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Protectionism in developing nations - Reframing the question

by Trond Ove Mon Apr 16th, 2007 at 10:43:26 AM EST

In his article on the 13th Metatone asked whether any large national economy has transitioned into a developed nation status without the use of protectionist measures. The underlying argument is a sound one, although in my view the question should be turned around. In other words: "Can the proponents of market liberalisation point to any advanced industrialised nation that has reached this position through the removal of trade barriers?"

What both questions clearly aim at is to attack the present "consensus" on economic development. But putting the question this way, we are inviting market-liberal ideologues to defend the record of their own ideal, instead of inviting them to attack the definition of "protectionism".

To expand a bit on my question, I will propose the argument that the richest countries in the world at the moment can be divided into three distinct groups: The vast majority population-wise is industrial nations, the strategic resource producers (mainly oil), and finally the financial centres. (Hong Kong, Singapore, Luxembourg, Channel Islands etc.)

All of them have made their position by preferred treatment of local industry and finance. Oil rich nations through nationalisation, cartelisation and cooperation between oil producing nations, the financial centres by their favoured positions within a bigger trade system, and finally the industrialised nations of the world, who have all to a varying degree used protectionistic measures to encourage the growth of domestic industry.

There might very well exist a rationale for opening up trade barriers when the economy is sufficiently advanced that the artificial barriers imposed to encourage industrial growth instead leads to lethargy. For instance if the favoured status of domestic industry leads to underinvestment in certain sectors, and as a result a gradual degradation of international competitiveness follows.

But forcing trade liberalisation on nations not facing issues with maturing industries should be seen for what they are, exploitative policies, locking the target country into a position of economic dependency.

We should be careful about framing the debate on globalisation just around the issue of market liberalisation versus protectionism, however. As even many proponents of market liberalisation are starting to realise, the issue of state power in a developing country is even more important than the level of protectionism.

The reason should be obvious. Without a functioning, efficient state apparatus, using trade barriers to encourage growth in domestic industry will either turn out to be inefficient, as the trade barriers are rendered moot by lax enforcement, or domestic industry is stifled by predatory taxation, bureaucratic overhead or general lawlessness within the country.

Francis Fukuyama, maybe THE leading intellectual behind the push towards a democratic market-liberal world order, is an example of this change of focus. In his book State Building: Governance and World Order in the 21st Century
rightly focuses on how western aid to developing nations have been wasted because of the lack of a professional, strong state apparatus to channel the aid. In some cases the aid has actually been counter-productive, by undermining and replacing the structures and capacity of the domestic administrative apparatus. An example of this has been how western aid agencies has, effectively, "crowded out" state run services like health services by offering superior, alternative channels for these services.

But of course, what Fukuyama proposes as the solution to increasing state capacities fits snugly into the market-liberal mould. First of all, he agrees with the common cry of the West that less government is better government (or at least that it is so for most developing nations).

Accordingly, the government should cut down its responsibilities to core areas of interest, and focus on how to get better in those areas. And the way to increase the strength of these state institutions seems in my reading of Fukuyama to be a rather confused and non-focused mix of business theories and New Public Management approaches. Colour me doubtful...

What we can all agree on, hopefully, is that an efficient, rule-based bureaucracy is vital to the long-term growth of an economy. The size of the public sector does not really matter, as long as it is efficient enough to "compete" with market-driven alternatives.

If we look at only the economy, the main problem with the Soviet system was not the size of the government sector, but the gradual and accelerating decline in state efficiency from the Stalin era and onwards. China is in that regard a counter-example. There rapid economic growth grew rapidly under state control from the early eighties onwards. Only recently has the state started to really reduce the scope of its institutional control, while maintaining, and in many areas expanding the scope and strength of its institutions.

There is little evidence that Fukuyamas insistence on NPM and business strategies for increasing state efficiency in developing nations would actually work. Important factors that are vital to the professionalisation of a bureaucracy is the institutional memories of the institutions, as well as the culture within the state apparatus as well as the expectations and culture of the wider society in which it operates.

What is abundantly clear (at least to me) is that the neo-liberal "growth-formula" of opening up trade barriers AND decreasing the scope of state institutions in target societies can lead to a "double whammy", where both domestic industry and the capacities of the state apparatus are severely weakened. In such circumstances, sustained economic growth is extremely difficult. In fact, many of the targets of such reforms have instead experienced spectacular economic collapses.

East Germany?

Rutherfordian ------------------------------ RDRutherford
by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Mon Apr 16th, 2007 at 08:15:47 PM EST
State institutions didn't decrease in scope when RDA joined RFA. Massive subventions were poured to the East.

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Mon Apr 16th, 2007 at 09:05:53 PM EST
[ Parent ]
I didn't think that state institutions was the question.

But then I guess with the right environment then capital inflows did work in at least this country.

The questions we seemed to be trying to answer are:
1. Name a large economy that made a transition from poor/agricultural to prosperous/industrial without the use of protectionism to first build an industrial base.
From: Ask ET: Protectionism and Fledgling Economies

  1. My posed question from above link:  Name a large economy that made a transition from poor/agricultural to prosperous/industrial without the use of protectionism to first build an industrial base.
  2. And this thread question: Can the proponents of market liberalisation point to any advanced industrialised nation that has reached this position through the removal of trade barriers?

Just like most of economics there is no clear answer to say that opening up a country will always lead to "success". But I brought up East Germany to bring up a country that after at least a certain level of liberalization then economic growth and prosperity grew. Whether it is a causal effect is another question.

So by your statement you seem to provide the concept that poor governance results in poor results and good governance results in good results.

On a side note, I am a strong proponent of Liberal Democracies including the positive effects of growth on freedoms of society.

Lastly I would love to see what others think of transition phase of merging the two economies.

Rutherfordian ------------------------------ RDRutherford

by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Mon Apr 16th, 2007 at 11:36:37 PM EST
[ Parent ]
Anyway, East Germany already had an industrial base before the reunion. It was certainly more developped than southern Italy, for example. (And I'm not sure East Germany is much prosperous now)

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Tue Apr 17th, 2007 at 03:21:21 AM EST
[ Parent ]
East Germany was heavily industrialised, albeit by the time of reunion the industry was quite uncompetitive with the world markets in general. So like you said Linca, it doesnt really qualify as an industrialising country.

Actually, it fits better into another group I pointed to in this diary, a nation whose closed trade systems after successful industrialisation has led to underinvestment.

by Trond Ove on Tue Apr 17th, 2007 at 03:49:10 AM EST
[ Parent ]
Another, more complex point I wanted to make, was how I think some of the problems in the unification process in Germany has been the clash between the distinct cultures that developed in the two countries during the Cold War era.

Especially when we talk about the state apparatus, the two parts of Germany developed in two quite different directions. (The different directions within economic policy are so obvious I am not going to extrapolate on them.)

Those differences in attitudes and preconceptions is probably part of why East German developments in many areas have gone so slow. And one of the reasons why Linkspartei rose from the ashes of the SED to become a genuine leftist power block within the BRD in the last few years.

I might try to flesh out these avenues of thought when I finally get around to writing a diary on my thesis on the reconstruction of Germany after the war.

by Trond Ove on Tue Apr 17th, 2007 at 03:58:35 AM EST
[ Parent ]
Just some general comments for now...
If no one or very few benefit from an industrial base then what good is it? I can understand that during an industrial base buildup that the benefits may not "trickle down" very well but at some time (E. Germany) it is either a success or a failure.

Yes, any two countries that merge will have a lot of frictional aspects. That is what made "Goodbye Lenin" such an interesting story line. And not just culturally, it seems like a lot of movement of peoples also.

Rutherfordian ------------------------------ RDRutherford

by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Tue Apr 17th, 2007 at 01:22:03 PM EST
[ Parent ]
The east german public was benefitting from east german industry. East Germany was the most prosperous Soviet Bloc country.

To imply that job security, an ok living standard and free education and health care is not benefits for the population is a bit of a stretch. DDR was a repressive communist dictatorship, but the East German people were better off (especially materially) than the majority of the people in the world today.

But no matter what one might feel about the specific case of the DDR, it is nevertheless outside of the scope of what I was talking about in my diary. That part of Germany has been industrialised since the Bismarck era.

by Trond Ove on Thu Apr 19th, 2007 at 08:55:26 AM EST
[ Parent ]
I notice now that my "question" is actually much less clear than Metatones. Maybe I should have stuck closer to the original, to make it clear that I am talking about the progression from non-industrial to industrial economies, not quantitative or qualitative differences within these broad groups of economies.

Maybe this would be better:
Name a large economy that made a transition from poor/agricultural to prosperous/industrial through the removal of trade barriers and liberalisation of the economy.

by Trond Ove on Tue Apr 17th, 2007 at 04:03:18 AM EST
[ Parent ]
I think that many economists are looking at these subtlety and thus maybe your question is too restrictive.

Jagdish Bhagwati defines it as "Freer Trade". Thus economist understand the importance of trade for increasing the wealth of nations, but to say all barriers should be removed may not make sense especially in a developing country that has no market control of its own.

It may be hard for me to describe it but he also talks about whether the government and industry is outward directed or whether it is inward directed. Much as many countries have tried Import Substitution with poor results. It is very hard for a government to pick winners and losers.

Jagdish talks about the growth occurring in both India and China after they started policies that were outward directed.

Rutherfordian ------------------------------ RDRutherford

by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Tue Apr 17th, 2007 at 02:06:54 PM EST
[ Parent ]
You might want to subject some of Jagdish's work to a bit of critical reading. He rather purposefully elides the growth data from different periods to buttress his points.
by Metatone (metatone [a|t] gmail (dot) com) on Wed Apr 18th, 2007 at 02:53:31 PM EST
[ Parent ]
Hmm... If Bhagwatis concept of "outward directed" is synonimous with an economy geared towards industrial exports, a la the Asian tigers of today, I can't really see any disagreement with what I am writing. Could you elaborate a bit more on his ideas?
by Trond Ove on Thu Apr 19th, 2007 at 09:02:38 AM EST
[ Parent ]
I typed some quotes of Jagdish at my blog entry: In Defense of Globalization. I hope that helps.

I have not seen the debate between Bhagwati and Joseph Stiglitz, but after reading some of both of them, I really do not see much difference in their opinions.

Rutherfordian ------------------------------ RDRutherford

by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Fri Apr 20th, 2007 at 12:29:50 AM EST
[ Parent ]

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