What is Actually Being Optimized in Developing Markets?

I’ve been back from Greenland for a bit and am putting my thoughts and notes in order.

I’m going to lay out parts of what I’m thinking here just to get it out of my head. The biggest thing that struck me is the way that chasing optimal market logic leads to local inefficiency. We see this in a lot of places but Greenland has some beautiful examples of what we might call penny-wise pound-foolish behavior driven by the logic of global markets.

In the southern part of Greenland, sheep farming is viable, though it requires winter fodder. This can be grown locally, but while the soil is nutrient rich, it lacks carbon. Carbon can be added through the use of fertilizers, particularly sheep wool pellets. Of course, there’s sheep wool in Greenland, but it isn’t cost effective to collect and process it, which, in some cases would require shipping it to Europe. Instead it is simply burned. Without investment in facilities that exceeds the resources of any given farmer and without a drop in transportation costs in Greenland, they’re stuck importing sheep wool pellets.

As an extra wrinkle, the small market means that demand can be erratic, making investment in specialized equipment and retention of skilled labor difficult. Use of currency is optimized, but use of local resources is entirely suboptimal. While the government monopoly on shipping exacerbates this problem, margins on sheep farming are low globally and sheep wool is underutilized even in environments where transportation is much easier, such as the British Isles.

I think part of the issue here is that there’s a misalignment of optimization criteria and production, as well as a systemic devaluation of small-scale/local production. And this sort of issue is hardly limited to Greenland. One thing that we saw in the wake of structural adjustment policies in the Carribean intended to make their markets “more competitive” was that due to the increased ease of importing food, local farms collapsed.

There’s an entire set of issues related to this- imported food tends to be less fresh and more heavily packaged, making it less nutritious, for comparison, see the obesity issues in the Pacific, and in parallel food deserts in the US, but let’s think about markets for the moment.

Once integrated into the global market, one's local industries now must compete with the lowest prices in the world. This is just basic economics and the fact that the optimal strategy for lowering prices is to pay workers less in a race to the bottom is also well known. What is important here is that a developing market is at a systemic disadvantage.  Particularly when the alternative proposed is extractive industries, there is no incentive to develop local industries.

(There’s actually a really interesting conversation to be had about ways that extractive industries such as mining can, and in some cases, are doing better, but that’s for later.) The issue is that the local production has to beat the economy of scale of established operations.

This is compounded by the fact that it's hard to put a dollar value on local production, particularly when it uses non-market structures like community gardens- in the case of farming in Greenland or the Pacific, we’d have to look at it in terms of emissions and health care money saved. Obviously community gardens have very real impacts in their communities, but it is overall social good rather than easily controlled revenue streams.

I think creating structures that diversify interests should go a long way in remedying this (for example, corporations owned in trust by non-profits that integrate community and worker interests), but a focus on the movement of things through the network or on production-in-network may be more useful than a focus on narrowly defined value. I’ll come back to this in the future, but for now, I think the inefficiencies in development suggest serious issues in the standard economic paradigm.