It’s January, and all the holiday-goers have started to return from their package tours to Thailand: blissful, tanned, and reeking of garlic. Also: loudly advocating the opportunity to get a tailor-made silk suit for the cheapness of chips. And this line:

“It’s cheaper to fly to Bangkok and buy a new wardrobe than it is to shop at Gucci.”

Which is true. And I don’t just mean in the sense that most shops are cheaper than Gucci. Thai clothing is cheap in general – and the question is: why? Because surely, if we’re believers in purchasing power parity*, we should reasonably expect things to cost around the same, with maybe some differences for transport costs**. And everything else should be adjusted for through the exchange rate.

That is: if goods are cheaper in Thailand, people should choose to buy Thai goods and import them rather than source local goods. In order to buy the Thai goods, importers will buy Thai bahts in order to pay their Thai suppliers. This increase in demand for the baht will cause it to strengthen (ie. increase in “price” relative to the home currency of the importer – let’s say that the home currency is US dollars). As that happens, Thai goods become more expensive in US dollar terms – and that should, in theory, continue until the importer’s home country becomes indifferent between local goods and Thai goods.

But that’s not what happens. And the reason for that is quite simple (once it was pointed out to me…***).

And I’m going to quote Mr Chang again:

“Why are there such huge differences between the things that you can buy in different countries with what should be the same sums of money? Such differences exist basically because market exchange rates are largely determined by the supply and demand for internationally traded goods and services (although in the short run currency speculation can influence market exchange rate), while what a sum of money can buy in a particular country is determined by the prices of all goods and services, and not just those that are internationally traded.” 

Which makes a lot of sense, because most things cannot be outsourced or traded. Like the bus drivers. And for the developing countries: labour.

When you think about it, almost everything hinges on the price and supply of labour. Labour markets determine the cost of goods. And in many ways, the cost of labour (the wage rate) is the benchmark against which the price of goods must be set.

And because there are so many Thai that are willing to work for not a lot of wage…

So if you’re worried that you might miss the cheap suit wave in Thailand, worry not. Until the high-labour-cost countries decide to liberalize their immigration policies, we’re likely to be getting our tailor-made suits from Phuket for many Christmases to come.

*All things should end up costing the same, no matter where you are. Imagine the rage if you suddenly find yourself paying double for a Big Mac just because you bought it in Paris.

**Maple Syrup should be cheapest in Canada, where it is made.

***Oh the shame.