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Monday, October 7, 2013

Imports of Products - Exports of Jobs

Every time I walk through Greek supermarkets, shops, etc., I wonder whether Greek leadership understands the following formula:

Whenever Greece imports a product which could just as well be produced in Greece, it exports jobs. And where the jobs are, there are the wage/income taxes, social contributions and revenues for the state. The toothpaste which I buy in Greece is produced in Brazil and comes to Greece via a distributor in Hamburg. All of the product development/production jobs are in Brazil and most of the distribution jobs are in Germany. The same goes for the related wage/income taxes, social contributions and revenues for the state. Is there any reason why Greece needs to import toothpaste from Brazil? Or import it in the first place?

Why wouldn't Greek leadership continually hammer in this point in public speeches, writings, interviews, etc. until the advantages of "buying Greek" are clear to even the last Greek in the most remote village? The government could take a cue from John Maynard Keynes who said the following in a radio address to the British people in January 1931:

"Whenever you save five shillings, you put a man out of work for a day, whereas whenever you buy goods, you increase employment - though they must be British, home-produced goods if you are to increase employment in this country. Therefore, O patriotic housewives, sally out tomorrow early into the streets and to to the wonderful sales!"

Keynes presents the trade-off as one of saving versus spending. In today's Greek depression, I am not sure that this is the relevant trade-off because demand has very much declined because of lack of money, not because of undue saving. But Greek housewives (and consumers in general) are still spending money and as long as one spends money, however reduced the volume is, there is a trade-off, or rather a choice to be made: will the Euro be spent on a Greek product or on an imported one. Thus, one would have to adapt Keynes quote to today's Greece as follows:

"Whenever you spend 5 Euros on an imported product which is also produced domestically, you put a Greek out of work for a day. If you spend the money on Greek products, you increase employment in Greece and aggregate demand as well. Therefore, O patriotic Greek housewives (and consumers in general), sally out tomorrow early into the shops and buy only Greek products!"

I can't wait to hear such speeches!

9 comments:

  1. That's a big foul and never works. Why would people buy more expensive stuff. That does not play well even in rich countries like that USA where a lot of stuff comes from China. Don't say this to the struggling Greeks. They will buy whatever represents a better value to them. If Brazilian toothpaste costs $5 and Greek toothpaste costs $10 would you still encourage them? Where do you draw the line? The only route possible is find areas where Greece is competitive and focus on them and not encourage low productivity through Greek-products only consumption. And on another note, I would not want to pay my government/politicians to advertise to me what products to buy and where from. That's not what I would consider a productive use of my tax dollars (ahem Euros).

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    1. 1 of 2
      I can tell that you wrote your comment with quite a bit of prejudice, probably justified prejudice. Yes, when governments get involved in planning consumption, it normally leads to a mess. But that is not what I have in mind.

      When a country imports 3.200 Euros for every 1.000 Euros it exports (Greece in 2008), common sense would suggest that something ought to be done about that. I mean, this could only go on forever if the country had gigantic foreign revenues from services (Greece had high foreign revenues from tourism and shipping but not nearly enough to close the hole) or if the country had unlimited access to foreign credit (which Greece seemed to have until 2008, but then the country experienced what a ‘sudden stop’ is).

      Now one can do what Greece did (or, as some say, what the Troika forced Greece to do), namely: kill domestic demand so that imports will go down automatically. That has worked in the sense that Greece’s current account is now approaching balance. And yet, Greece is still importing very significant amounts of products for which actually Greece should have comparative advantages (agricultural products, meat, fish, even olive oil).

      Consider the macro-perspective: government austerity caused the GDP to decline dramatically and that lead to excessive unemployment. If Greece had substituted some of its imports through new domestic production, GDP might not have fallen so dramatically but certainly the unemployment wouldn’t have had to go so high.

      The question is, of course, how one could accomplish that on a micro-level. I agree that the Greek consumer ought to be able to buy Brazilian toothpaste if it is cheaper than the Greek one. But the individual consumer does not understand that there is no longer money to do that. The consumer may say “what do you mean that there is no longer money; I still have money!” And he would have to be told “ok, you have the money but the country no longer has”.

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    2. 2 of 2
      Whenever a Greek consumer buys an imported product, even with his own savings, he increases the foreign debt of all Greeks. Why? Because he increases the foreign funding needs of the country. That foreign funding comes into the country as foreign debt of the banking sector. And, as we know, the foreign debt of the banking sector, when push comes to shove, becomes foreign debt of all citizens (see Ireland; see Spain).

      Foreign exporters might cry ‘foul play’ when they can no longer export so much to Greece. This is what I would say to a German ‘foul-play-cryer’: “Look, your exports to Greece are not paid by the Greeks; they are paid by your own tax payers because they are having to give Greece the money which it needs to pay for your exports. You might as well cut the circle and give your exports to Greece free of charge”.

      Now the real problem is that any limitation on imports allows clever domestic producers to produce less competitively and/or to make undue profits. Historical evidence would probably prove that this is what generally happens. But IT DOES NOT HAVE TO HAPPEN! It wouldn’t happen if it were embedded in a longer term economic development plan. Simply the fact that this has never been accomplished in the past shouldn’t necessarily mean that it couldn’t be accomplished in the future. John Maynard Keynes was a great proponent of doing something like that in Britain in the 1930s and 1940s, and he was known to have unorthodox and intuitive ideas which might not be applicable in general but which could fit very well a particular situation.

      I take it that you are American. Well, there are two reasons why the US has been able to allow its consumers to buy every product wherever it was the cheapest in the world for decades. One, the US has a seemingly unlimited ability to obtain foreign credit and it is a great place for foreign investment. These are the reasons why the US has been able to dramatically overspend abroad for decades (on the positive side, they created jobs and wealth in the rest of the world during the process). Unfortunately, these two reasons do not apply to Greece.

      Mind you, what I am suggesting is no different from what would have happened to Greece if it had stuck to the Drachma. Overspending abroad would have depleted Greece’s foreign currency reserves. Greece would have had to reduce imports by making them more expensive (tariffs, devaluation). In the final analysis, the Greek consumer would have had to pay more for the imported toothpaste and would sooner or later have decided to buy domestic one.

      Perhaps you want to read the paper below where I explained in more detail what I have in mind (which is a bit old by now).

      http://klauskastner.blogspot.co.at/2012/09/an-economic-development-plan-for-greece.html

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    3. I just want to echo what Klaus says here (with whom I completely agree on this).

      While short-term and on an individual basis it makes sense to buy cheaper foreign products rather than more expensive (and perhaps of an inferior quality) domestic ones, long term we'll pay the price through an economic crisis.

      I also agree with Klaus when he says that a national currency would have acted as a cushion for such a current-account imbalance because it would have caused a currency crisis, while the euro didn't.

      As for the comparative advantage theory, I tend to think of it as a myth, similar to the efficient markets one. So far globalization hasn't given any credence to such a theory. More often than not, we are at odds to find such advantages where they don't exist, as it happens for example with the financial sector in the UK, or in the USA.

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    4. I wasn't making a case for any 'comparative advantage theory'. I just meant that, for example, I love the produce we buy at the laikí which is so far better than the produce we get in Austria. So for me, Greece has a definite advantage there and I just wish Greece would export its produce to Austrian supermarkets. Instead, I understand that Greece even imports produce.

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    5. It was the anonymous commenter who mentioned the comparative advantage theory (upon which globalization was built).

      I think that the problems with this theory are obvious.

      Firstly, not every country necessarily has some comparative advantage, therefore how will unbridled globalization be balanced?

      Secondly, even if we assume that every country has a comparative advantage, it doesn't mean that it's going to be able to exploit that comparative advantage (therefore how will unbridled globalization be balanced)?

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  2. Please let me know: What brand is this tooth paste from Brazil, what price and what weight does it have? Thx.

    H. Trickler

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    1. Colgate Sensitive Pro-Relief; produced in Sao Bernardo, Brazil; EUR 4,04 for a package of 2 tubes; weight I don't know; seems regular size per tube.

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  3. So we can blame Keynes for Britain's obsession with consumption rather than production, and for preferring debt over thrift,

    I asked the Greek lady who makes what I consider to be the finest spanakopita in Sydney whether she uses Greek cheese. She turned up her nose, and then laughed saying something like "you have to be joking", then she showed me the tubs of Bulgarian and Australian Feta that she uses. That's not because Greek Feta isn't available but it is far too salty for anyone other than Greeks - not unlike Finnish licorice, which as far as I know isn't available here.

    But Finnish telecomms (mobile and fibre) and broadcasting gear is available and widely used - Finland's population is half that of Greece.

    CK

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