Protecting infant industries does not work

By Penny Hawthorne | 20 June 2005

In a paper for the Far Eastern Economic Review, Prof. Jagdish Bhagwati discusses the effects of protecting infant industries:

The protection of infant industries against imports much too often tends to be indiscriminate and creates strong incentives for the infant producers to remain inefficient and to continue demanding protection which then becomes politically difficult to remove. The result is that the infant does not learn and grows up wearing protectionist diapers into premature senility.

Besides, the notion that the poor countries need infant-industry protection to industrialize has always been indulged to excess whereas experience shows otherwise. India managed with its own native entrepreneurs to develop industries such as textiles, shipping and steel under British rule, without protection and even despite British hostility. There are other examples of growth without protection, at least of a sustained variety. Fear, not experience, is at the heart of protectionism here.

Moreover, postwar trade analyses show, and what the charities do not understand, is that autarkic trade barriers create a bias against exports. Therefore, even when the rich-country markets are opened further, one's own trade barriers can prevent the penetration of these markets. To use a helpful analogy, even if the rich-country door is opened, the poor-country exporters may find that the poor-country door is closed and they cannot get out to get past the rich-country's open door. Studies of African trade policy by economists such as Alexander Yeats have underlined this important lesson which emerged from in-depth empirical studies of several developing countries' trade policies during the 1960s and '70s.