Trade-offs and Prosperity


The term “trade-off” is employed in economics to refer to the fact that budgeting inevitably involves sacrificing some of X to get more of Y. With a fixed amount of savings, one can buy a car or take an expensive vacation, but not both. The car can be “traded off” for the vacation or vice versa. Note that the premise of the argument is the fact that the amount of savings is fixed. If one wins the lottery, both the car and the vacation are suddenly affordable. All this is obvious at least in daily life. But the same reasoning that explains simple trade-offs is often employed to talk about the state of the economy as a whole. Then the obvious turns out to be misleading and ideological.

The issue of trade-offs arises whenever environmental questions are discussed. For example, Americans are told by conservative opponents of environmental regulation that we have traded off a considerable portion of our national wealth for costly environmental protections. Clean air requires the installation of expensive pollution control devices on cars. We could have bigger and better cars if we were not so concerned about air quality. Jobs are lost too when new regulations raises costs of production and close off markets. In a developing country like China, the rate of growth is said to be at stake. Growth would be slowed if more attention was paid to the environment. A society struggling to grow its way out of poverty cannot afford to be too picky about the environment. Or so it is said.

In reality, much regulation encourages innovation, increases the supply of public goods, and stimulates the development of new businesses. For example, many of the effects of environmental protection consist in public goods such as better air quality that benefit everyone in the society. Growth should include these goods too. But the medical costs that decline and the health benefits that rise in a cleaner environment are difficult to calculate and hard to trace back to specific environmental regulations. It is easy to spot a loss of jobs in a regulated business that loses sales and difficult to attribute new jobs in remote sectors of the economy to the innovations or services that respond to the same regulations, yet the connection may be detected in subtle economic analyses. But subtle economic analyses hold no interest for businesses anxious to avoid regulation and their academic, political and journalistic representatives. These latter put out the story that regulation and development are opposed.

This is what lies behind the concern that environmental and other regulations must be traded off against prosperity. But there is a deeper problem. The trade-off ideology is connected to the structure of the prevailing model of wealth in Western societies. This model has been exported to developing societies with unfortunate results. The Western world has developed under capitalist conditions in which a small minority of the population has had the political and cultural power to define a model of wealth based on luxurious private consumption for the few. To own a car and a house is the ultimate confirmation of middle class status in American society.

The costs of this way of life are high but since World War II most of the poor have achieved to a tolerable level of welfare. Governments have succeed in convincing most people of the wisdom of investing in public goods such as cleaner air. And well organized and relatively honest legal and administrative systems protect most poor people from the worst abuses most of the time despite the fact that they have few means to protect themselves. In this sense the system can be said to “work” even though it is unjust and remains far more polluting than it has to be.

Take this same model of wealth and transfer it to a developing economy and chaos results. The chaos is evident in practically every big city in the Southern hemisphere: traffic jams and air pollution are not simply problems of transportation and public health but signify a deeper systemic failure. The problems of rural people in these developing societies testify to the failure. All too often poverty increases for whole sectors of the population as other sectors are enriched. The unbalanced outcome is due to the privileging of the production of such private consumables as automobiles. Organizations like the World Bank are increasingly aware of the fact that they have often promoted the opposite of what they intended by supporting this type of development. A world wide revision in development policy is needed to restore the balance.

It may be asked why Western countries do not accept their responsibility for the situation that has resulted from their exploitative past and more recent bad advice. This is a fruitless complaint, however justified. The fact is that Western countries are unlikely to devote more than a tiny fraction of their wealth to helping poor neighbors. The neighbors must therefore help themselves, and this they can best do by elaborating independent approaches to development that are equitable and respectful of the environment. The production of a huge “middle class” consuming Western goods and an equally huge poverty class of peasants living with the combined inconveniences of their ancestors and injustices of modernity is a formula for future disaster.

Might a change in course result in slower GDP growth? Perhaps so, if public goods are left out of account as is usually the case in business circles. Even where a slowing occurs, such a trade-off has very little to do with economic principles and a lot to do with the source of investment capital. Lawrence Summers, the prominent American economist, once admitted that globalized capitalism has serious flaws but he went on to say that it is the only thing that seems to work at this point in history. It is true that a tremendous economic dynamic has developed around freer trade and investment. It would be a shame to miss out.

But investors from the developed countries seek opportunities they understand and expect to be profitable. They orient development toward the familiar products that have succeeded at home. Their knowledge of technology, finance and marketing is invaluable when it comes to these products. The demand is there in the developing world, stimulated in every corner of the globe by intense propaganda for the American way of life. Jobs follow the investments and give purchasing power to buy the products. The economic circle of investment and consumption closes like a noose around the neck of developing societies.

National independence has been achieved in the developing world only with great difficulty since World War II and now a similar economic independence is required. Economic independence does not mean autarchy but it surely implies some significant orientation of foreign investment toward sensible goals. There is nothing unprecedented about this.

Western nations protect certain especially privileged industries or sectors of the population such as agriculture despite all their rhetoric about free trade. It is absurd for poor countries to be “more catholic than the Pope,” as we say of someone who aspires to a level of orthodoxy unknown even to the most prominent representative of the church.

In Western countries it is commonplace to demand concessions to the public from private investors. Investors in a large real estate project may be asked to set aside some land for parks or a school. After all, the population their project will attract requires public services. It is reasonable that they share the costs with which they burden the existing community. Where is such a policy followed in the developing world? In Western countries companies are subject to fairly strict regulations concerning the polluting effects of their production and products. Why is this not the case throughout the developing world? In many Western countries governments and companies recognize the social costs of progress to workers displaced by new technologies. Adequate compensation and retraining help soften the blow. Why is this not a normal practice in the developing world too?

One could go on multiplying examples of ways in which Western countries manage development to limit its deleterious effects while maximizing the advantages of private investment. It is time for developing countries to study these strategies and to adopt them. Prosperity will not be achieved without emulating these social techniques that complement and humanize the raw technological advance advertised as the road to riches by those who are already rich.