pondelok, apríla 02, 2007

Trade Protectionism = Racial Discrimination


Swedish economist and the recipient of the Nobel prize in 1973, Gunnar Myrdal once wrote that from all experiments, central planning is the best approach to be applied in developing countries on their path towards prosperity. The so called central planning approach included a tight policy of protectionism in all fields including high tariffs and import quotas. As today’s trade protectionism is deeply entailed in the African and mostly totalitarian countries, their achievement in past decades has been miserable, facing a low level of GDP, the lack of institutional stability and a very weak structural performance in an international perspective. Ad hoc critics of the free-market economics and economics in general have blamed “unrestricted entrepreneurial capitalism” to be the main reason why third-world countries are still waving in the spiral of economic deadline. However, a serious and thorough economic analysis of the situation shows quite the opposite results.

First, there is a question of institutional performance and stability. Recently, International Private Property Index has shown that the measured protection of private property rights is the weakest in predominantly totalitarian third-world countries such as Ethiopia and Bangladesh. The weakness of the institutions is the first step on the way to miserable economic performance. The institutional protection of private property rights pertains the issues such as the protection of intellectual property, trademark protection, patent strength, copyright piracy, registering property, access to loans, corruption level, judicial independence and political stability. The performance of the third-world countries is very weak in this respect as international studies and research observations have shown. It takes years to register a property and start to run a business. In Haiti, for example, it lasts 683 days before your property is sufficiently registered. As the institutional efficiency is low, the underground economy is widespread and so is the economic performance harshly undermined.

The central-planning approach further focused on trade protection of the economies in the early transitional passage. It was said that the best way for those countries to achieve high level of GDP is to “repeat the development path exercised by Western countries.” High level of trade protectionism is among the foremost reasons for a very low level of GDP as the entrepreneurs in those economies have been deprived from gaining access to international product and financial markets.

Assume there’s an economy. Probably the most common goal of the economic policymakers is to let the economy grow and thus to ensure the conditions needed for productive behavior to flourish. In every economy, dynamic entrepreneurial sector is the basis for high growth and reducing unemployment. Enterprises cannot compete internationally if the system of tariffs and quotas does not allow them to buy very much needed capital equipment and technology to run a business and trigger the productivity level. As the import of business tools become steeply difficult, the probability of buying the wanted technology and other means of production legally comes to the minimum. Consequently, if the entrepreneurial sector is destined to search the domestic market to buy the wanted, then it can hardly find the right information about more productive technology offered in the international markets. As oppressively developed countries are mostly factor-driven economies, the products and business services are almost non-existent or large monopoly structures dominate the domestic market. Extracting from the fact that high import quotas indirectly raise the price of foreign products, the innovative capacity can hardly find its place. The consequence of such policy chains several reactions: (1) the outburst of the informal sector and (2) the lack of entrepreneurial dynamism as enterprises in certain country cannot spillover competitive advantages and buy the products needed to operate to increase the productivity and the quality of products offered in the market. if there is any successful enterprise, the system of high import quotas negatively affects the competitive pricing and consumer prices. Protectionist trade policy doesn’t affect the number of jobs but the fields in which individuals may work. If protectionist policy practice increases the number ob jobs in the import sector, it decreases the number of vacant jobs in the export sector, i.e. in the sector which produces exchangeable goods but they cannot be exchanged because they are more expensive because of the system of high tariffs and quotas. At last, the export is the price the countries pay to import goods from abroad. If trade barriers decrease the price of imported goods, then those barriers also lower the value of exported goods. As the products thus become uncompetitive in the international markets, the long-run effect is higher unemployment as the export sector is unable to cover-up the losses and this inevitably leads to fewer jobs.

As the economies in the third world countries have insufficient capital equipment and technology, the entrepreneurial sector cannot absorb the advantages and gains from the international trade. Coupled with explosive government intervention, a weak rule of law and miserable education conditions, the effect of abovementioned trade policy increases the convergence gap as well as it denies consumers a market product choice.

The critics of the liberalization in the third-world countries are focused on the repetition of thoughts that foreign direct investment is a bad option for the nations in transit. The net effect of foreign direct investment is clearly visible. New investors bring new capital, technology and equipment in a country and they need a labor force to run the production. As a matter of fact, laborers in that precise country gain as they get a job. Their standard of living would be much lower if the investment flows were heavily restricted. In fact, there’s a question disliked by many; what do you consider better? An employed person in the factory, receiving a payment for taking part in the production process or a person seeking a better way of living in the street through criminal while being unemployed?

In the end, the implications of protectionism are unimaginable. The denial of access to international market results in the demolition of entrepreneurial sector which cannot sustain its competitive advantages and is thus forced to walk on water with seeking supply-chains on domestic markets only. Financial protectionism is equally painful. In the age of globalization, the market business is becoming more integrated and companies from all over the world are in the need of funding in order to support the growth agenda. Chicago economist, Gary Becker once brilliantly captured the essence when he told the real meaning of protectionism: trade protectionism is equal to racial discrimination.

Staunch trade protectionist policy is definitely one of the reasons why third-world countries haven’t achieved very much progress in the previous periods. Hence, the establishment of high quotas and tariffs raised the price of the most demanded goods in the market. The course of protectionism negatively affected the efficiency and openness of capital markets. Discretionary right to setup such system resulted in a prolonged period of economic contractions and spinning crisis. In such an environment, education enrollment and the investment barriers resulted in a low-paced growth and structural crisis in which the free exchange mechanism is unreasonably blamed for.

Rok SPRUK is a supply-side economist and a classical liberal. He lives in Slovenia where he studies economics and business. His fields of professional interest and research are economic growth, international economics, macroeconomics, tax reform, international competitiveness, free trade and globalization. In the field of business he is focused on strategic management, financial markets, business models, marketing and innovation. Rok works for economic freedom, individual liberty, free enterprise and a free society. His ideas, writings and observations are posted on his blog Capitalism & Freedom. You can contact Rok by sending an email to rok.spruk@gmail.com