Please, i am looking for nuanced
and detailed answers only. answer
to this question must use political
economy and address the history of
colonialism that led to the
bifurcation of the
"developed" and
"developing" worlds we
have today.
i am not looking for a simple
explanation. i am a graduate
student in the social sciences so i
already know the simple answers.
but i have yet to get a really good
answer that explains just why this
is.
why i can stay in a hotel in india
for $5 a night that would cost me
$50-100 a night if it were in the
us.
yet, this doesn't work for
everything. an iced latte at the
indian coffee chain barrista costs
about $2, compared to $4 at
starbucks in the us. for this
product, the difference is only
about 2 times, rather than 10-20
times for the hotel.
other things, too, differ wildly.
pay for an hour of work for
unskilled labor in india is mere
pennies.
as a tourist i've been able to
take advantage of this inequality
in exchange.
but it doesn't seem fair.
Well, I think there are three effects here. I am not an international trade economist or a development economist but I am a monetary economist. I see three effects going on here. One of them is that your internal reference prices have given you a sense of "fair." You know what things should cost in the United States because you have grown used to the price structure there. Prices reflect the marginal scarcity of some thing, but while prices are "global," in concept the cost to transport the cup of coffee from
India to the United States is such that local pricing rules prevail. Prices in
India are fair, because they reflect the local changes in scarcity.
This internal reference price drives how you know in the United States if you are being "cheated." All your reference prices are wrong now and they should fairly reflect the reference prices in
India. You might even be being cheated there and you would have no way to know. You might even be being ripped off on the room. I recommend you look up the Slutsky equation and if you have the calculus generalize it with added local costs and local fixed costs.
The second issue is pay.
India has a nightmare of constitution in that it is constitutionally a socialist state. Most segments of
India do not work correctly because of this, so everything in
India reflects massive amounts of waste. Socialism tends to work better after you have built up a huge
economy and a little waste makes everyone a little bit more comfortable, but for a
poor economy it just keeps people
poor. So prices and wages are distorted by the constitutional nature of India's government. Pay is
low because many functions of business are precluded by governmental interference. Someone has to pay for the waste and it is often the poorest person. If you lived in
India you would find it very costly to hire a person to work for you, officially, and so the pay will have to be
low to pay the huge labor expenses the government creates for employers. The smallest part of labor costs in
India are the wage.
Finally,
currencies of OECD
countries are claims on those nations' productive capacity.
Money is locked up savings. While a dollar can buy you goods in both
India and the United States,
Indian rupees will not buy you anything in the US and if you fly to Pakistan dollars will buy goods there but
rupees will not. So OECD member
countries have
money which is inherently more valuable than the
money of a developing nation. In particular, dollars, euros and sterling can be used as ordinary
money anywhere they have trading partners. An
Indian barrista wanting to buy coffee from Columbia will be required to pay in dollars.
Indian banks are inefficient
money changers so it costs much less to get dollars from you than from
Indian banks.
People in other
countries hold much higher levels of savings in the form of
bank notes. Institutional savings systems like postal and savings
bank systems don't work correctly in most developing countries so bank notes , and in some places postage stamps, work as ways to set aside
money for future needs.
Bank notes are very inefficient savings vehicles. Because of inflation loss, the United States government makes about 4 cents per year off each one dollar bill you give to someone in
India in a hidden tax called seigniorage. For all practical purposes, a dollar bill
spent by a US soldier in Vietnam and still in circulation in Vietnam has transferred about 80 cents in hidden taxes to the
American government over the years. Americans receive several hundred billion dollars in tax
money each year, in the form of seigniorage, from outside the United States. On a per capita basis, each citizen of
China will pay between thirty and fifty dollars this year in taxes to the people of the United States for the use of
American currency.
On a per capita basis, and this is a back of the envelope calculation, each
American receives about eight hundred dollars per year in seigniorage revenue from the people of the world. Americans locked up their savings in the form of
currency and other people bought
American savings in exchange for goods and services.
While it sounds like Americans are making out like bandits, there is a second side to this story. The use of dollars, euros and pounds reduce poverty, prevent starvation, reduce conflict and permit higher wages globally in amounts far greater than the annual US seigniorage revenue. The reason everyone else wants this
money is that they make more than we do off of it. It makes them wealthier than they could otherwise be.
The only thing that resembles colonialism in this issue has to do with the gold standard and Bretton Woods. Bretton Woods was an agreement on how
nations would settle debts with one another in 1946. The gold standard is the cause of the Great Depression and so when
nations went off the gold standard in the
1930s they were very cautious on how to resume it. They were not going to resume it the way they had following World War I, that lead to Hitler's rise to power. So they came up with a two tier system of dollars or gold. A nation could pay for obligations either in dollars or gold, but the US could only pay in gold to prevent the US from simply turning on the printing presses. The dollar was chosen, over the ruble, the franc or the pound because
money is a claim on production and all of Europe and Asia were flattened by the war and had little or no productive capacity. Their
money was a claim on nothing. You have to get goods or services for
money to hold value and the only industrial nation left standing was America. The only nation even close would have been Argentina but the Depression knocked it out of the running. Had Argentina paralleled America since about 1900, it would be the other major super power. Argentina is one of the world's most interesting economic conundrums because had politicians there made slightly different choices, we would be competing with Argentina for dominance.
Bretton Woods worked until 1972 when the British Ambassador showed up at the Treasury Window to redeem gold
notes. He literally brought enough in
notes to demand 1/3rd of America's gold supply and he did. He wanted immediate transfer of 1/3 of America's gold. The US reneged and went off gold, it had to or the
American economy would have collapsed. To prevent a collapse in the dollar a group of
American investors went to Saudi Arabia to get a promise that OPEC member firms would only accept dollars in payment for oil, essentially backing the
American currency in oil. For a variety of reasons OPEC agreed to back
American currency. The promise to pay was now backed implicitly by the Middle Eastern states, Venezuela and a few other states. They in turn got direct financial access to America's productive capacity because they were now awash in dollars.
Even during the Bretton Woods era, however, there was always a Sterling zone where the dollar did not hold sway, but that was somewhat incidental to your issue. The reason sterling held its power was that it provided an alternative to the dollar and to gold, permitting people flexibility in their
currency choices that a dollar only standard would not permit.
This isn't really a bifurcation question unless you really take
Indian institutions back into their basis in the colonial era and why they work the way they do. It is not a byproduct of colonialism but the failure to reject the political institutions which evolved after colonialism. It is a failure in political
economy to learn from your own mistakes and the mistakes of others.
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