Srinivasa Ramanujan was one of the greatest mathematical geniuses in history. He was born in a small village in rural India. But his village was very poor. He was often unable to afford food, and finally died at the age of just 33, from a disease associated with dirty water. His death could have been easily prevented, but Ramanujan could not afford a doctor. (source)
That was a hundred years ago. Today, India still produces great thinkers. Take Amit Garg for example. He recently broke the world record for dividing a ten digit number by a five digit number, all in his head. But to find the best funded universities, Amit had to move to America.
How can India be so rich in people, yet so poor in money? How can it still be poor after a hundred years of investment and progress? Indians work just as hard as people in richer nations; heir nation has democracy, trade, and natural resources. Yet, the average Indian wage is still a tiny fraction of the average American wage. Why?
This problem is repeated in many developing nations. Why?
Whenever rich nations and poor nations both exist, the money is often sucked from the poor into the rich. Differences in income act like a gigantic global vacuum cleaner.
This is true no matter how clever or hard working the poor people are, and no matter how much the rich try to send aid. This essay looks at why.
The border between rich and poor nations acts as a Global Vacuum Cleaner. Rich individuals’ greater buying power means that things of value will tend to be sucked out of poor nations into rich nations, leaving poverty behind.
This is not the only economic force at work of course. There are other major forces, such as where the rent goes on land, establishing overseas factories, charitable giving, etc. Some of these can be used to counteract the vacuum. But this essay is a reminder that the natural effect of inequality is to suck wealth from the poor to the rich. This effect is so fundamental, so constant, that it dwarfs any aid budget.
Ironically the GVC even hurts rich nations. Without the vacuum, poor people could create more wealth, then both nations would benefit far more from trade and faster scientific advances.
Imagine two nations:
Tenland, where people earn ten dollars per hour.
And Oneland, where people earn one dollar per hour.
Both nations make products that take an hour to manufacture. So a product from Oneland costs one dollar. But a product from Tenland costs ten dollars.
Imagine you live in Tenland. Obviously you will buy your products from Oneland, because they only cost one dollar instead of ten.
But if you live in Oneland and need something from Tenland (as you will from time to time), then you have to pay ten dollars. You have to work ten times longer than if you bought something locally.
Thus, work goes from Oneland to Tenland at a rate ten times faster than it goes the other way. The border becomes a Global Vacuum Cleaner (GVC), sucking the work out of Oneland. Eventually, Oneland gets in debt to Tenland, and has to sell its natural resources in a haste just to pay the bills.
Onelanders have to work longer and longer hours. Few can afford to save for retirement, so they have more children instead: your children look after you in old age. But more mouths to feed means more work to be done: so even the children have to work.
Tenland not only sucks out products and natural resources, it sucks out the best brains as well. Tenland welcomes anyone who can create a lot of wealth. But ordinary Onelanders don’t get visas: Tenlanders are afraid of their own wages going down.
One way out is for Oneland to increase the value of what it sells. Oneland could buy Tenland machines and starts manufacturing more advanced goods. The machines would be expensive: Oneland would need to sell everything it had, but these Tenland machines mean it can compete like Tenland, right?
Wrong. Tenland virtually always has better machines. It uses Oneland’s cheap raw materials (e.g. Congolese Coltan for electronics), and can thus make products for a similar price. However, Tenland has more machines and can offer a much better choice, enabling Tenland to sell for more.
The GVC gives so much power to one side that trade rules themselves are written to favor the rich countries. When international rules are decided, Tenland will specify things that only it can produce. All in the name of quality and safety, of course.
The GVC gets a further boost from the “race to the bottom”: some parts of Oneland will be so poor that the people will do absolutely anything to get money. So anyone from Oneland who charges more cannot sell.
What if the people of Oneland close their borders? Then the GVC stalls. But Oneland is hindered from improving its condition without machines from Tenland. Oneland needs to buy from Tenland. So, they need Tenland dollars. To get them, they need to sell things to Tenland. This starts the GVC up again.
What if compassionate Tenland customers just pay extra, so Oneland suppliers can be paid more? This does not change the underlying mathematics of the vacuum. Money will be sucked back into the rich nation.
Many people think the global vacuum can never change, because Tenland relies on Oneland for cheap resources.
Yet the opposite is true: if we get rid of cheap labor, the rich actually become richer. This is why:
Consider a world like today, where Tenland sucks value out of Oneland.
This means Oneland schools do not have many books and Oneland farmers cannot invest for the future. So despite being smart and hard working, Oneland workers and farmers cannot do what Tenlanders do.
So not only does Tenland produce the best value added goods, it also produces some of the best workers and best crops. Tenland even grows its own wood, because Tenlanders like to walk through beautiful forests.
So if we add up all the sources of Tenland wealth, Oneland is a very small part.
With more recycling, Tenland would rely on Oneland for even less.
But if Tenland can make money on its own, so can Oneland. If Onelanders were paid as much as Tenlanders, and used the same self-sufficient methods, they would create the same wealth as Tenland.
But what of Tenland’s small reliance on cheap Oneland materials? Yes, each would pay more for that small amount. But each would gain a greater profit due to increased trade.
For a real world example, compare how much the USA gained from Japan before and after Japan became wealthy. Cheap rice is nice, but better cars and better software are much more useful.
When two nations are wealthy they both make more money. Because they have more choice, and faster scientific progress.
Imagine a world with no more Onelands. No more desperate people to support terrorism or cut down rain forests just to survive. More inventions and artists. And the side effect of more recycling means the planet is safe for the next ten thousand years.
- The Global Vacuum Cleaner (GVC) is a natural result of unequal wages.
- So for every dollar we give in aid, tens or hundreds of dollars come in the other direction.
- But if the poor are paid more, then the rich would make even more money.
- Shutting down the GVC also creates peace and a better environment.
What to do?
How do we create a world where the poor are paid more? We need two changes:
- Create more wealth and more jobs, so we no longer fear immigration.
- How do we do that? We need to remove artificial shortages, i.e. the hoarding of natural resources domestically. This will enable us to no longer rely on stripping poor nations of their natural resources.
This essay was inspired by an article from Oxfam in the 1980s. It calculated that for every dollar given in aid, ten dollars or more comes back in the form of lower prices for raw materials.
That fact changed my life. It led me on a quest to understand the economics of poverty and wealth. I try to avoid relying on statistics, as these can be endlessly interpreted. Where possible I want to understand the underlying logic, and the logic behind the logic. Hence my own web site, AnswersAnswers.com.
Thanks for reading.
Chris Tolworthy, February 2015
Oberwolfach Photo Collection, Creative Commons License: Attribution-Share Alike 2.0 Germany, via.Wikimedia.
Robert Kanigel (1991), “The Man Who Knew Infinity: a Life of the Genius Ramanujan.” New York: Charles Scribner’s Sons. ISBN 0-684-19259-4.)
Amit Garg facts:
From the Tribune of India, 23 April 2012. http://www.tribuneindia.com/2012/20120424/main4.htm)
GDP per capita:
World Bank, 2013 figures
Henry George Photo
Copyright expired image, via “Henry George: 100 Years Later”
Ethical trade statistics:
Peter Griffiths (2011), “Ethical objections to Fairtrade.” The Journal of Business Ethics July 2011. Online copy: http://www.griffithsspeaker.com/Fairtrade/Ethical%20Objections%20to%20Fairtrade%20web.pdf
All other art by the author.