• Wednesday, Dec 11, 2019
  • Last Update : 05:18 am

A double win

  • Published at 09:55 pm July 6th, 2019
Tangail teacher makes it big growing a variety of fruits
Shamsul Alam shows fruits grown at his farm at Rasulpur union of Tangail's Ghatail upazila Bigstock

The economics of sanitary napkins

As varied groups are protesting, it’s an odd thought that sanitary napkins and babies’ nappies are a luxury good that should be taxed at a near penal rate of 45%. But that is indeed what is happening to imports of these items into Bangladesh. 

Of course, to an economist, they are luxury items, for that just means something we spend more of our income on as incomes rise. People who are truly destitute don’t buy either, so at low but rising levels of income, they are luxury goods. 

That’s not quite what people mean though. What everyone else outside the textbooks means is that they’re a necessity of civilized life, not some luxurious extra that we might like to have.

We can argue that either way, and it’s not the point I want to raise here. Rather, to look at the manner in which the government has also decided that raw materials for the making of these items can be imported duty-free. This sounds good, and the reason given sounds good too. 

This means that women and babies will be able to have these luxurious essentials cheaper. For local manufacturers will, behind that tariff barrier, be able to build up their production, and thus supply that domestic market. The argument being that yes, we’d like people to be able to have these things. 

But our local producers just can’t compete -- even when we add in all those shipping costs -- with the far larger and more efficient foreign producers. So, in the end, as the local producers scale up their ability and efficiency, we’ll get both cheap products and also local industry. 

A double win.

Now, there is a worry that industries which grow up behind a tariff barrier never do actually gain that global efficiency level. Certainly, that’s been the experience of many who have tried this path to development. It’s also true that comparative advantage doesn’t really work that way. 

If foreigners are better at making tampons then we should just buy from the foreigners. We should be doing whatever it is that we’re best at doing. 

No, it doesn’t require that we’re better than the foreigners, we should just be doing whatever it is that we’re least bad at, then trading with everyone else who is doing the same thing. 

Think about it, if everyone really is doing what they’re least bad at then we do indeed end up in the best possible world we can have at this stage. But even that’s not the correct complaint about this development strategy. 

Think what really happens here as we use these barriers to develop local industry. We don’t, in fact, develop local wages in that import substitution sector. Wages across Bangladesh are determined by productivity across the Bangladeshi economy. 

The very fact that we need tariff barriers to protect tells us that this activity is low productivity, therefore we’re not raising it and thus we’re not raising wages. So, who does benefit from this?

The local capitalists. The local factory owners. The rich people that is. Now, I’m happy enough to insist on certain things that favour the rich, sensible tax rates for example. The right to property and so on. 

But these are consequential, we all gain in the long run from people being willing to invest, something they won’t do if we steal their stuff when they do. Tariff protection is rather different.

Think again what happens. We agree that local industry is uncompetitive. That’s why we’re having tariffs in the first place. That means that during that development process, tampons cost more than they would if we weren’t trying to develop local industry. 

We’ve also, by our very idea of having tariffs, made sure that tampons are more expensive because no one can buy the nice cheap ones from foreigners. After this process is all over, who gains the benefit? Well, it’s the people who own those now efficient and profitable sanitary napkin factories, isn’t it?

Who has lost here? In that future, when the local factories are as efficient as global ones -- if they ever are -- then no one continues to lose except maybe the shareholders of the international corporations and we really don’t care about them. But who has lost in the interim? 

Well, that’s our wives and sisters, daughters and mothers, isn’t it? They have had to pay more for their monthlies than they would have in the absence of our decision to impose the tariffs. 

Some will simply not have been able to afford them at all and will have had to retreat to more traditional -- perhaps more primitive -- means of dealing with natural human fertility.

And, well, this doesn’t sound right, does it? The distaff side of the population has to suffer in order that capitalists should get rich at some unknown date in the future? As a matter of public policy, that’s what the government is going to set out to insist upon?

I’ve long insisted that the only fair trade is free trade, this is just another example of that basic case. Why should women have to wait a decade or two?

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.