AM
and let's not forget the crucial thing. even if nike leaves to find cheaper labor elsewhere, their workers are now at least minimally skilled, and have a better chance of finding better work elsewhere, than they would have been if nike never showed up.
Posted by: shawn | Nov 8, 2007 7:30:15 AM
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