Protectionism – good or bad? It depends……

February 3, 2009

     By Duncan Green     

I wrote this for the ‘Development and the Crisis‘ website I plugged recently, but thought I’d recycle it here:

It’s official. Protectionism is the Great Satan. Gordon Brown decries it in Davos; William Easterly crows over what he sees as Dani Rodrik’s conversion to the cause. All countries must eschew protectionism or risk a disastrous return to the trade wars that triggered the Great Depression.

Hang on a minute. For the last decade of highly polarised debates on trade and globalization, many NGOs, along with economists like Ha-Joon Chang (and Rodrik for that matter, but I’ll leave him to respond to Easterly), have argued something entirely different, namely that trade tariffs, and industrial policy in general, have played a vital role in the history of almost every successful economy, but the benefits of state intervention decline as an economy develops.

I summarized the argument in From Poverty to Power. As economies developed and became more complex, and industries achieved international competitiveness, the costs and benefits of state intervention in both agriculture and industry shifted, and governments started to reduce their role and open up the economy. Exactly the same sequence had previously been adopted by rich countries at an earlier stage of development. Deregulation and liberalisation are thus better seen as the outcomes of successful development, rather than as initial conditions.

In other words, it is not double standards, but history that leads to the argument that protectionism makes more sense in developing countries than in rich ones. This was the historical basis for the growing emphasis by developing countries and NGOs like Oxfam on the need to retain ‘policy space’ in trade and investment agreements.

Now that distinction appears to be going out the window. Does the advent of a global economic crisis mean that argument no longer applies? If anything, the reverse. In the early 1990s, when I was doing the research for Silent Revolution, a book on the rise of market economics in Latin America, I was blown away when I read Manufacturing Miracles, by Gary Gereffi and Donald Wyman, a comparison of industrialization and development in Latin America and East Asia.

Among its findings was that Asian Newly Industrialised Countries (NICs) like South Korea and Taiwan were much more astute than the Latin Americans at riding the global economic tides. When the world economy was booming, they went all out for exports; when global markets slowed, they turned inwards in bouts of industrial upgrading that involved state-directed credit and other support, but also involved protecting themselves from imports of the more advanced sectors (iron and steel, chemicals etc) that they were trying to move into. i.e. protectionism.

If you buy that argument, then now is precisely the time when developing countries that were hitherto cashing in on the commodity boom should consider whether they want to diversify and upgrade, and if so, opt for a period of import substitution and hands-on industrial policy.

Perhaps the arguments are complicated by the severity and global nature of the recession, and the fact that more developing countries have become systemically significant, so that if China, for example follows the old path, it would really matter. But that is not the case for most developing countries – they could turn inwards and no-one would really notice. And anyway, if you believe the anti-China lobby, they’ve never been anything other than protectionist even in the boom!

Don’t get me wrong, I still think protectionism is a lousy idea for the North, but we need to be more nuanced when it comes to development. Good thing or bad thing? Answer – sorry – it depends on who you are (and how you do it).