Open or closed bor­ders, that is the ques­tion We look at the ef­fects of in­dus­try pro­tec­tion on a coun­try’s econ­omy. Is it dam­ag­ing or not? If im­ple­mented cor­rectly, as with the Asian tigers, such poli­cies can be lib­er­at­ing.

Finweek English Edition - - OPINION - Edi­to­rial@fin­ is as­so­ciate pro­fes­sor in Eco­nomics at Stel­len­bosch Univer­sity.

most econ­o­mists would agree that open world trade in­creases eco­nomic growth and raises liv­ing stan­dards. Trade bar­ri­ers re­duce coun­tries’ abil­ity to spe­cialise in goods and ser­vices which they are good at, and force them to pro­duce things they’re not good at.

But econ­o­mists also know that free trade isn’t al­ways good for every­one. Un­com­pet­i­tive in­dus­tries that em­ploy many thou­sands can suf­fer when trade bar­ri­ers pro­tect­ing those in­dus­tries fall.

Many coun­tries pro­tect cer­tain key in­dus­tries, ar­gu­ing that they are in­dus­tries of na­tional se­cu­rity (clas­sic ex­am­ples are mil­i­tary spend­ing or food se­cu­rity). Other in­dus­tries are pro­tected be­cause they’re young and, it is ar­gued, will be­come more ef­fi­cient once they ob­tain cer­tain economies of scale. This is known as in­fant in­dus­try pro­tec­tion. But many in­fants never grow up. SA’s cloth­ing and textile in­dus­try has re­ceived gov­ern­ment sup­port since the 1930s, and we still pay ex­or­bi­tant im­port tar­iffs on clothes.

But some­times it works. As Con­crete Eco­nomics, a new book by Stephen Co­hen and Brad de Long, ex­plains, the US be­came the man­u­fac­tur­ing hub of the late 19th and early 20th cen­turies be­cause it was pro­tect­ing its lo­cal in­dus­tries from cheap British im­ports. Their com­par­a­tive ad­van­tage switched from agri­cul­tural goods to man­u­fac­tur­ing goods, lead­ing to higher pay­ing jobs and more dy­namic tech­no­log­i­cal in­no­va­tion.

The East Asian tigers fol­lowed the same model. By copy­ing the ba­sic and later ad­vanced tech­no­log­i­cal prod­ucts of the West, they built a do­mes­tic in­dus­try be­hind high tar­iffs. Once they’d built up the nec­es­sary tech­no­log­i­cal know-how, they ex­ported their way to pros­per­ity. Now they are at the tech­no­log­i­cal fron­tier de­sign­ing and build­ing new phones (Sam­sung, Korean), com­put­ers (Len­ovo, Chi­nese) and ro­bots (Honda, Sony, Fu­jitsu, Hi­tachi and Toy­ota – all Ja­panese firms).

But it didn’t work ev­ery­where. At­tempts at im­port-sub­sti­tute in­dus­tri­al­is­ing failed to pro­pel Ar­gentina, Brazil and many other smaller South Amer­i­can coun­tries to pros­per­ity in the same way it did East Asian coun­tries. Post­colo­nial Africa only man­aged to im­pose a heavy bur­den on poor con­sumers with­out stim­u­lat­ing any large-scale in­dus­trial ac­tiv­ity. Many African coun­tries re­main in­cred­i­bly pro­tected – just ask any im­porter to Nigeria, for ex­am­ple – con­tribut­ing lit­tle to the rise of African in­dus­try.

So are open bor­ders good or bad? A new pa­per by Pable Fa­jgel­baum and Amit Khan­del­wal gives the stan­dard econ­o­mist re­sponse: it de­pends. Some con­sumers buy more trad­able goods and are there­fore more af­fected by rel­a­tive price changes caused by in­ter­na­tional trade. They find that those con­sumers who gain most are of­ten the poor, who buy more trad­able goods and ser­vices. Open bor­ders, they claim, are a very good thing if you are poor.

So pol­i­cy­mak­ers are stuck be­tween a rock and a hard place: close bor­ders in the hope that some in­dus­tries grow be­yond in­fants, at the cost of cheaper goods and ser­vices for poor peo­ple. Or open the bor­ders and al­low the poor­est ac­cess to cheap goods and ser­vices, know­ing that some un­com­pet­i­tive in­dus­tries will suf­fer.

Take SA’s dis­pute over chicken im­ports. Chicken is the most im­por­tant pro­tein for poor South Africans. By deny­ing them ac­cess to cheap food we hurt them – and their chil­dren’s abil­ity to con­sume nu­tri­tious pro­tein so crit­i­cal for early child­hood devel­op­ment – and per­pet­u­ate the cy­cle of poverty. And by pro­tect­ing chicken im­ports, do we re­ally stim­u­late lo­cal eco­nomic devel­op­ment in dy­namic in­dus­tries with ag­glom­er­a­tion and spill-over ex­ter­nal­i­ties? Prob­a­bly not.

In con­trast, we pro­tect the lo­cal au­to­mo­tive in­dus­try be­cause it cre­ates di­rect jobs and be­cause ve­hi­cles sup­port an en­tire value chain, from raw ma­te­rial to assem­bly. Un­like rear­ing chick­ens, build­ing a car re­quires vast num­bers of en­gi­neers and other skilled ar­ti­sans that may have large (and un­ex­pected and un­planned) spill-overs in re­lated in­dus­tries.

What made Ja­pan, the first Asian tiger, so suc­cess­ful was a ca­pa­ble bu­reau­cratic ad­min­is­tra­tion that could, with lit­tle po­lit­i­cal in­flu­ence, judge which in­dus­tries re­quired sup­port and which didn’t. Some that re­ceived sup­port failed to de­liver, and sup­port was quickly re­moved. To­day we recog­nise the suc­cess­ful ones: Canon, Kawasaki and Pana­sonic.

Wher­ever pro­tec­tion has failed, it is be­cause sup­ported firms gain po­lit­i­cal in­flu­ence to pro­tect their sup­port. Bu­reau­crats are peo­ple too – of­ten poorly paid – and find it dif­fi­cult to chal­lenge en­trenched in­ter­ests of the firms they ini­tially sup­ported. The gov­ern­ment bu­reau­crats that steered Ja­pan’s mir­a­cle were well re­mu­ner­ated (there­fore less cor­rupt­ible) and were top grad­u­ates from Ja­pan’s best uni­ver­si­ties. They had the fore­sight to in­vest in in­dus­tries of the fu­ture.

In gen­eral, then, open bor­ders are likely to be more ben­e­fi­cial than closed ones, es­pe­cially to the poor. But this doesn’t say there is no role for in­dus­trial pol­icy. If po­lit­i­cal in­flu­ence can be thwarted – and that’s a big if, es­pe­cially given re­cent rev­e­la­tions of state cap­ture in SA – sup­port for strate­gic in­dus­tries that have large spill-overs can play an im­por­tant role in build­ing a thriv­ing econ­omy.

The hard ques­tions re­main, though: Who picks the win­ners? And what hap­pens when they fail?

Post­colo­nial Africa only man­aged to im­pose a heavy bur­den on poor con­sumers with­out stim­u­lat­ing any large-scale in­dus­trial ac­tiv­ity.

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