The elephant in the room

The wage gaps between rich and poor countries exist not mainly because of differences in individual productivity but mainly because of immigration control.

Ha-Joon Chang in chapter 3, or Thing 3, in his book 23 THINGS THEY DON'T TELL YOU ABOUT CAPITALISM

Under the chapter heading:

Most people in rich countries are paid more than they should be

Chang then sets out:

What they tell you

In a market economy, people are rewarded according to their productivity. 

This is followed by his view of:

What they don't tell you

The wage gaps between rich and poor countries exist not mainly because of differences in individual productivity but mainly because of immigration control.

This is the elephant in the room!

The main reason that a bus driver in Liverpool, or Hull, is paid many times more than a bus driver in Bandung, is, as Ha-Joon Chang says; "to put it bluntly, protectionism".

Our story of bus drivers reveals the existence of the proverbial elephant in the room. it shows that the living standards  of the huge majority of people in rich countries critically depend on the existence of the most draconian control over their labour markets - immigration control. Despite this, immigration control is invisible to many and deliberately ignored by others when they talk about the virtues of the free market.

I have already argued (see Thing 1) that there really is no such thing as a free market, but the example of immigration control reveals the sheer extent of market regulation that we have in supposedly free-market economies but fail to see.

While they complain about minimum wage legislation, regulations on working hours, and various 'artificial' entry barriers into the labour market imposed by trade unions, few economists even mention immigration control as one of those nasty regulations hampering the workings of the free labour market. Hardly any of them advocates the abolition of immigration control. But, if they are to be consistent, they should also advocate free immigration. The fact that few of them do once again proves my point in Thing 1 that the boundary of the market is politically determined and that free-market economists are as 'political' as those who want to regulate markets.

(pages 26-27)

The comparison we might make between the wages of a bus driver in Liverpool, or Hull, and the bus driver in Bandung, follows from a comparison that Ha-Joon Chung makes between a bus driver in Sweden and a bus driver in India.

"Sven is paid fifty times more than Ram."

Later in this chapter on Thing 3 Ha-Joon Chang asks the question:

Are poor countries poor because of their poor people? 

This is his answer:

Our story about the bus drivers not only exposes the myth that everyone is getting paid fairly, according to her own worth in a free market, but also provides us with an important insight into the cause of poverty in developing countries.

Many people think that poor countries are poor because of the poor people. Indeed, the rich people in poor countries typically blame their countries' poverty on the ignorance, laziness and passivity of their poor. if only their fellow countrymen worked like the Japanese, kept time like the Germans and were inventive like the Americans - many of these people would tell you, if you would listen - their country would be a rich one.

Arithmetically speaking, it is true that poor people are the ones that pull down the average national income in poor countries. Little do the rich people in poor countries realize, however, that their countries are poor not because of their poor but because of themselves. To go back to our bus driver example, the primary reason why Sven is paid fifty times more than Ram is that he shares his labour market with other people who are way more than fifty times more productive than their Indian counterparts.

Even if the average wage in Sweden is about fifty times higher than the average wage in India, most Sweded are certainly not fifty times more productive than their Indian counterparts. Many of them, including Sven, are probably less skilled. But there are some Swedes - those top managers, scientists and engineers in world-leading companies such as Ericsson, Saab and SKF (at the time of writing - correct) - who are hundreds of times more productive than their Indian equivalents, so Sweden's average national productivity ends up being in the region of fifty times that of India.

In other words, poor people from poor countries are usually able to hold their own against their counterparts in rich countries.

It is the rich from the poor countries who cannot do that. It is their low relative productivity that makes their countries poor, so their usual diatribe that their countries are poor because of all those poor people is totally misplaced. Instead of blaming their own poor people for dragging the country down, the rich of the poor countries should ask themselves why they cannot pull the rest of their countries up as much as the rich of the rich countries do.

Ha-Joon Chang says in the introduction to his book 23 THINGS THEY DON'T TELL YOU ABOUT CAPITALISM:

We do not live in the best of all possible worlds. If different decisions had been taken, the world would have been a different place. Given this, we need to ask whether the decisions that the rich and the powerful take are based on sound reasoning and robust evidence. Only when we do that can we demand right actions from corporations, governments and international organizations. Without our active economic citizenship, we will always be the victims of people who have greater ability to make decisions, who tell us that things happen because they have to and therefore that there is nothing we can do to alter them, however unpleasant and unjust they may appear. (p. xvii)

And the first "Thing" he tells the reader is:

Thing 1.

There is no such thing as a free market

What they tell you:

Markets need to be free. When the government interferes to dictate what market participants can or cannot do, resources cannot flow to their most efficient use. If people cannot do the things they find most profitable, they lose the incentive to invest and innovate. Thus, if the government puts a cap on house rents, landlords lose the incentive to maintain their properties or build new ones. Or, if the government restricts the kinds of financial products that can be sold, two contracting parties that may both have benefited from innovative transactions that fulfil their idiosyncratic needs cannot reap the potential gains of free contract. People must be left 'free to choose', as the title of free-market visionary Milton Friedman's famous book goes.

What they don't tell you:

The free market doesn't exist. Every market has some rules and boundaries that restrict freedom of choice. A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them. How 'free' a market is cannot be objectively defined. It is a political definition. The usual claim by free-market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved and those free-marketeers are as politically motivated as anyone. Overcoming the myth that there is such a thing as an objectively defined 'free market' is the first step towards understanding capitalism.

On the Re:LODE Methods & Purposes page there is an article on Economism where Ha-Joon Chang's ideas are juxtaposed with those of David Harvey.