We should opt for cheaper goods, regardless of where they come from
The grand question in economic development is: How do we add value? Note what is not being included in that question -- how do we add value here? Nor is the correct question: How do we create jobs here?
What makes us richer is being able to consume that value which is created. Who produces it is a very secondary question indeed. With these basics, we can now examine the claims of success being made about the local assembly of mobile phone handsets.
In one sense, this clearly has been a success. Near half the Bangladeshi market is being supplied by handsets being assembled inside the country. That was the goal -- to increase local production. The goal is being reached, who wouldn’t want to praise this?
Well, most economists actually. Our aim is to make the population richer by increasing what they are able to consume. This is the only worthwhile definition of wages or income after all -- what can I get with it?
If I can gain less in return for my labour -- sure, intermediated through the wages I get and the prices I must pay -- then my income has just gone down in any real sense. If I can get more for each hour I work then my real wage has just gone up.
So, the local production of handsets -- does this make them more expensive or less?
It makes them more expensive, thus the plan is making each and every mobile phone user in Bangladesh poorer. This isn’t what we’re aiming at all for, but it is what is being done. Yes, I know this isn’t how it is normally thought about, yet it is still true.
The plan itself is driven by import duty. Those excise taxes on things as they cross the border. It is not, and never will be, true that Bangladesh is going to produce up to date processing chips for smartphones, nor the screens necessary, and so on.
The plants to make these cost many billions of US dollars each, and need to operate at a global scale to be efficient. However, it is possible to import these components and assemble them locally, this being what is both done and what is planned that should be done.
It has to be said that there’s not much value associated with that assembly. The usual calculation is that Chinese factories add about $10 per handset for doing it.
Near all of the value is in either those complex components that aren’t made locally, or are in the design, software, and brand which also aren’t made locally. So, the addition of value in Bangladesh is going to be of the order of that $10 apiece.
On the other hand, the import duty is currently 57% on a completed handset. The duty on the import of components is only 15%. It’s that price difference which is driving the local assembly, according to the plan.
Note what that difference implies. Local assembly costs more than Chinese or elsewhere. If this were not so then we wouldn’t need the tax incentive to promote the local work.
And if it were cheaper to do the work in Bangladesh, it would be happening already, even if the tax rates were the same. So we know that there’s a price disadvantage just from the way the tax rates are set.
What we now want to know is whether this is all worth it. If we had no duty on phone imports, then they would be cheaper than they are now. This is obvious, this is the purpose of the 57% duty. The duty exists in order to encourage local production.
What value is gained from the local assembly? It can’t be more than that $10 cost of assembly elsewhere. Sure, it can cost more than that, but the value gained can only be that amount.
So, is everyone paying 57% more for an imported phone worth gaining that $10 in local value add on the domestic assembly of phones? Or even, we’ve just made all phones, local and foreign, more expensive. Is this worth doing at all?
Probably not. I would say certainly not, as I place no value on local jobs -- no, not local to Bangladesh, but the basic idea of local jobs anywhere.
Other people do have different value systems, and so they might place value on that local assembly. But even if they do, then the question of how much that value is gets skipped. Because it becomes a mantra of local jobs good, cheap foreign goods bad.
When the actual point, to an economist, is cheap goods good, expensive ones bad. Where they come from, who has made them, is an irrelevance.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.