A guide to the infant industry debate

By Penny Hawthorne | 24 June 2005

The developed economies of today have protected their economies at various times, but that does not account for their development. There are plenty of examples of worse economic performance resulting from protectionism, notably in the interwar years. Many scholars, like Ha Joon Chang, have used the examples of Britain before the 1840s, the US and Germany in the 19th century, and the east Asian Tigers from the 1950s.

British performance was buoyed before the Corn Laws by the integration of the national market and then the Industrial Revolution, both more pronounced in Britain than other countries. Trade liberalisation from the early 1840s, virtually completed by the late 1850s and held right up to 1914, played its part in the competitive transformation of the British economy.

It has long been conventional wisdom that German and American infant industry protection was successful. Douglas Irwin, Professor of Economics at Dartmouth College, contests this in a series of studies on US trade policy in the 19th century. He argues that such protection was inefficient; and that growth resulted more from the integration of internal markets and technological change - a combination of Smithian (economies of scale from a wider market) and Promethian growth.

What about the east Asian Tigers? Protection of infants largely failed in southeast Asia, just as it did in Latin America, Africa and south Asia. The Malaysian car industry is the most egregious recent example. Rather these economies have latched on to fast catch-up growth through manufacturing exports driven by foreign direct investment. This is the path China has taken. Hong Kong and Singapore have grown through free trade, of course. Northeast Asia is more complicated. There are sectoral examples where infant industry protection has probably worked, especially in South Korea. But one can point to lots of other examples in Japan, Taiwan and Korea where it hasn't.

All this reinforces the overwhelming evidence from the postwar period that open economies with more liberal trade policies grow faster and have more success with poverty reduction than closed economies.

Finally, there is the Joan-Robinson argument. Just because developed economies have thrown rocks into their harbours in the past and even today (e.g. the CAP), it doesn't mean developing economies should throw rocks in theirs. Mutual self-harm is no way to develop.

For follow up reading, look at Angus Maddison's The World Economy published by the OECD; FT columnist Martin Wolf's Why Globalization Works; The Political Economy of Poverty, Equity and Growth by Deepak Lal et al; Ian Little's writings, e.g. Collection and Recollections: Economic Papers and Their Provenance; and various World Bank studies on openness and growth.