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The Travels of a T-Shirt in the Global Economy: An Economist Examines the Markets, Power, and Politics of World Trade
Wednesday, October 19, 2005
International Monetary Fund
MR. LANKES: Welcome, everybody, to today's Book Forum, which I have the honor to moderate. My name is Hans-Peter Lankes, and I work here at the IMF. With me are Pietra Rivoli and Brink Lindsey. A few words of introduction to the book: I think the organizers made a really splendid choice here. The book is about textiles, which are kind of symbolic of everything that's good and bad about globalization, and are a particularly hot topic this year. It is also, I found, a very readable book. It's full of things that will help you argue the case with your grandmother ...
. . . in a much more concrete and tangible manner than you may have been able to do so far. The book contains a whole range of anecdotes and insights and ironies that are very useful. I'll just mention my favorite, which is that the growth of the North Carolina textile mills in the late 1800s when they were established was driven by sales to China!
And, in fact, China purchased more than half of U.S. cloth exports at the time, which is of course slightly ironic given what's happening today. Moreover, North Carolina's low labor standards at the time helped them to displace Massachusetts from the preeminent position in the U.S. textiles production.
More fundamental is an insight that I gained from the book and I found truly remarkable: the role that the textile mills, warts and all, have played and are continuing to play in the emancipation of women in male-dominated rural societies. I found that to be a very interesting aspect of the book.
The book steers mercifully clear of moralizing. It is sort of like circling a Buddhist stone garden. One slips into every conceivable perspective on this issue and there are no villains, only actors in what I call an epic struggle and a fantastically complex, forward-driving, and culture-transforming enterprise. That is what I came out with after reading this book.
Lastly, here's a book about globalization that does not mention the IMF even once until virtually the last page, and there in a very subordinate role. So there's neither a Stiglitzian indictment of the IMF nor a pat on our back, and I wonder whether we should feel offended.
Now, I should stop here since it is not my job to present the book, but let me introduce our speakers. As you saw in the announcement, Dr. Rivoli is an associate professor at Georgetown University's McDonough School of Business, and the author of the book that we are here for today. NPR did a very interesting three-part story on Pietra's book, and it is one of six shortlisted for the Best Business Book of the Year Award that has just been inaugurated by the Financial Times and Goldman Sachs. She is in very good company there. For instance, Tom Friedman's "The World Is Flat" is one of the other contenders. Being shortlisted has already entitled Pietra to some prize money, we understand, and we will be rooting for her to win more when the book goes to the final selection on November 21.
Brink Lindsey, our distinguished discussant, is a household name among the trade policy crowd. An attorney with extensive experience in international trade regulation, Lindsey is the author of "Against the Dead Hand: The Uncertain Struggle for Global Capitalism," which won the 2003 Sir Antony Fisher Memorial Award. Brink established the Cato Institute's Center for Trade Policy Studies, although he has moved on to broader responsibilities for Cato's research today. That center is now undoubtedly one of the leading voices for increasing public understanding of the benefits of free trade and the costs of protectionism. I recommend their website—it's www.freetrade.org—for its very interesting and informative content. The titles of their publications are fun as well. There's one on softwood lumber subsidies, which is called "Nailing the Homeowner," and it only gets better. The writing is very clear and very precise.
Let me now give the floor to Dr. Rivoli.
DR. RIVOLI: Thanks so much, Hans-Peter and Prakash and organizing this and Brink for participating. Of course, thanks to all of you as well for coming. I'll stand at the podium. For some reason, my brain works a little better when I'm standing up. Maybe it's because I'm a college professor, and usually when I talk to a group of people I'm standing.
I like to think of the book as a biography. So if you want to put the book in a genre, my preferred place would be to look at it as a biography. It is a biography of a particular cotton T-shirt that I bought five or six years ago in Fort Lauderdale, Florida. I brought it with me today just so you could see what it looks like.
It's a fairly typical tacky tourist T-shirt that I bought for $6. I always get nervous when I take it out. I usually keep it sort of folded up and tucked somewhere on a shelf. But when I talk about the book, I like to at least have people be able to see the real subject
The premise that motivates the book is that these very simple things in the global economy can have very big stories to tell. So we can take this $6 product and try to see what it can illuminate about the very complex and complicated world of trade and globalization. Just as you might read a biography of a person to get a sense of the place and the time in which the person lived, we could also, as we think about economics and trade and business, think about a biography of a thing to illuminate the broader context of a number of ongoing debates.
One time many years back, I remember reading a biography of a woman who lived in the woods of Maine, maybe in the late 1700s. And she was a pretty boring person because if you lived in Maine in the 1700s, pretty much all you did was try to stay alive and, you know, keep your clothes washed once a year and so forth. So it was a very simple life she led. But after finishing the book, I felt like I understood what Maine was like in the 1700s.
And so, again, that's my idea: can we take this simple story of this simple thing and illuminate something broader? I argue at the beginning of the book that we can do that, and that anecdotes or biographies or stories have really not been utilized the way they could be or should be by those who engage in debates about globalization. I think that the T-shirt story can illuminate a number of areas of debate in a way that other kinds of approaches—data-driven approaches, theory-driven approaches—cannot.
Unlike many books about globalization, I did not write this book to persuade anybody about anything. I didn't have a moral I was trying to get across, a point I was trying to convey.
You can see the basic chronology of the T-shirt's life on a very nifty map that National Public Radio put together when they did the series on the book. If you look at the map, you can see that, as best as we can tell, the T-shirt was probably born around Lubbock, Texas. West Texas is the biggest producer of cotton in the United States. It's the most important cotton-growing region. And if you took that area around Lubbock all by itself, it would be the eighth-biggest cotton producer in the world if you called that region of Texas a country.
The cotton that comes from that area is cheap and short-fiber cotton that you would find in a cheap T-shirt. So those of you who are out there better dressed than this T-shirt, your cotton probably didn't come from around Lubbock. This is where the cheap stuff comes from. So that's where my T-shirt, as far as we could tell looking at some trade data and trying to figure out what kind of cotton goes into what, that's where it was likely born.
The cotton was shipped—cotton is shipped in bales of about 500 pounds—to Shanghai, China. China is America's biggest customer, biggest importer of raw cotton. And there the cotton was spun into yarn, and the yarn was knit into cloth, and the T-shirt was cut into pieces and sewn back together and so forth. So that's where the cotton was transformed, essentially from plant into clothing.
The T-shirt then came back into the United States as an import as part of the wave of imports of textiles and clothing that's coming from China into the United States, and that's where I bought it. But more than the geographical journey back from China to the United States, what I'm looking at in the book is the trade policy and the structures that we have or at least had in place that govern how clothing gets from one place to another. So, really, the T-shirt is traveling through a web of trade policy, and that's one of the middle sections of the book.
Now, of course I'm going to keep this particular T-shirt, but once most people are finished with their T-shirts they throw them away. One of the things that a lot of people find the most interesting about the book is the story of what happens next. Tanzania on the east coast of Africa lists used clothing as its single largest import from the United States. So it's the number one export from the U.S. to Tanzania. So, as I tried to tell this biography, I even tried to figure out what happens to the T-shirt in the afterlife, and it's kind of an interesting story. About half of the clothing that we throw away in the United States ends up being exported. A small amount stays here and gets sold, you know, in your thrift shops or what have you. About a quarter of it is turned into wiping rags and sold to factories. Another quarter is shredded. And maybe you're sitting on it right now because one of the biggest uses for shredded used clothing is to pad furniture.
So I came from the beginning of the life of the T-shirt, its birth in the Texas cotton field, to the very end with its afterlife, whether it's as used clothing in Tanzania or stuffing in the bottom of our chairs. That's the chronology, or the biography's highlights I guess you'd say.
Now, apart from just telling this story, my focus was really on two things. One was on the "why". Why did this life story turn out the way it did? Why was the cotton from Texas? Why did it have to travel so far to China to become a T-shirt? What explains the trade flows of the T-shirts back here to the United States? So once I have the biography laid out, I then piece-by-piece try to figure out what kind of variables explain this particular life story. That's my academic hat, right? Economists are always trying to, you know, use one thing to explain another. We're always trying to figure out why.
But the more nosy part of me also wanted to find out "who", and this was almost like a bonus for me. This was like the fun part of the book that I could do after I'd finished doing all the hard work. You know, there's so little in business and economic writing that talks about people. Economists always talk about producers or investors or consumers or workers or management. But where are just the people? And I wanted, as I wrote this book, to meet some of these people.
Let me show you the pictures of a few of them.
• There are the Reinsches, Nelson and his wife, Ruth. They are the cotton farmers that I spent time with in Lubbock, Texas, who taught me all about cotton farming.
• Then there's Geofrey Milonge, who runs a used T-shirt stall in Dar es Salaam on the east coast of Africa in Tanzania. He sells about a hundred used American T-shirts per day. T-shirts about our most boring suburban moments—Crystal Lake triathlon or fun run or something like that—are ending up there on the east coast of Africa. Geofrey taught me a lot about the used clothing trade.
• Yuan Zhi is a woman in Shanghai. She works at a cutting machine in the T-shirt factory—she cuts the fabric before it's sewn.
• And then there's a very interesting collection of fellows—they are one of what in the book I call the "alphabet armies" who fight out over trade policy. These are guys from Bangladesh, Turkey, America, Egypt, Pakistan, and Sri Lanka. So we have a global collection of people here, and this picture was taken of them in Belgium where they had all gathered to try to figure out what to do about China.
That was a very interesting part of the story for me, to see how these people from very different places came together to try to come up with a common agenda. These are some of the folks that I talked to, some of the folks that not only educated me, but who I tried to use to bring the story a little bit more to life.
Another thing that made this project very interesting is that almost every chapter in this T-shirt's life is right now a hotbed of some kind of controversy. It was very interesting to me to think about how such a simple thing could be embroiled in so many current public policy battles.
For example, the number one contentious issue right now probably in the Doha Round of trade negotiations is agricultural subsidies, and the poster child for agricultural subsidies has been America's subsidies to its cotton growers. If you look at what derailed the trade talks in Cancun, it was American subsidies paid to cotton farmers like Nelson and Ruth Reinsch. So since I started work on the book and continuing so this moment, these cotton subsidies have been at the forefront of what's happening in international trade.
Then if we think about what's happened on China on the public policy front in the past year, you know, there's just no end to the list of controversies. If you talk to U.S. Congress or you talk to U.S. manufacturers, you can take your pick. Do you want to complain about their subsidies? Do you want to complain about the state-owned enterprises? Do you want to complain about nonperforming loans? Do you want to complain about the undervalued currency? Or if you're an activist, do you want to complain about the working conditions, or do you want to complain about the lack of a free press? I mean China is just this big hotbed of controversies coming from all angles, and that was something that I just kind of had to keep sorting out as I did this research.
The T-shirt's journey back to the United States is also fraught with controversy. As probably all of you know, most of the remaining import quotas on clothing were lifted on January 1 after 40 years of limiting imports of clothing into the United States from most important developing countries. Once those quotas were eliminated, we started to see, you know, various kinds of gushes of goods from China. If you compare the first quarter of 2005 to the first quarter of 2004, U.S. imports from China of cotton knit shirts—in other words, T-shirts, although they might also include something like a polo shirt—are up about 1,200 percent. That's what we mean by a gush. The quotas were lifted and they sort of just gushed in. And that, of course, has created its own controversy, and if I'm not mistaken, the U.S. chief textile negotiator is in Beijing right now, or else he's on his way back or something. They are trying to negotiate a solution to this so-called China problem. And if you think about it, it's kind of amazing that there is somebody in the United States whose job is chief textile negotiator. I mean, we don't have a chief automobile negotiator or a chief airplane negotiator, but we have a chief textile negotiator whose job it is to try to sort out these trade frictions that have been the result of decades and decades of all kinds of unintended consequences of trade policy.
So it seems like everywhere this T-shirt goes, it's in the middle of one debate or another. The fact that the T-shirt was embroiled in such controversy gave the book a lot of immediacy and made it a very exciting project. But it also relates to one of the lessons I got as I wrote and finished this book, because I will say that the story of the T-shirt's life didn't really turn out the way I thought it was going to turn out.
I didn't have a plan for a moral, as I said earlier, but I did have some biases that result from my background, my training as a business professor, my training in economics. I thought that the story of this T-shirt's life would really be a story about markets. I thought I was going to have fairly positive things to say about markets, maybe about how market activity in textiles and clothing was lifting certain groups, helping other groups. I thought I was going to have a story about how people competed, how people got the cheapest, the best T-shirts.
There is some of that business story in the book, but what really came out were some more nuanced conclusions. Markets, global markets in goods, whether they're good or evil are not as central to the story as I would have thought. Rather than a story of how people were competing—how do I make a faster T-shirt, a better T-shirt, a cheaper T-shirt—what I found is that the story of the T-shirt and why its life turned out the way it did was really a story about politics. So it wasn't about how people were making the best T-shirts. It was about how people were using political power.
• Why does the T-shirt come from Texas? That's all about politics. It has a great deal to do with public policy towards agriculture, broadly speaking. The subsidies are just one narrow piece of that.
• Why is the T-shirt made in China? That's all about politics, too. You can especially look at the way China manages its migration inside the country—whatever you might say about it from a moral perspective, from the perspective of producing large volumes of T-shirts, those government policies I found had a great deal of explanatory power. So this wasn't so much, again, a story about markets. It was a story about public policy in China. That's why the T-shirt was born there.
• What about the story of my T-shirt when it is trying to come back to the United States? Well, trade flows in textiles and apparel have been for many years governed by a very complicated web of trade policy.
So over and over again, as I tried to understand something, I kept coming back to politics. I kept saying, okay, the way to understand why this happened is to understand how the politics works. The markets are really not central; they're not that big a part of the story.
Now, much of the debate over globalization is about markets. On the right you have people saying that unfettered markets will lift all boats. On the left you say unfettered markets are crushing the poor. Coming out of writing this book, one of my conclusions was that this particular debate on the virtues versus the evils of markets was misspecified, at least for this T-shirt. It wasn't whether markets were good or bad but about whether the politics were good or bad and what the effects of the politics were on various actors in the T-shirt story.
Now, this relates to a second point. Many activists—more broadly, people on the left—have a variety of proposals or ideas that kind of go something along these lines: we have to protect the poor, we have to protect those that don't have resources from the cruelty of market forces. That's not something I found in my T-shirt's life story. What I did find over and over again is that those people without power, those people that were poorer, those people that had fewer resources, didn't so much need to be protected as they needed to be allowed to play. And they needed to be allowed to play with the same deck of cards as everybody else.
I say this because whenever in my T-shirt's life I came across an underdog—and it could have been a cotton sharecropper, it could have been a Chinese sweatshop worker, today it could have been an African farmer—it wasn't the markets that were having the most serious negative effects. It was the structures, especially political structures, that we have in place that were keeping these people from being able to play the game as full citizens.
Now, why do we have these structures in place? Well, that leads to my third point, which is that even the most passionate defenders of free markets don't like to experience them up close and personal. Where do you find the most passionate defenders of free trade? You find them, you know, in the tenured members of economics departments all over the world.
And so tenured members of economics departments have themselves created structures to protect themselves from markets, right? And their doing so has negative effects for people outside that particular group.
I found something similar to that over and over again. If you look at cotton subsidies, for example, this is an example of a phenomenon where a group with political power is using structures to protect themselves from markets. This is not about the markets pummeling the poor. This is about groups with power, just like tenured economics professors, creating structures that keep others out of the game. The same thing is true in China when we look at the women who stitch clothing together. The set of rules in place that govern household registration in China—and I won't get into the details here—essentially keep these women from participating in the market as full citizens. And, of course, when we look at the trade policy of the more powerful players in the world economy—the U.S. and Europe—and the way they have been able to protect themselves from imports from producers in poorer countries, you once again have an example of a tenured economics professor who's protecting himself from the market forces, and in so doing keeping other people from being able to play. I found this as a theme over and over again, except in the very last place of the T-shirt's journey: Things were different in Tanzania.
So this T-shirt then, in the context of the globalization debate, doesn't put forth the markets as either the savior of humanity or the villain. Instead, what the T-shirt has to say to all of us is that what needs examining are the rules by which we all play.
Thank you very much.
MR. LANKES: Thank you very much, Pietra. This was very inspiring. Markets, good or bad, I wonder how Brink will feel about that.
MR. LINDSEY: Thank you, Hans-Peter. Thanks to Prakash Loungani at the IMF, who was my co-author on that humorously titled "Nailing the Homeowner" paper, for inviting me here today. And thanks to Pietra Rivoli for writing such a wonderful book.
I like this book very much and I recommend it highly, and let me start off by echoing and amplifying a couple of points that Hans-Peter made at the outset.
First, this book is just full of interesting facts and stories that even people who follow international trade fairly closely might not know much about: the history of the American cotton industry; the history of the textile and apparel industries centuries-long global search for cheap labor; the 40-year saga of textile and apparel import quotas; and then this fascinating story of the used clothing market in Africa. All of these are presented clearly and appealingly and are just chock full of fascinating details. And weaving them all together is this wonderful leap of the imagination to see that behind a product as humble as a cheesy T-shirt from Fort Lauderdale is this amazing story with so much complexity, so many interrelated parts and people.
It reminded me of a little epiphany I had some years back. As Hans-Peter mentioned, I'm a recovering lawyer ...
... and I used to do unfair trade cases, antidumping cases, where I represented the accused unfair traders. I was working on a case on cigarette lighters from Thailand. One of the great things about being an antidumping lawyer is you get this little mini crash course on all these strange parts, from high-tech to low-tech, and at this point I was living and breathing cigarette lighters. I walked into a convenience store and at the cash register I picked up the lighters and started looking at them. And I saw one from Thailand and I saw that it had a little silk-screened hokey "I heart something" on it. Because of what I knew about lighters, I knew that I had been to the factory where that lighter was made. It was a sole importer into the United States, and I had met him, I knew him. And because of the cheesy silk screening on it, I knew exactly who had bought it from the importer and sold it to this convenience store. So at every step along the way, I knew personally the people involved, and that made me feel really cool.
MR. LINDSEY: You know, it's definitely not the kind of knowledge that really impresses people at Washington cocktail parties, but the realization that behind this little cigarette lighter were all these people, and behind every other product on the shelves were a host of other people. It really impressed on me the wonderful limitless complexity of the global market economy. So, first of all, the book is interesting.
Second, the book is scrupulously fair-minded. I really applaud the book's modulated tone and its generosity towards opposing points of view. International trade is a topic that is very heavy these days on polemics and bombast, and what passes for a globalization debate all too often isn't much of a debate at all. There's lots of preaching to the choir, lots of screaming past each other, but not so much a real rejoinder of issues and not so much effort to figure out what has got the other side so worked up.
But Pietra's book is a really refreshing break from all of the strident shouting. She's trying to soothe passions rather than rile them up. She's trying to get people to not just get excited about their own points of view, but to consider points of view they might find in the first instance uncongenial, to point out the ironies and unexpected outcomes that result from the clash of righteous certainties, and to give credit to opponents for the things that they do get right. To all of which I say: `thank you very much, and well done, and good luck getting your book on cable news shows.'
Nuance and shades of gray aren't exactly in high demand on the tube or in our larger political debate. So thank you very much for bucking the tide.
This book is, as Pietra said, much more concerned with telling stories than with constructing arguments and marshalling facts in support of those arguments. But there are a number of important ideas that come through when you read these stories, and I wanted to address three of them.
Idea number one: what's good for business and what's good for the market are two different things. So as told by Pietra, the history of the American cotton industry is a history of various efforts to shield cotton growers from markets, and in particular, to shield them from competitive labor markets through slavery, sharecropping, through company towns, through the bracero program of guest workers. And also, of course, shielding them from supply and demand through agricultural subsidies that account for a significant fraction of cotton growers' current revenues.
Textile and apparel producers likewise have been seeking protection from market forces, in particular foreign competition, since before the Industrial Revolution. There's a wonderful story in there about the English woolen industry and its attempt to keep out competing goods. So that's a story that's been with us for centuries.
The larger point of this tale, and a point that needs to be made incessantly because confusion about it is so rife, is that being pro-market isn't the same thing as being pro-business. Far from it. Activists and protesters on the left, who tend to take a very dim view of global capitalism, don't realize this fact very often. They're the ones, I think, who suffer most from this confusion. Anyone who has a kind word to say about market competition is too often condemned from the left side of the political aisle as just a shill for Big Business. And it's common, I think, from this point of view, to condemn market forces as just nothing more than the unrestrained grab for profits by heartless corporations whereas, in fact, market competition acts as a powerful constraint on corporate profit-seeking. That's why all these corporations are so desperate to hide themselves from market forces. Indeed, it's when markets are constrained or suppressed that business abuses are often most pronounced. That point comes through again and again in a number of the different stories that Pietra tells.
Idea number two: free trade is not a panacea, but it's something. Pietra serves up healthy doses of humility for both so-called fair traders on the NGO left and free traders alike. In her discussion of cotton subsidies, she notes, correctly, that if all of the U.S.'s egregious subsidies were wiped out overnight, life wouldn't be dramatically better for African cotton farmers on whose behalf NGOs are campaigning.
In discussing Nelson Reinsch, whose picture we saw, she writes, and I quote, "While critics of U.S. agricultural policy are quick to point the finger at U.S. cotton subsidies as the source of America's advantage, the removal of the subsidies would do little, at least in the short term, to develop the literacy, property rights, commercial infrastructure, and scientific progress required to take on Nelson Reinsch in world markets. Activists at Oxfam would do well to take on these causes as well. If Nelson Reinsch is embedded in a system that protects and enriches him, cotton farmers in West Africa are embedded in a system that exposes and impoverishes them."
Now, let me hasten to add that I think that the decision by Oxfam and other NGOs to target rich-country agricultural policies is a huge improvement over the reflexive anti-trade, anti-market obstructionism that dominated the NGO contribution to the globalization debate before. Rich-country agricultural policies are scandalous, and they deserve every bit of righteous indignation that can be thrown their way. But it's important to keep a sense of perspective. If all you knew about this situation was from reading NGO polemics, you would think that indeed the great thing that is holding African agriculture down is rich-country policies whereas, in fact, I think the vast majority of the problems faced by those farmers are internal. So even if all of these rich-country subsidies and trade barriers disappeared tomorrow, the problems would still be there.
Indeed, it's a seldom mentioned fact that these policies, which we all decry, are actually beneficial to many poor people around the world. Yes, agricultural subsidies depress world prices and, therefore, hurt exporters in developing countries. But by depressing prices, they help poor people who buy imported food, and most developing countries are actually net food importers. So our extravagance as taxpayers and consumers to support our farmers does confer benefits to the developing world as well as costs.
Meanwhile, Pietra's wonderful portrait of the mitumba or used clothing market in Tanzania provides some perspective for those of us on the free trade side who are pushing economic liberalization as the cure to all ills. I think it's pretty clear that zeroing out your tariffs on industrial goods is not going to put you on the express lane to prosperity if everything else in your country is a mess. If your country has suffered under brutal colonial exploitation and then under disastrous socialist experimentation, if it's now ruled by a kleptocratic clique that loots your country and sends billions off to Swiss bank accounts, if your country or the neighborhood in which it's located is the scene of ongoing civil wars, if low-level official corruption is endemic, and if on top of everything else malaria and HIV and other diseases are running rampant, then fixing trade policy really isn't the most urgent of your problems.
So economic liberalization alone isn't going to make a dent. It's dealing with all those other `ifs' which I think now goes by the convenient, if somewhat bloodless, term of "governance," getting the basic institutions and cultures in place to make market-based wealth creation a possibility. That is the key, and the policy mix is really the icing on the cake. If you lack the cake and you just try the icing, you're not going to get very far. In fact, the most likely consequence of economic or trade liberalization in the absence of institutional and cultural change is that you are going to get rid of the old state-owned industries that had previously existed under protection and chase their workers back into subsistence agriculture or into the informal sector. And so you're not going to have that takeoff or economic miracle just as a result of economic liberalization alone.
But if free trade isn't a silver bullet, it's something; it's better than nothing. And here Pietra reminds us of something we all learned back in Econ 101, which is that the main benefit of trade is on the import side, not on the export side. In Africa, in particular, free trade or freer trade has allowed ordinary Africans in very poor countries to have access to goods that otherwise they wouldn't be able to buy.
Pietra notes a study that looked at Tanzania in particular before and after some fairly radical changes in policy regime. Tanzania was one of the most aggressive in experimenting and dabbling with socialist policies, and then in the late '80s and early '90s, it turned things around quite dramatically. But the study looked at what happened before and after and found that life on the ground really hadn't changed that much. But, Pietra writes, and I quote, "There was one thing Waters"—the author of this study—"noticed almost as an afterthought. People were better dressed. This may seem a small thing to us, but because it is the only thing, it is important to the people in Shunga. Thanks to world trade, life was just a little better in a remote corner of one of the world's poorest countries."
The book's idea number three (and here I'm going to quibble a little bit with our author): capitalism and activism are actually fighting on the same side, even if they don't know it. In an ingenious and provocative attempt to bridge the chasm between the warring sides of the globalization debate, Pietra argues that multinationals and NGOs are often fighting on the same side. Here let me quote her again: "In a larger sense, however, global capitalism and labor activism are not enemies but are instead cooperators, however unwitting, in improving the human condition. As much as the CEOs would like to silence the activists and the activists would like to silence the corporations, the fact is that the two need each other."
I think that there is certainly something to this point. Markets are effective at raising living standards only in the proper institutional setting, and good institutions are unlikely to arise when political power is monopolized by a tiny elite. So just as market-generated wealth tends to promote political liberalization by producing a middle class that wants some say in how the country is run, in the same way broader political participation can help produce better institutions that then promote superior economic performance. So NGO efforts that help workers to stand up for themselves and better promote their own interests can help to promote better governance and, therefore, better market performance over the longer term.
I do think, however, that Pietra tries to stretch this point a little bit farther than the facts allow. Unfortunately, I am afraid, a great deal of labor activism proceeds in fairly blind defiance of some basic economic realities and, therefore, doesn't accomplish much of anything, and sometimes actually makes things worse than before.
What ultimately makes people better off is building the productive capacity of a country's economy by changing its culture, its institutions, and its policies to facilitate entrepreneurial activity and market-based wealth creations. Too many activists, I think, don't really get this. They are stuck in a zero-sum way of looking at things. They think that the main way to help the poor is to transfer wealth from the rich to the poor.
In the macro context, this leads to thinking along the lines of Jeff Sachs's latest attempt to revive large-scale foreign aid initiatives. On the micro scale, it means winning concessions for particular workers or at particular workplaces, which may make those particular workers better off or may make those particular businesses nicer places to work, but perhaps at the expense of non-favored workers elsewhere in the economy.
So, for example, efforts to eliminate child labor in exporting industries is a very laudable world passion. The idea of my children or those of anybody I know—or of anybody I don't know for that matter—working in the conditions that children work in sweatshops for export is abhorrent. But the fact is they're working there not because capitalists are greedy. They're working there because the country is very poor, and if you squeeze one part of the poverty balloon, it's going to pooch out somewhere else. So if you succeed in getting export industries to get rid of child labor, what you have done is eliminate one source of employment for those children. And where are they going to go? They're going to go where the activists aren't looking. They're going to go back into subsistence agriculture or go to the informal market stalls. Or they're going to do something worse. They're going to go into something really abusive and horrible, like prostitution. And there have been studies that looked in particular at the effect of an anti-child labor initiative in Bangladesh and what happened to the children who used to work there. For many of them it wasn't a very happy story. So you end up doing something that appears to do good and certainly makes you feel good about your efforts, but doesn't actually change the system.
Even worse, I think, are efforts to push for local changes through boycotts or through trade restrictions. I'm very suspicious of any activity that's designed to help poor people by throwing them out of work because it's going to be better for them in the long run.
So I think when workplace protections and standards are imposed in the context of a dynamic growing economy, and in basic line with what an economy at that particular level of development can sustain, then they can protect against isolated local abuses. However, if poverty is endemic, those restrictions and standards are only, at best, cosmetic.
So rather than seeing this happy, invisible hand that is guiding activists and businesses to further the common good, I'm afraid I see a great deal of wasted energy and passion that settles for feeling good over actually doing good and that too often stirs up political opposition to the processes of market competition that ultimately are the foundation for rising living standards.
So I think more rigorous attention ought to be paid to drawing the distinction between feel-good and do-good activism and figuring out ways to channel the healthy and laudable passions of activists into more constructive directions.
With that quibble aside, let me just reiterate what a wonderful, entertaining, and informative book this is. I learned a lot. So will you. And thanks again to Pietra for writing it.
MR. LANKES: Thank you very much, Brink, I think that was a lot there that people might want to take up in addition to the presentation by Pietra.
Let me kick it off with some statistics that supplement what Pietra mentioned about T-shirt imports into the United States this year. If you look at all textile imports, not just T-shirts, you see that Asia has done very well this year. The Middle East has kind of held its own, more or less. The Western Hemisphere has shrunk a bit, and then Europe and especially Sub-Saharan Africa have taken a hit. So what China has gained, one could conclude, the Africans have lost. If you look at the market shares of these different regions in the U.S. market, Asia has a 60 percent share and a big chunk of that is, of course, China. The shares of the other parts of the world are smaller and shrinking.
I wanted to ask a question related to this. I think one of the most compelling aspects of the book is how you describe how the production of T-shirts and textiles moves from one country to another across history, across 300 years, in fact, and sparks industrialization and sparks cultural change, as well as social and economic change, and kind of makes it possible for societies to, you know, take a step out of their rural paths and into a new world, with a lot of pain, and especially pain and sacrifice for young women.
But most of these changes, as far as I can see, gave these countries some time—you know, the move from England to the United States and some other countries took two or three generations in each case. The move from Massachusetts to North Carolina took 20, 30 years, and so on, and similarly for the moves in the 20th century. Now, if all of a sudden, we free up these quotas and half of the world gets into that business, if China and India and Bangladesh and Pakistan and everybody gets into that same business and tries to follow that same model, would it still work? Is it perhaps going to create frictions that we cannot really manage in the same way that earlier frictions that have been painful have been managed? In short, can that model be multiplied by 20? One possible approach—and I am playing devil's advocate here—would be to say, well, okay, let's just give this whole thing a bit more time. Maybe it was premature to phase out the quotas in world trade. Maybe what we're seeing here is just too fast and let's go slowly. What do you say to that?
DR. RIVOLI: Well, we actually did go slowly. There was in place what was supposed to be a ten-year phase-out; it was designed to be a long and gradual phase-out. But what happened was kind of unforeseen because back when the original deal was negotiated in 1993, China was not at the time a WTO member. So when they negotiated this phase-out of the quotas, nobody was thinking about China because the phase-out only applied to countries that were members of the World Trade Organization.
But then China becomes a member of the WTO, you know, eight or so years later, and all of a sudden China is eligible to have its quotas removed as well. And the limits on China were very tight import limits. If you compare the import limits to their productive capacity, they were very tightly constrained. And so as soon as you uncorked that wine bottle, you saw what happened—the gush doesn't tell us so much about how fast exports from China can grow as much as it tells us how constrained they were to begin with. What we're seeing actually in China right now is already an example of what I write about in the book. There are whole regions in southern China, in Guangzhou, where people thought, `okay, well, that's where all the T-shirts are going to come from, you know, for the next 30 or 40 years'. But already labor costs in South China have gotten too high to produce cheap T-shirts, and so already production of cheaper clothing is moving to cheaper places from China, even as we speak.
I think this mobility will accelerate; it's going to be faster than what I write about in the historical context. It's sometimes a little hard to think about China as one country. If you look at its size or its population or by a lot of different measures, you're really talking about more than one country here. So what's going to happen, I think, with China is you're going to have—just like we did in the United States—production move from southern and eastern China to western China, just like we had the mills move from New England to North Carolina.
So the basic trends of mobility in this industry are only going to accelerate, and so will the tendency—which we've already seen at we've seen, especially with India and China—to very quickly move out of low-end textiles into, in the case of India, high-tech and, in the case of China, higher-end manufacturing.
So I guess I don't see a big change from the historical pattern. What I see is a speeding up of the historical pattern.
MR. LANKES: Thanks. Brink, should we give more time to Africa?
MR. LINDSEY: I think, just to get around to answering your question and to amplify on what Pietra said, the search for cheap labor costs that goes on over centuries in the textiles industry that she describes brings home a point that I think is quite familiar, which is that the textile industry is frequently the starter industry for industrial takeoff, but it's the starter industry if the conditions are right, that is, if institutions and cultures are there that are congenial to or consistent with market-based economic activity. Then the textile industry is a fairly simple one and one that can make use of cheap labor and can help to build a dynamic of broader economic development.
But that isn't really what happened with a lot of textile-producing countries that we see in the world today. A lot of their textile industries are pure artifacts of the quota system, where it wasn't so much that producers were running around looking for cheaper labor costs; it was that they were running around looking for places that weren't under quota yet. And so producers would set up factories in places that had no competitive advantages whatsoever except that they were not quota-bound yet or quota was doled out to them for foreign policy reasons.
And so there are a number of textile producers in the world today—and many of them, unfortunately are concentrated in Africa—that didn't have those preconditions for takeoff for textiles to provide the spark. They're just taking advantage of a strange and temporary policy loophole.
So when you see countries like Bangladesh—not to pick on Africa all the time—where textiles makes up 80 percent of the country's exports and they have been under quota protection for decades, you see that this isn't a country that just needs a little bit more time. It's a country that has deep institutional problems that just a little bit more time of having textile protectionism isn't going to help.
And so I think if we thought that giving Africa a few more years of preferential access for its textiles would do good, then that would be one thing. I'm very dubious that that is the case. We do, in fact, give some preferential access to African textiles under the AGOA, the African Growth and Opportunity Act, so that there is zero tariff treatment on African textiles that Chinese textiles don't enjoy. It's just not enough.
MR. LANKES: Thank you very much. Maybe we can turn to the audience now. If you have any questions, ideally you would get up and go to the microphone; otherwise, if you have a good, loud, sonorous voice, you can do that from your seat as well. Yes, please?
QUESTIONER: My name is Mary Mullen and I work with the Bosnia Support Committee. I just was curious about the used clothes trading. How is that done?
DR. RIVOLI: It's actually a fairly big but a simple business. Most of our clothing is tossed into Salvation Army bins or Goodwill bins. The Salvation Army generally sells it by the pound to about two or three thousand companies in the United States, who will sort it, grade it, bale it, and export it. So that's how it works.
Now, many countries actually ban the import of used clothing. So, for example, you can't send used clothes to Mexico or Brazil or India or China. There are about 30 to 35 countries that do not allow used clothing to come in. But that leaves the whole rest of the world. Eastern Europe actually is a very big buyer of used winter clothing because that has no market in Africa. So if you throw away a nice jacket from Land's End, then it probably goes to Eastern Europe. But if you throw away tropical weight clothing in good condition, then it probably goes to Africa. So this is the business function that's performed by this industry, you know, the sorting and the grading and the selling to the different markets.
Actually, the biggest dollar value buyer of American used clothing is actually Japan, and it's because they have some funny tastes for our Mickey Mouse T-shirts. Certain Mickey Mouse T-shirts in good condition can go for $100 in Tokyo—old vintage Levi's and so forth. So there's that sort of high-end piece of the market as well.
MR. LANKES: Thank you. Yes?
QUESTIONER: Hi, I'm from the Treasury Department. I was thinking about Ms. Rivoli's point that it's not so much that these countries need protection but they should be given the sort of deck of cards to play fairly, and also the comment from Mr. Lindsey about the importance of institutions, that trade is not a panacea but we need the proper institutions. But what then is the priority? In developing countries, a whole myriad of policies need to be in place. But if you could prioritize the policies that would facilitate growth or playing fairly, what would they be? Thank you.
MR. LINDSEY: That's a big question, but I would say reduced down to the bottom line, there's a couple of basic issues that mark the difference between countries that have some kind of brighter economic future and those that don't.
First, how can you get governments—which we can cynically say are motivated by an incentive to maximize tax revenues—to move away from looting wealth from people on a one-time, short-term basis to creating policies and institutions that produce private wealth that then can be skimmed off the top through taxation?
If you go from a short-term, short-time-horizon looting economy to a long-term, long-time-horizon tax economy, that is a gigantic threshold. Many countries rich in natural resources can't get past that threshold because their governments have a ready source of income. They can just pump it out of the ground or mine it out of the ground, and they don't have to create policies and institutions that allow private wealth to be created. This is why we have this strange spectacle of countries rich in natural resources being mired in poverty and, you know, hunks of rock like Hong Kong becoming incredible rich. They became rich because that was the only way the government could figure out how to raise revenue. So that's big question number one.
Big question number two, which is related, is: How do you get people to think that the way to get rich is to build a better mousetrap rather than to get in with somebody in the government and extract money from other people? So how do you get people culturally to think that the way to get ahead in life is to create wealth rather than to steal wealth?
There are no easy answers for that either. We talk about `institutions'—that's usually what we talk about when we don't really know what else to talk about, and we aren't always sure what we're saying. A lot of times we talk about corruption as a clear indicator of bad institutions. Well, China is not free of corruption, and yet somehow or another China has made that cultural shift so that the people are thinking all the time that the way to get ahead is to build a business.
And so making that transition on the government side and making that transition on the private sector side are the ball game. What we don't know is any kind of reliable way how to cross those thresholds for countries that haven't done it yet.
DR. RIVOLI: I guess I'd just very briefly add that I don't see these things as distinct entities. I wouldn't put the unfair game playing over here and the governance over here. If you look at a set of good policies, if you look at effective governance, then generally what you're also looking at are structures where people do have a fair chance to play. So I don't see them as competing, and I certainly don't see them as sequential. I think if you look at the best governance, especially globally—and I hope that's what's happening with Doha right now—then the best governance is about eliminating some of these tilted playing fields.
MR. LANKES: Thanks. Yes, please.
QUESTIONER: Fascinating story, and certainly I'll be looking forward to reading it. You don't seem to have mentioned enormous role of companies that are bulk buyers of products and also companies which are involved in the grading and marketing of T-shirts and so on. Maybe it's not that important in the case of T-shirts, but certainly in the case of primary commodities like coffee and cocoa, the issue of trading and processing is extremely important. What we have seen is that as trade barriers have come down and trade has become less hindered by government interventions, the intra-firm trade has increased enormously, and these actors have become very important. Therefore, they are actually the drivers in the international trade. Whether trade has become much fairer as a result of reducing government intervention is very much an open question because corporate strategies and corporate linkages have started to intervene. Thank you.
DR. RIVOLI: Well, this is what you hear quite a bit about Wal-Mart. I keep hearing the statistic that if Wal-Mart were a country, it would be our eighth or ninth—or something—biggest exporter to the U.S. I did look at this to some extent in the book. I looked at the apparel supply chain. Generally what you have with apparel is you have a system of subcontracting. You have virtually no American apparel firms that produce their own apparel anymore. All of it is subcontracted out, and most of it is imported. And what's happening in that supply chain right now is driven by what went on with the quotas.
If you look at our big apparel firms, if you look at, you know, a Liz Claiborne or a Gap or a Nike or somebody like that, up until last year they had to source generally from 40 to 50 different countries at the same time in order to get enough goods to meet their demand here in the United States. So they had to have this very complicated supply network of contractors with dozens and dozens of countries, and that's because no single country or no small group of countries had enough quota.
Now, with the end of the quotas, most of those companies that I talked to said that they want to move from 40 to 50 countries down to, you know, six to ten countries. And so what you're going to see is a little bit of a modified example of what you're talking about, which is kind of a move to concentrate the trade flows, not just to smaller numbers of companies but to smaller numbers of countries.
So I think that it is true that there is always going to be this mobility in this industry, but what these companies are interested in now is developing some stability in their supply chain by getting longer-term relationships with, you know, five or ten bigger suppliers.
Now, whether that takes us a step away from free trade is an interesting question. I don't think that in itself the idea of a stable supply chain is necessarily, you know, anti-trade. But I think that there is no doubt that we are going to see bigger concentrations, both on the corporate side and on the country side, at least in this particular industry.
MR. LANKES: Brink?
MR. LINDSEY: Well, just a brief follow-up on your particular focus on commodities. I think basically we see productivity in basic manufacturing and in basic commodity production growing faster than productivity elsewhere in the economy. So commodities get cheaper relative to everything else, which means that a greater and greater percentage of the value-added between production and consumer happens somewhere in the middle.
Now, I don't think this is a kind of zero-sum process where the processors are taking wealth that used to go to the producers. It's simply that the producers have competed themselves down to where they don't make very much money on what they do, and if they don't have the capacities to get into the higher-value-added industries, then they're missing out on most of the revenue stream. Take coffee, for example. There have been enormous advances in productivity in Brazil. Also, new countries have come online in coffee production, like Vietnam. As a result, if you just produce commodity-grade coffee, if you're a Central American or Colombian coffee grower producing standard commodity coffee, your prices have deteriorated terribly over the years. Unless you can get into one of the specialty gourmet coffee kinds of niches with a lot of value-added, you're stuck in a very bad situation. I don't think this is the fault of the Procter & Gamble's of the world. The main fault lies in the governance of countries that can't produce more economic opportunities other than simple commodity production.
In other developed countries—like Hong Kong, which lost 80 percent of its manufacturing employment in a relatively brief period of time but wasn't impoverished—there are complex economic systems in place that they can move into other sectors and thrive. In Central America, that kind of institutional framework doesn't exist, so if you have terrible prices for coffee production, people don't move out. They just are impoverished coffee producers.
So I think what you're pointing to is absolutely a real phenomenon. But I wouldn't blame it on the processors. I would blame it on economic progress in some parts of the world and a lack of economic progress in others.
MR. LANKES: Thanks. We're beginning to run up against time constraints, but let's take two more questions.
QUESTIONER: I'm Stephen Hendrickson from the Wilson Center. There was an article today in the Financial Times about the increased production of computer components in China and subsequent increase in research and development there as well. I think maybe a lot of Americans would be understanding of cheap T-shirts being produced in other countries, but there's a concern that a shift in research and development somehow is a greater vulnerability for the U.S. economy. I wondered if the panelists could comment on whether research and development is somehow fundamentally different from basic manufacturing and what that might portend for the economies of the more industrialized countries. Thank you.
QUESTIONER: Hi. I'm Katherine Stecher with the Nicaragua Network, and my question was whether the speakers could offer a critique of liberalization of other sectors after having looked at T-shirt and apparel, more specifically WTO and service sectors and intellectual property rights and how that plays into what you've said about people having a hand in the market.
DR. RIVOLI: I think the two questions are actually linked. They're linked because of the importance of IP, intellectual property, and research and development. One of the things that is a very big sticking point with China trade is IP and the so-called theft of IP that you keep seeing in China. So the fact that research and development capabilities in China are growing is actually a solution to the IP trade issue, at least in practice.
You know, I for one would not want to say to China or to any other country that your role in the global economy is to produce cheap T-shirts and mine is to produce research. The whole point of stepping on this industrialization ladder to begin with is that you want to end up near the top of the ladder. I don't think that there's a limited amount of research to be done, and I don't think the size of the pie is fixed. The notion that there's a fixed pie that China is getting a bigger piece of is an erroneous one.
What's interesting with China right now in textiles and apparel is you have some very advanced research taking place. They used to just sell the cheap T-shirts, but now they're doing the research on textile processes. That makes sense. That's where the research should be going on. You know, we don't have the mills in South Carolina. So it doesn't make sense for Clemson University to be doing that research anymore. It makes sense for it to be happening in Shanghai. So I view it as an example of the process working rather than not working.
MR. LINDSEY: I would echo that, and add that once you've passed those basic thresholds I was talking about, once you have a market congenial culture and institutions and you have a functioning market economy, I'm very sanguine about the systemic effects of ongoing trade integration. Yes, of course, some people on the ground are going to be dislocated. That absolutely happens. That's just a feature of capitalism. And really there's no particular difference between the ongoing specialization and wealth creation on the one hand and dislocation on the other—what Schumpeter called "creative destruction"—when it comes to trade versus when it comes to technological progress. If we discover that the Chinese can make some high-tech product cheaper than we can, then we ought to specialize in doing something that we're relatively better at. And the fact that we can get stuff cheaper from China is no different than if somebody in America had invented some machine to make it for cheaper. In both situations, you have higher productivity. In both situations, you have some labor that has been made redundant. So in the big picture, I think the trade game is one that can be played indefinitely.
MR. LANKES: Anything about services liberalization and the sensitivities there?
MR. LINDSEY: Yeah, I have quite different views about services liberalization versus imposing Western IP protections on developing countries. I think services liberalization is actually quite important for promoting developing country growth. A lot of the trade liberalization that's occurred in Africa, for example, has been on the industrial goods side, and they don't make a lot of industrial goods. But even if you zero out your tariffs there and even if you're fully exposed to competitive forces, you're not necessarily going to be a very congenial place or very attractive place for foreign investors to come and set up shop. If your ports are a corrupt and inefficient mess, if your telecommunications infrastructure is spotty and unreliable, if your financial intermediation is a mess, you're not going to have a lot of domestic investment. So those basic service industries really serve as the backbone for a modern economy, and in too much of the developing world, the local monopoly service providers are utterly shielded from domestic as well as international competition. Allowing foreign competition and foreign investment in service industries would go a great way towards modernizing those economies, making them more attractive to foreign and domestic investment, and helping to promote economic takeoff. So I think services liberalization is actually a big plus for developing countries.
On the IP side, I think it's much more complicated, and it's a gigantic topic, but I would say that I think at least some of the time imposing Western-style IP protections on developing countries really is to the interest of U.S. and European IP holders and a net drain on the resources of particularly the poorest countries.
MR. LANKES: Thank you very much. I think you've both handled these questions remarkably well. One last observation that came to mind while I was looking at the presentation, at the pictures—this is an industry that is dominated by a female workforce, certainly on the textile production side of things. I just wondered that if there were a few female faces among those "alphabet armies" that are battling it out over policy in this area whether anything would be different.
DR. RIVOLI: We do have some. They were not in that particular picture I showed, and they're actually on the other side of that particular army. The opposing army is actually made up mostly of women, at least the United States. I don't know what kind of lessons we can draw from that.
MR. LANKES: Okay. Well, thank you very much, Pietra and Brink.
IMF EXTERNAL RELATIONS DEPARTMENT