Transcript Industrialization and industrial policy

3a. Industrialization and
industrial policy
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Overview
 Rationales for industrialization
 SEA industrialization patterns
 Industrial promotion policies, esp. tariffs
 Effects of a tariff on industry growth, welfare and
distribution
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Motives for industrialization
 Modernization, technology transfer
 Diversification
 Less reliance on season/climate
 Less price risk – manufacturing prices are stable
 Less dependence on foreign sources
 (Belief in) increasing returns in some industries - lower
unit costs permit more output using same resources.
 Marshallian interfirm/interindustry externalities (shared
infrastructure, agglomeration externalities)
 Overall aim: capture 'long-run comparative advantage' as
an industrial economy.
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Growth rates of GDP and mfg value added
(av. annual %)
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Employment in industry (% total labor force)
Why so much variation in industriztn and employment
rates and patterns among apparently similar economies?
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Labor productivity: sectoral differences
GDP Share 1990
Country
Output p er worker 1990
Agric
Ind.
Serv.
Agric
Ind.
Serv.
Indones ia
22
40
38
0.4
2.9
1.2
Philippines
22
35
43
0.5
2.3
1.1
Tha iland
12
39
48
0.2
2.8
2.2
Source: World Development Report, various years. Y/L in $Х000
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Industrial promotion strategies
 Why? Promote industrial growth, get growth dividend
 How? Mainly, but not exclusively, trade policies
 Economics of protectionism
 Tariffs are most popular, if not best, way to protect favored
industries.
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Easier to monitor trade flows at the port
Raise revenue for G.
Easy to levy (many losers, but per capita losses are small)
Some of the biggest losers may be foreigners anyway.
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Outcomes of protection: one sector
S
p*(1+t)
a
p*
b
c
d
D
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Q1
Q2
Q3
Q4
A tariff boosts production by raising domestic price from p* to p*(1+t)
-- Diverts demand from imports to domestic products (a)
-- Reduces total demand (consumers must pay more)
-- Raises gov’t revenue (c)
-- Causes deadweight losses through misallocation (b + d)
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Intersectoral effects of protection
Exch. rate
(Rp/$)
S = export earnings
E0
E1
D = import bill
D'
F1
F0
For. exchange
• Supply of forex comes from exports; demand is to cover imports
• Tariff on imports reduces the demand for forex
-- Floating exchange rate: tariff causes ER appreciation
• Lerner symmetry: a tariff discourages both imports and exports
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Philippine protectionism and development
 In SE Asia, the Philippines had highest and most persistent tariffs
 High rates of nominal protection on imports produced negative
effective protection for traditional exports (agriculture)
 Effective protective rates by import category:
Import category
1960
1970
Nonessential
349
354
Semiessential
149
57
Essential
-15
5
Nonessential
173
203
Semiessential
52
14
Essential
50
19
-27
-33
Consumer items
Producer items
Trad’l exports
• What effect would these have had on incentives to produce and invest?
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Static gains and losses from protection
 Protected industries grow, at expense of foreigners,
consumers and other industries
 Gov’t revenue will probably be higher due to tariffs
 Inward orientation: domestic markets for all goods become
relatively important
 Industry structure: protection tends to create monopolies
 “rent-seeking society”
• Distortions to investment and FDI incentives
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Dynamics: growth implications of protection
Does inward orientation have long-run effects on growth?
 Answer depends on how protection is used
 Do infant industries really do grow up?
 Do the costs of protection inhibit/enhance growth in other
sectors?
 Protection and growth in the long run
 Incentives & opportunities for rent-seeking (infant industries
fail to grow)
 Investment follows rents rather than seeking efficient
opportunities …
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The Bhagwati effect in Thailand
 Bhagwati hypothesis: rent-seeking FDI creates fewer
productivity gains than efficiency-seeking FDI
 High tariffs and monopoly power attract rent-seeking FDI
 Protected industries are more capital-intensive than average,
so there’s a ‘technology gap’ as well
 Growth dividends from this FDI are small – or even negative
 Kohpaiboon (World Dev 2006) finds this for Thailand:
 At the mean rate of industry protection, labor productivity is
lower by 0.15% for every 1% higher foreign ownership share
 Implication: protection “damages” the growth effect of FDI
 Any comparisons with Vietnam?
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Protection and income distribution (1)
Supply side (factor markets)
 What are the characteristics of industries most likely to be
awarded protection?
 Which industries display least comp. adv?
 What are the likely factor market effects of expansion in
these industries (& contraction/slower growth in others)?
 Factors used intensively in expanding industries enjoy price
rises (demand for their services has risen)
 Factors used intensively in contracting sectors lose
 In SE Asia, which factors are likely to gain most from
industry promotion? Lose most?
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Protection and income distribution (2)
Demand side (product markets)
 Consumers of goods produced in protected industries lose thru
higher prices.
 Industries using inputs produced by protected sectors lose.
 Consumers of goods whose prices are indirectly affected (N
goods) lose.
 Protection and non-traded goods: if T and N goods are substitutes,
raising some T prices will increase N demand and price
Combined distributional outcomes
 Losers from protection are owners of factors not intensively used
in protected industries, and/or consumers of protected goods
and/or non-traded goods.
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Winners and losers from protection
 Given the chance, which groups would vote for industry
protection, and which against? Why? (at least 3
reasons…individual interest and national interest)
 Manufacturing sector capitalists
 Farmers in export crop sectors (coffee, coconut, tropical fruit)
 Skilled workers/middle class
 Unskilled workers
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Industrialization and protection: summary
 Development benefits of industry growth are clear
 But ISI in SE Asia was not the most efficient path to
industrialization
 Uncompetitive industries rely on (small) domestic market
 Protected industries are capital-intensive, their growth does
not generate many jobs
 Spillover costs to other industries, including exporters
 Protected industries attract ‘bad’ (rent-seeking) investment
 Protection favors owners of capital against owners of labor
 Any alternatives? Under what conditions might industry
grow successfully without protection?
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