2008-11-15

"The case for forward-looking protectionism"

The Financial Times Economists' Forum published this bone-headed article by Ha-Joon Chang, a South Korean now at University of Cambridge, who studied under Robert Rowthorn, "a leading British Marxist economist".

Among other things, Ha-Joon Chang calls for the U.S. both to employ some protectionist policies, as well as to encourage developing countries to make use of them to develop their fledgling industries; as if their own protectionism isn't part and parcel of what's been obstructing progress for developing countries in the first place.

He also makes a pointless appeal to Alexander Hamilton, citing the weighty argument that he appears on the $10 bill (so his policies must have been good).

Here's my response (currently awaiting moderation on FT):
Trade barriers imposed by developing nations necessarily:

(1) Help only those infant industries whose consumers are predominantly local.

(2) Harm those same local consumers by restricting their access to more expensive, lower quality local goods, rather than allowing them access to cheaper and higher quality foreign goods. (If such were not the case, trade barriers would not be necessary.)

The world’s marketplace is global. If developing countries are to have worthwhile industries, those industries will have to compete globally. There is a huge leap from serving a few poor customers held hostage by trade barriers, to competitiveness on the global markets. Companies that need privileged access to their small local market in order to function cannot make that leap. Companies that can make the leap, do not need trade barriers.

I do not see how the developed world will become developed by organically growing competitors to world giants. How are those competitors going to make the leap from providing inferior products and services to an artificially protected local market, to competing effectively worldwide?

How is this going to happen, if the neighbors of such countries, themselves being developing countries, have their own protectionist agendas?

If protectionism doesn’t work for these reasons when employed by a large group of small countries, then at what size country does it begin to work?

Alexander Hamilton was born in Nevis. Some say that the U.S. constitution was drafted requiring presidents to be U.S.-born specifically with the aim of excluding Hamilton.

How much credence does one get from appearing on a dollar bill? Robert Mugabe is also on his country’s currency. Does it add to his economic credibility?

8 comments:

Daniel said...

Moreover it is an empirically proven fact that globalization reduces the potential of conflict between economicaly bonded countries.
Breton Woods resulted in a sustainable period of peace in the Western world since the WW2, hardly seen before.
Remove the incentives for peace(foreign markets) and you might end up on a road to the next war.

History has so far shown us that no war in Europe was fought without economic motives.
Napoleon had the support of the affluent French for France was blocked from European markets by Germans and Austrians.
So did Hitler had the support of German industrialists in invading Poland, as they were imposing high tariffs.

Daniel said...

I hope Obama will take advice from his economists- who are reliable according to Mankiw.

denis bider said...

Except that he seems to have replaced the supposedly great economists in his campaign team with a bunch of lawyer friends:

"... He had many great economists on his campaign—where are they now? ..."

dasblinkenlight said...

I cannot agree more - protectionism leads to prolonged stagnation of product quality.

A good way to see what happens when you over-protect would be to compare So. Korea's car makers to the ex-soviet ones. Both were at the same "insta-junk" level some 20 years ago. However, Korean car manufacturers were competing worldwide, and thus have successfully "graduated" into "the club of major players" on the world level. In contrast, ex-soviets are still making cars from quarter-century ago, while whining about their inability to compete inside Russia and pointing to the "too low" import tax, which currently stands at 48%.

Marko said...

Protectionism worked for South Korea. Read Chang's book "Bad Samaritans" where he demolishes the notion that neoliberal recipes for economic development are valid everywhere and at all times.

"Companies that need privileged access to their small local market in order to function cannot make that leap. Companies that can make the leap, do not need trade barriers."

Very simplistic view. If a company cannot count on privileged access to its local market, it will be erased by foreign competition. But if it is shielded by tariffs and other industrial policy measures, carefully sequenced, then, after some time, it will be able to stand on equal footing with its foreign competitors.

That happened in South Korea, careful sequencing. First trade barriers, then export-led growth. The latter just was not possible without the former and you will find many such examples in the history of capitalism.

How do you think the US build its supremacy in financial services? By letting British banks to freely do business in the newly independent US? Dream on.

denis bider said...

I'm sure you can find cases where wise businessmen used political advantage to get a foothold in the local market and then used that as leverage to enter global markets. But this is not what generally happens, nor is it necessary for a country's businesses to become globally competitive. (Nokia? Ericsson?)

All things considered, I would argue that the negative outcome (Russian automotive industry, suffering local consumers) is more likely than the positive outcome (genuinely successful businesses evolving out of protectionism).

More likely than not, the businesses being protected will seek to perpetuate such protection, at the expense of local people's suffering, rather than seek to become globally competitive, allowing trade barriers to be removed.

Witness U.S. landing rights, monopolized by U.S. airlines since... forever. Improving the lives of passengers, eh? Providing excellent and globally competitive service, eh?

You would impose suffering on people in order to benefit a few people with cozy and protected market niches that they will likely only work to perpetuate.

Marko said...

Sure, you can always find examples where industrial policy has been hijacked by special interests, but that still does not mean that neoliberal recipes are the only valid answer to development challenges.

By kick-starting its development process with policies running contrary to the neoliberal dogma, South Korea demolished neoliberal claims as to the universal validity of their recipes.

The problem with well-meaning libertarians such as yourself is that your theories cannot be applied to the real world, i.e. a system that is shaped by discrepancies in power among various constituencies.

I am sure that you cannot point to a country that conforms to the principles you stand for. That makes it very easy for you to criticize everything, saying "if only they were smart enough to (enter your favourite neoliberal economic policy measure)"

denis bider said...

You use the term 'neoliberal' as if it were a coherent policy and as if I was a representative proponent of such a policy. Neither is the case. Your usage seems similar in accuracy as if I was generalizing by calling you 'communist'.

You assert that examples of liberal ideas working in practice cannot be found. So, say, you're claiming that the growth of Ireland over the past few decades is no evidence in no regard?

And the European Union, the whole principle behind it is to impede protectionism and promote stability, the rule of law, and economic freedom - that, in your opinion, has not been helping the development of the EU's new members in any way?

That's sheer bollocks, and you know it.

Protectionism is wrong in principle, just like murder or lying is wrong in principle. Still, murder or lying can be used to further one's cause, just like protectionism can be used to further one's cause.

That does not mean it should be used as a matter of principle.