Infant industries and rent-seeking

By Tim Worstall | 28 June 2005

Prominent Indian economist and Nobel Laureate Amartya Sen struck me forcefully with these words:

Reducing corruption in developing countries by opening markets would be reason enough to liberalize, even if no other economic benefits materialized.

As we are all aware, there is a current of thought out there that while we should liberalize our markets to imports from the poor countries, they should not have to do the same for imports from us. The most common formulation of this argument concerns infant industry protection, the idea that in order to grow their own economies the poor nations need to protect themselves from overzealous competition from our more mature industries.

The problem (amongst others) with this idea is that it is based upon, requires, good governance. If industries are to be protected by tariffs or quotas, quite obviously it is going to be the Government that decides upon which and by how much they get protected. Even when such ideas were tried by the relatively uncorrupt Asian economies like Japan the merit of such protection was and is heatedly debated by economists. If such powers to protect favoured industries and companies are being handed out by Governments we already know to be greatly corrupt (who thinks that Zimbabwe handing out import permits would be done in the optimal manner required for the theory to work?) then who can believe that such a system will work?

Those who have worked, as I have, in economies both grossly corrupt and hedge bound with rules about what may be done will know that huge amounts of time and effort are spent in bribing the bureaucracy to get favourable treatment.

As Dr Sen points out, it is far better to liberalize, to remove the restrictions, so as to reduce the ability of the politicians and bureaucrats to go rent seeking.