Monday, September 08, 2008

Rethinking Protectionism

I commented on this post on a Lib Dem blog a zillion years ago, today I found out it got nominated for an award on LibDem voice. It's managed to stir me into finally writing something.

What is worrying me about this kind of post is that it's a sign of a very simplistic view of international trade being a popular, widely held viewpoint. The Lib Dems obviously aren't alone, most political parties view protectionism as inherently bad and free trade is inherently good. The problem with this viewpoint is that it ignores some of the complications within these arguments.

When people think of protectionism, what comes to mind is "beggar thy neighbour" policies that by their implementaion have seriously disrupted the trade of neighbouring countries. What is not so well reported are the enormous successes that occured as a result of protectionism, Nokia became the globally recognised company today due to serious restrictions on capital market access, Toyota and Honda are the result of policies designed to nurture developing industries and the industrial development of the US owes itself to protectionist policies.

Further to it's development advantages, there is the price stability argument to consider. In the perfect free trade world global food prices would depend on the world supply of food, this would be subject to fluctuations based on supply. Due to the nature of food production, suppliers are likely to be slow to adapt to pricing signals and therfore highly volatile. The result is that many farmers are likely to be unable to sustain their business since they will not be able to plan for the volatile prices.

The point I'd like to make here is not that protectionism is always a good thing, just that it should not be rejected out of hand as a policy idea. My view is that many developing countries could do with more flexibility over the setting of such policies and that occasionally, even in developed countries it is worth the government intervening for purposes of redevelopment and preservation of industry.


Bloggers4Labour said...

Sure, no economic policy should be rejected out of hand, but however successful a few large companies from somewhat closed economies may have turned out to be (by hook or by crook), the real question is: would consumers/citizens have been better off if - rather than promoting "national champions", there had been domestic competition. Toyota and Nokia have made mistakes, and perhaps in 10 years we won't be able to flag them up as benign success stories.

Protectionism puts decision-making in the hands of Governments, or rather, bureaucrats, providing a temptation for corruption and politically-motivated company policies. My observation is that, while this is not intrinsically bad, the kinds of developing countries that do try to protect their industries nowadays are likely to also demonstrate a contempt for political democracy, so the move represents a general squeezing of private economic activity.

Due to the nature of food production, suppliers are likely to be slow to adapt to pricing signals and therefore highly volatile. The result is that many farmers are likely to be unable to sustain their business since they will not be able to plan for the volatile prices.

I'll leave aside the general question of whether farmers should be farming or doing something different, and just mention commodity futures. Clearly it's in farmers' interests to know what to do in future, how much to produce, be able to buy their future raw materials at a price that looks to be reasonable etc., hence the market for farm-produce futures. Farmers, wherever they are in the world, should be able to soften fluctuations this way. Governments cannot make decisions any better: by protecting, they solve the problem by compelling everybody else to suit the farmers. It's like trying to stop an apple falling onto the floor by raising up the level of the house, and the rest of the street.

So, to conclude: while we can't 100% rule out protection, we should be highly suspicious of the motivations behind such moves.

Andreas Paterson said...

Thanks for the contribution B4L, first on the infant industries point much of what I'm writing is inspired by the works of Dr Ha-Joon Chang (Kicking Away the Ladder and Bad Samaritans) he's done some pretty detailed study of the field. His take on the matter is that the pattern is just too common to be ignored. Almost every developed country has used protectionism to aid it's industrial development, I'll see if I can dig out a bit more detail when I have them to hand.

The point he makes is that in order for a company to be able to compete it needs to build up a base of expertise and technology, startup companies in developing countries take time to do this and would likely be driven out of business, or taken over by more advanced foreign competitors. On Toyota and Nokia they may fail in 10 years time, but now they are fully integrated into the world economy I think it's safe to say that both have made valulable contributions and innovations in their field, I'm not sure it's possible to attribute their future failure and their protectionist origins.

On the point on putting decision making in the hands of governments, I personally don't see the problem with this. In the UK we have bureaucrats who set interest rates. I would make the point here that an Ethiopian bureaucrat probably knows more of the state of Ethiopian farming than those at the WTO negotiating table. I think this is probably a pretty fundamental difference here, since I'm a great believer in the idea that governments should take a very active role in the management of the economy.

On corruption, I'm not really sure whether the level of protectionism has much relation. Even a corrupt regime has an interest in development since it's power depends on the well being of it's citizens and corruption is likely to occur regardless of the level of openess of the economy. Further, I'd point out that privatisation deals an example of removing politics from the economy can actually encourage corruption (our governments privatisation of CDC comes to mind).

On futures markets, I worry that these things are designed for speculators to make money rather than acting as a price smoothing mechanism. Recent commodity price speculation being an example.