When traveling overseas, I’m always amazed at just how much cheaper certain goods and services are compared to the States. In Jordan, I can get a taxi ride into town for a dinar and a half (approximately two American dollars), a haircut for two or three dinar (about three to four dollars), and a whole roast chicken, with a side of fries, pickles, garlic sauce, and a drink, delivered to my doorstep for only five dinar (around seven dollars). At my local barbershop, a plain haircut will set me back thirty dollars. I’ve tried cheaper barbers nearby, but have always been disappointed with the results. But at a measly two dinar, my barber in Jordan will not just cut my hair, but also give me a shave, a massage, style my hair, and offer a complimentary wax of the nose and forehead, which I always tend to turn down. The massive difference in price in no way can be explained by a difference in quality, as, especially in regards to food, the quality of service provided overseas is often better than in the States.
So then what causes this massive divergence in pricing? Well, it’s important to note that not all goods are cheaper in Jordan. In fact, many goods are far more expensive, specifically brand name clothes, cars, and electronics, such as new computers or video game consoles. These goods are imported, and thus are subject to customs taxes, which are particularly burdensome in Jordan. When imported into Jordan, between import fees, customs taxes, and sales tax, one can expect to pay an effective tax of around 100% on the purchase of a new car. Even without the burden of taxes, these sorts of goods are still particularly expensive, especially when considering that the average income in Jordan is about 600 dinar a month, which is roughly 800 USD a month.
One could then argue, somewhat flimsily, that certain goods are cheaper because consumer incomes are lower in Jordan, but then the question is begged, why are incomes lower in Jordan? An average barber in Jordan may make about 500 or so dinar a month, while a barber in the United States will likely make around 40 or 50 thousand a year. The American barber will make nearly ten times as much as the Jordanian barber, which is especially striking as it’s practically impossible to argue that the American barber is ten times as effective as his Jordanian counterpart. It becomes apparent that the two questions, why are certain goods cheaper and why are incomes lower, are fundamentally the same question, as the salary of the barber is intrinsically tied to the cost he can charge for a haircut.
To understand why certain goods are cheaper and why wages are lower in economically developing nations, such as Jordan, it’s important to understand what differentiates a developed from a developing nation. Developed nations, such as the United States, tend to have a more highly educated populace, as well as greater capital deepening developed through intensive capital investment. Meaning that there are more companies with large production structures which require highly skilled labor, such as engineers, researchers, and managers, and that there are more people who are educated enough to work in those jobs. Major corporations such as these take large amounts of capital resources and infrastructure and a good deal of market openness to develop, and for there to be enough skilled labor to operate at a large scale requires a developed education system, not just to a high school level but beyond that into the collegiate level. The United States, along with Europe and the Far East, possess some of the best educational systems and universities in the world, along with highly developed commercial infrastructure built over decades of intensive capital investment.
These highly skilled jobs are also highly paid. An engineer or researcher at a major corporation can likely expect their salaries to start in the 70 or 80 thousand range and go into the six figures after only a few years on the job. This is because these jobs are highly economically productive. It’s basic marginal productivity theory of wages, in a competitive market wages approach the marginal revenue product of labor. In the United States, according to the Bureau of Labor Statistics, just under half of all Americans were employed in managerial or professional occupations as of 2023. Excluding managerial roles, more than 40 million Americans were employed as professionals, a number several times larger than the entire population of Jordan.
These highly skilled workers drive up the cost of goods and services in their area. This is primarily through two factors. First, when skilled labor consists of such a large portion of the workforce, the proportion of unskilled labor must be smaller. Naturally, the proportion of the population that are barbers, taxi drivers, construction workers, and janitors are far less in developed nations than developing nations, simply due to the fact that the proportion that are skilled workers is far higher. Simply speaking, the supply of workers for these roles is far smaller, leading to higher wages, which is then passed on in higher costs of services. Secondly, these highly skilled workers themselves demand goods and services. Due to the income effect, they use their large salaries to bid up the costs of goods and services, an effect which compounds the greater the proportion in which they exist in a community. Their dollars must necessarily compete with the dollars of other skilled laborers for the services provided by local barbers, taxi drivers, and handymen. These factors not only bid up the costs of services, but also the wages of those who provide those services, explaining not only the cost discrepancy but also the wage discrepancy. While the first factor tightens supply, the second increases demand, leading to a compounding effect on prices and wages.
One final question is that why are only certain goods cheaper in developing countries? Why are services, such as hiring a taxi driver or hiring a handyman, so much cheaper in Jordan, but certain goods, such as imported electronics, far more expensive? The answer clearly lies in the divergence in labor costs. When looking in the grocery store in Jordan and comparing the products on display, the difference becomes clear. Imported products are produced with the labor of the country they are imported from, when you buy an American or European product, you are paying the wages of the American or European worker who had a hand producing that product. The cheapest goods in the grocery store are those produced locally, in Jordan, with Jordanian labor, or imported from another developing nation with low wages. A bag of chips from a Jordanian brand will run you a pittance, 15 grush, or around 20 cents (One of our favorite brands between me and my cousins is a local brand ironically called Millionair, with that spelling). It then becomes apparent that the difference in the prices of goods between these nations is tied to the difference in wages paid for the labor which is used to produce these goods.
Simply put, an explanation as to why certain goods and services are cheaper in developing nations is that the wages paid for the labor used to produce those goods and provide those services are drastically lower, and the reason as to why wages are lower in developing nations is that a lower proportion of the population is employed in skilled, professional labor, leading to a relative overabundance of unskilled labor as well as decreased demand for the services provided by said unskilled laborers.
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