Saturday, December 6, 2008

Economics from the CEO perspective

That bout with the foreign wage blog allowed me to create a couple of good analogies that are useful for explaining this current mess. The first one comes from courtesy of my buddy Pete who just returned to the sates from a little island in the South Pacific called Tonga.

Tonga, I am told, is an island of extremely content Polynesians. They have advanced medical facilities, some industry and a 99% literacy rate. Every Tongan male is guaranteed a plot of land. Most are self sufficient and self sustaining. It is the only South Pacific nation to never be conquered or colonized. It is ruled by a monarchy in which the king must approve every facet of the economy. Let us depart from what I am sure about to using “Tonga” to a more exemplary version. (Since it is a real place, I don’t want to hear from people saying things like, “I have been there, or I know people from there who say they don’t like it.” or what ever.) So our Tongans have existed for thousands of years on this island. They grow enough food to feed themselves. If someone wants to open a new shop in the nation, the King considers the affect on the surround economy.

Let us say that on one particularly small island, there are 25 fishermen. They supply all of the islands fish needs by traditional spearing methods during low tied. The average fisherman works about 30 hours a week which includes cleaning and processing the fish for market sale. The average fishermen spear a max of 10 fish an hour or/ but averages 250 fish a week. This results in a market price for fish of about $.25 a fish. The average fisherman makes about 62.50 a week or 2 bucks an hour. A major source of the fish are Skipjack tuna. It is a highly sought after breed of tuna in the US. The US market gets about $5 a fish. So a commercial fishing company approaches the king and says, “I would like to set up a commercial fishing operation in your kingdom.” The king says that if he allows that it will cause many of his native fishermen to become unemployed. The commercial company rep offers this deal. We will employ any Tongan that looses work to our operation. We will give them twice the average salary of a fisherman. As a matter of fact we will need twice the number of fisherman to work the fleet. With the increased supplies, we will ultimately result in a “per fish” price here in Tonga of $.125. that would be a 50% drop. This all sounding fine and good to the king, he allows it.

Well the first thing that happens is that the traditional fishermen resist. But soon the price of fish drops so low that they are finding themselves working 50 hours a week to get the same wage they had made prior to the commercial company showing up. They soon give up and join the fishing company and enjoy a new level of wealth. As the next couple of years tic by, the" trickle down" effect on the economy from the new wealthier citizens causes a rise on the cost of living. The Tongans that try to remain true to the traditional way and live off the land find it harder and harder to buy things that their farm doesn’t supply. Doctors stop taking 3 chickens and a bushel of corn as payment for an office visit. Meanwhile, the fishermen are being driven to work harder and longer for the same money. They could never quit because their bills are structured in a way that only the high paying commercial job will pay the bills. If they do, the commercial fishing company will just bring in others from other Polynesian surrounding cultures to do the job the Tongans wont do. That is right, they now have "bills". Soon Tongans realize that this "fair and beneficial" agreement is neither.

The kicker of the whole thing is that the CEO of the commercial fishing company can not figure out why everybody has spite towards him. From his point of view he has paved the way for the paying of twice the average wage to the Tongan fishermen and raised their standard of living. On top of that the cost of fish has been cut in half and more Tongan people can afford it more often. Meanwhile, back in the states, all of the unemployed Tuna fishermen that would have been unable to afford $5 a fish prices can now get the Tongan tuna for only $3 a fish. He is wondering why people don’t call him a hero.

The global point here is that two cultures and economies can not mix with positive impact. There are consequences when ethics, living standards, morals, and flat out economics don't mesh.

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