Comparative advantage – why other countries are not “stealing your lunch”

By Gordon Lee
In September last year, Prime Minister Lee Hsien Loong said, “If you look at other countries: Vietnam, China, even in India, they’re not talking about work-life balance; they are hungry, anxious, about to steal your lunch. So I think I’d better guard my lunch.”
It seems so intuitive that economies compete against each other – so intuitive, yet wrong.
You hardly get economists, whose job it is to understand these issues, up in arms about “cheap imports”, or “economic competition”, or any other similar terms propagated in the media by businesses and politicians. It’s a dog-eat-dog world in politics and in business. One party benefits at another’s expense. It is no wonder then that it is politicians and businesses that are most vocal about Singapore’s need to “compete” against the rest of the world. To them, international trade is a zero sum game: if one country benefits, another has to lose.
The study of economics, however, presents quite a different situation. The economic concept that runs contrary to this mistaken idea of a zero sum game is called “the law of comparative advantage” – which is also taught at the GCE “A”-level standard. In a nutshell, by specialising in producing goods and services that they are best at and trading to obtain other goods and services, countries are able to maximise their own consumption.
What determines the level of consumption in a country has nothing to do with how efficiently their trading partners are able to produce goods and services. What determines a country’s level of consumption is its own ability to produce goods and services efficiently.
This means that a country can decide by itself the level of work (production and material consumption) and leisure (non-material consumption) that is appropriate for it, without the need to care or bother about whether the workers in other countries are slogging for 24 hours a day or 2 hours a day.
A simple way to illustrate comparative advantage is to take two countries, A and B, and assume that there are only two goods they can produce, food and clothes. Both countries have 120 units of resources each.

Country A can produce 1 unit of food for 5 unit of resources, and 1 unit of clothes for 2 unit of resources. Even though Country B can produce both products more cheaply, there is still a role for both countries to specialise, produce and trade.
Assume that without trade, both countries spend 3/4 of their resources (90 units) to produce food, and 1/4 (30 units) to produce clothes.

With trade, countries can specialise. Since Country B can produce food 5 times more efficiently than Country A, but clothes only twice as efficiently, it specialises in producing food and Country A specialises in producing clothes. The global production is now higher, and after trading at the price of 2 food = 3.5 clothes, both countries now have more than they would have not specialising and trading. Trade is a win-win; otherwise, why would countries trade?

The above example is, if course, highly simplified. But what can we learn from it?

1. What a country consumes is determined by its own productive efficiency – and that is why both with and without trade, Country B above consumes more. This also means that “cheap imports” do not undermine a country’s welfare.
2. Even if a country produces everything more expensively than its trading partners, there is still a role for it to specialise, produce and benefit from trade. Countries do not “go out of business”.
3. Therefore, a country can decide on its own the best work-life balance – without needing to look at what other countries are doing.

What does this mean for Singapore? Singapore has often been portrayed as a highly competitive society, or at least a society that is in need of high competition – terms like “spurs in our hides” and “cheaper, better, faster” must be all too familiar to Singaporeans by now. But there is no such competition and dwelling on it causes a poor work-like balance, undue stress and social unhappiness.
The law of comparative advantage teaches that it is possible to increase economic welfare without working more and with the same limited set of resources. The Government needs to abandon their mistaken policy of trying to engineer an economy that does everything (the so-called “hub of hubs”) to the social and economic detriment of the country. Instead, Singapore’s areas of comparative advantage should be identified, supported and exploited.