Thomas DiLorenzo on How Sweatshops Help the Third World Poor (but Foreign Aid doesn't)

One of the oldest myths about capitalism is the notion that factories that offer the poor higher wages to lure them off the streets (and away from lives of begging, stealing, prostitution, or worse) or away fom back-breaking farm labor somehow impoverishes and exploits them. They are said to work in "sweatshops" for "subsistence wages."

That was the claim made by socialists and unionists in the early days of the industrial revolution, and it is still made today – the self-interest of labor unions in this anti-capitalist crusade has always been transparent: Unions cannot exist without somehow prohibiting competition from non-union labor, whether that labor is at home or abroad. Thus, they wage campaigns of propaganda, intimidation, or violence against non-union workers, whether they are in Indiana or Indonesia. They are not in the least concerned about the well-being of the Third World poor.

If the labor unions have their way, the poor whose lives are improved by their employment by multinational corporations would all be thrown out of work, many of whom would be forced to resort to crime, prostitution, or starvation. That is the "moral high ground" that has been staked out on college campuses all over America where unions have been successful in instigating "anti-sweatshop" campaigns, seminars, and protests.

In a forthcoming article in the Journal of Labor Research Ben Powell and David Skarbek present the results of a survey of "sweatshops" in eleven Third World countries. In nine of the eleven countries, "sweatshop" wages in foreign factories located there were higher than the average. In Honduras, where almost half the working population lives on $2/day, "sweatshops" pay $13.10/day. "Sweatshop" wages are more than double the national average in Cambodia, Haiti, Nicaragua, and Honduras. The implication of this for all those naïve college students (and faculty) who have been duped into becoming anti-sweatshop protesters is that they should support and encourage more direct foreign investment in the Third World if they are at all concerned about the economic wellbeing of the people there.

It is never the workers in countries like Honduras who protest the existence of a new factory there built by a Nike or a General Motors. The people there benefit as consumers as well as workers, since there are more (and cheaper) consumer goods manufactured and sold in their country (as well as in other parts of the world). Capital investment of this sort is infinitely superior to the alternative – foreign aid – which always empowers the governmental recipients of the "aid," making things even worse for the private economies of "aid" recipients. Market-based capital investment is always far superior to politicized capital allocation.

A necessary ingredient for capitalist success is a culture of entrepreneurship, management, risk taking, marketing, financial know-how, and other skills that have developed over several hundred years in the capitalist countries, and another virtue of foreign investment in the Third World is that it has the potential of transferring such knowledge to countries where it previously did not exist – or at least was not very prevalent. It is not only technology that the poor countries need, but the culture of capitalism. Without it they will never dig their way out of poverty.

The existence of foreign factories in poor countries also creates what economists call "agglomeration economies." The location of a factory will cause many businesses of all types to sprout all around the factory to serve the factory itself as well as all of the employees. Thus, it is not just the factory jobs that are created. Furthermore, a successful investment in a poor country will send a signal to other potential investors that there is a stable environment for investment there, which can lead to even more investment, job creation and prosperity.

Capital investment in poor countries will cause wages to rise over time by increasing the marginal productivity of labor. This is what has occurred since the dawn of the industrial revolution and it is occurring today all around the world. Discouraging such investment, which is the objective of the anti-sweatshop movement, will do the opposite and cause wages to stagnate.

If you want to support the Third World poor, purchase more of the products that they labor to make in the capitalist enterprises that have located there.

von Mises Institute