Government Protection of Industries

The issue of protecting certain industries of a country has long been a topic discussed by economists, political scientists, sociologists, and has also played a central role in the shaping of public opinion and in effect has been used by politicians especially in electoral campaigns in order to attract a certain area of the population.

In such an argument, political economists have pointed out that industries, in order to be continually competitive especially in today’s global economic market, must first be protected by the government if they are entering a market in the global economy where others have already proliferated and gained market base. Government protectionism of such industries have played an important role in the shaping of trade policies and other trading discussions including those of tariffs, subsidies, and the like.

Although the industries which the government protects or subsidizes may range from agriculture to my technology, manufacturing, and industrial markets, the concept is relatively the same — that such industries must be protected by the government in order for there to be improvements by the producers of those industries so that they might could be more economically competitive in the global arena.

However, as the following evidence shows, and as the main point and argument of this paper, governments should not implement policies that seek to create a protectionist atmosphere for local industries — no matter what specific good or service that that industry produces.

The following arguments are those that have been put forward by economists and relevant research and literature who have studied protectionist policies both from a theoretical context and from a historical context and offers such evidence of why government protectionism of local industries that compete in international markets would not be beneficial for the economy in the long run.

The first argument against government protectionism and subsidy of local industries is the economic argument that has been put forward to defeat the claim of other economists that support the infant industry argument and therefore support protecting local manufacturers.

According to this argument, if the government gives subsidy to growing industries that have chosen to interact with the global economic market, then although short-term gains for the specific industries might be large, the long-term effect is that such support the industries by the government would eventually fall short of collapsing on itself because of the lack of innovation and technology that such protected industries create by themselves if they were left in a free market situation.

In such literature, the most popular and the most cited example for the removal of such government subsidies are the studies made on the agricultural basin agricultural export sector of Argentina and Latin American countries (Thies & Porche, 2008). In the 1960s, the infant industry argument put forward by economists stated that in order for an industry to develop on its own without being crushed and overpowered by competition in the local and global arena of economic trade, then government must give subsidies and protect such industries from being overrun by providing price for it, technological incentives, capital funneling, and so forth.

However, a surprise that came about to these economists who supported the infant industry argument in government protectionism is that the specific industries which the government had chosen to subsidize and support were the actual industries that failed in the long run. Relevant literature on the topic shows that one reason for this is that because such industries, because they were protected by the government, did not see the need to innovate and drive capital and profits towards research and development (Fernandes, 2007).

As a result, other industries in other countries, the same kinds of industries as the protected industries but this time not protected by their local governments, faced heavy global competition and therefore had been continuous need to undergo research and development of their products. As a result, those economies that had not been subsidize or supported by the government were the actual economies to have seen long term economic gains. Another argument on why local governments should not implement protectionist policies on specific industries is that such an action would eventually lead to an equal capital distribution and support.

By this, we mean that governments that have chosen a certain industry to protect or to give subsidy eventually also ignores or brings negative welfare or negative results to the competitors of those industries. For example, in many Southeast Asian countries, government subsidy was heavily channeled towards agriculture because, as some of the arguments of the supporters of such policies have indicated, agriculture is the most essential industry to address especially in third world in developing economies because of problems of food security and poverty (Chari & Gupta, 2008).

As a result, again, in the 1970s and 1980s — and even to some policies in the present — government support and subsidies are given to local agricultural manufacturers and farmers. However, as economists researching the topic had pointed out, even though heavy government subsidy and support is given to agriculture, countries still do not seem to escape from the poverty and food security trap which such subsidies and protection should have addressed in the 1st Pl.

The reason, according to these economists and political scientists, is that by channeling support and government funds towards agricultural development, other sectors of an economy which are important in the global economic market such as manufacturing, industry, and the training and education of its population to shift out from agricultural production towards higher income jobs were not given focus.

In fact, some researchers that have explored the topic has even pointed out that such support for agriculture has not only resulted in a loss for government funds by focusing on an industry that only addresses part of the issue, but in fact contributes to the problem because it merely adjusts the poverty line through the population of the country rather than addressing it through the income of its citizens (Bai, Lu, & Tao, 2006).

The third argument that has been put forward — now by sociologists and political scientists — is that Government protectionism of certain industries result not from computing the industry with the largest economic welfare impact but rather that industry with the most powerful collective action and influence on the electoral body which government support this channeled to. The supporting theory for this argument is the median voter theory that claims that individuals within an industry or a market do not have the power to influence the decisions of policymakers and politicians because they are small as compared to the greater population.

However, if enough of these individuals — say producers or powerful elements within an economy and the market — article viewed together, then they could be able to influence political outcomes by rallying popular votes and decisions towards the ruling political party (Rose–Ackerman, 2008). More literature on the subject of the occurrence as median voter series in popular electoral situations in economies all over the world are available and are still being researched by the same political scientists.

One argument that has been put forward by supporters of government protectionism of industries is that it may be able to have significant effects to developing countries which have chosen to compete in an industry — at least from an international perspective — through knowledge spillovers. By this, proprietors of the argument claimed that since other industries have already explored the knowledge required in order to undergo such production process, then respective economies may be able to follow suit by implementing the same technology at lower research cost and to government support, could be beneficial for the local market.

However, one problem with this is that such a theory and proposition fails to recognize that technological improvements are not necessarily only knowledge base but rather require capital intensive channeling (Chari & Gupta, 2008). For example, even though DeBeers in south Africa already has the knowledge and has published the best way in order to mine diamonds, companies could not just suddenly go into the diamond market because first, diamonds occur only in certain locations and second, large amounts of machinery, capital, and human knowledge is required in order to facilitate such economies of scale and improvement.

Therefore, the argument of knowledge spillovers could only be efficient in a market where the only capital required is the knowledge produced by the economic activity — and this is rarely an instance especially in today’s industry and manufacturing driven world. As these research and argument show, government protectionism and subsidy to local industries in order to compete in the global market would, although deliver short run incremental gains for producers, could actually be harmful to the development of the economy and the long-run improvement of national output.

Even today, where many experiments of political intervention to economic actions and market operations have been explored, economists are pointing out that the best and still proven way in order to ensure equilibrium and improvements in all parts of the local and global markets is to leave such markets alone to the invisible hand as economic interaction. References: Bai, C. E. , Lu, J. , & Tao, Z. (2006).

The multitask theory of state enterprise reform: Empirical evidence from China. The American Economic Review, 353–357. Chari, A., & Gupta, N. (2008). Incumbents and protectionism: the political economy of foreign entry liberalization. Journal of Financial Economics, 88(3), 633–656. Fernandes, A. M. (2007). Trade policy, trade volumes and plant-level productivity in Colombian manufacturing industries. Journal of International Economics, 71(1), 52–71. Rose–Ackerman, S. (2008). Corruption and government. International Peacekeeping, 15(3), 328–343. Thies, C. G. , & Porche, S. (2008). The political economy of agricultural protection. The Journal of Politics, 69(01), 116–127.