So in an economics class we were talking about arguments for and against free trade and we hit on the topic of the "Infant Industry Argument" which basically is that a government must protect its still underdeveloped industries by discouraging competition by raising tariffs on imports, giving subsidies to these industries, etc... Of course this is done until the industry is capable of competing in the international market. The East Asian Tigers (South Korea, Hong Kong, Taiwan, and Singapore), another topic we hit on, pursued this policy. They promoted land reform, raised tariffs on imports, put heavy spending on education, and were basically an export driven economy. Of course, this policy led to periods of huge economic growth. Yet with this model that has proven to work in these countries, international finance organizations, the IMF and the World Bank, still seem to promote neoliberal policies of low tariffs and regulation, low spending, etc... Why?

I'll give you three guesses and the first two don't count.

I am clearly implying what you are thinking.

Did you discuss labor laws in those countries by any chance?

I really don't know if it is purely intentional though. There could always be the fact that the people only have one frame of mind to work from and so they assume that what they are doing at the moment economicly is obviously the superior policy. I doubt this is the case, but it's nice to give the Big 8 the benefit of the doubt.

I am sure there are better arguments then that Bayes. Practically every country in the third world has lax labor laws yet they have not all experienced economic growth at such a large rate as had the East Asian Tigers.

This post has been edited by The Poster Formerly Known as Y2A: Jun 7 2005, 08:48 PM

On top of that, pre-industrial societies always have lax labor laws.

I don't think it would work on third world states in places such as Africa, because of the lack of an industry there, I mean before the tiger economies even started, there was some sort of industial basis there to build upon, like Korea for instance had been colonised by Japan, and after the Second World War had received reparations from them and aid in order to build up the industry.

An Authoritarian model is needed to ensure the growth and rigid rules in which economic stability can prosper. Also a large ethnic homogenous people is much more likely to advance quickly than one with varying ethnicities, a large part of economic development is social development, which needs to be stable to promote inward investment.

Those nations did have high tariffs, but they also implemented very serious economic reforms in many areas, and underwent huge structural reforms. Raising tariffs are definitely not the way to economic growth as can be seen with many other nations that are still poor. And neither is free trade the only component of economic development. These nations would probably have been better off had they lowered tariffs, since it lowers consumer prices which can lead to higher standards of living. One thing to note is that none of the Asian tigers have as high a standard of living as say the US, which is much more open to trade.

Your conclusions don't make logical sense.

High Tariffs + economic reforms = growth, but because I don't like high tariffs it's only the economic reforms that are responsible.

Whether or not a nation has a high tariff doesn't matter if they don't economically reform either. So saying that nations with tariffs haven't succeeded doesn't mean anything unless they had high tariffs and economic reform like the tigers.

Unless you present an empirical example of a country that had low tariffs and economic reform and did better than the Tigers, why should anything you've said be warranted?

Especially specious is the comparison to the U.S. Practically no country has a standard living as high as the U.S., not even ones that started out on the same playing field. There's no reason to expect recently industrialized countries to have yer reached parity with already industrialized countries, especcially when even already industrialized countries have not yet converged.

Also, if you look at the Solow growth model, the only way for a country to raise standard of living, outside of technological process, is to increase savings, not consumption. Developing countries don't want consumerism. They want savings. Higher savings means higher amounts of physical capital per efficient worker in the long run. The growth rate of capital per efficient worker will eventually reach equilibrium at zero, but while the country adjusts to the new equilibrium a higher saving rate entails physical capital per effective worker will increase at a decreasing rate.

This post has been edited by Cerian: Jun 8 2005, 01:35 AM

impressive. very impressive.

Cerian-



Among the nations that have developed post ww2, only Hong Kong would be one which adopted more open trade policies than the rest. It does have a slightly higher per capita gdp than the other Asian tigers. Trade policies are one part of the picture in economic growth, other government policies in relation to enterprise, labor laws, etc play a very crucial role as well.



Possibly because the US has adopted more growth oriented policies than other industrialized nations, in regards to trade, labor policies, etc.

The primary determinants of growth are depreciation, population growth, technological progress, and capital accumulation through savings, not labor policy.

Labor policy is mainly a factor in medium run equilibrium.

Other issues are only germane as to how they affect capital accumulation, technology, and population. The issues that drive these factors are many, but I would say you can probably make theoretical arguments for both why open trade (encourage foreign investment as a means of fueling capital accumulation) and protectionism (increases amount of money the government can invest in capital accumulation) would lead to long run growth.

As to the U.S., European nations did begin to converge with the U.S. after WW2. In order to do this, they had to maintain higher growth rates than the U.S., and many of them were undoubtably much more protectionist than the U.S., considering you often had socialist governments in power. This would suggest that high rates of growth are not necessarily served one way or another by trade policy. Higher savings in Europe and heavy investment in capital to make up for WW2 probably had much more to do with the move up rather than trade policy.

This post has been edited by Cerian: Jun 8 2005, 04:13 AM

You should know that protectionism is not really a part of socialist dogma or anything, in fact, the "protectionists" tended to be conservatives (real ones, not liberals) Though admittedly it was a border-crossing issue.

True.

Cerian-



Labor policy can have a huge impact on industrialization. At the first stages of development, you will need to have labor intensive manufacturing to start the buildup. An example between the differences in labor policy in China(less restrictive) vs India(which is more restrictive) shows that growth can be slowed down if labor laws become too restrictive.



Protectionism can lead to an often needless investment in many areas when a nation can import from more efficient producers. Ie, the capital isn't being invested as well as it normally could be.



But at current time, they have not caught up to the US, the more "socialist" leaning nations have high levels of unemployment and slow rates of growth.

"But at current time, they have not caught up to the US, the more "socialist" leaning nations have high levels of unemployment and slow rates of growth."

Growth rates no slower than the U.S.'s. Unemployment is not related to growth unless it's a permanent change in the natural rate, and even then it's the change that matters, not the comparative rates.

"Protectionism can lead to an often needless investment in many areas when a nation can import from more efficient producers. Ie, the capital isn't being invested as well as it normally could be. "

So your argument is that protectionism begets investment while free trade begets easier consumption?

We're talking about something that depends on saving here Shankar, not consumption rates. Importing from cheap producers is not the issue, BEING a producer is the issue. Low barriers to foreign trade helps consumption, low barriers to foreign trade help other countries be producers.

Further, government has an interest in developing human capital, private industry does not. They can get their advanced human capital from the first world, they come to third world countries for cheap labor, not for skilled labor. However, improving human capital fuels growth.

"Labor policy can have a huge impact on industrialization. At the first stages of development, you will need to have labor intensive manufacturing to start the buildup. An example between the differences in labor policy in China(less restrictive) vs India(which is more restrictive) shows that growth can be slowed down if labor laws become too restrictive. "

India's growth rate is very close to China's and China has been accused of overreporting it's growth rate, so I don't see hard empirical evidence for this statement. Plus, you can't simply say that it's only labor policy that is the issue.

Cerian-



Both France and Germany have growth rates less than 1.5% compared with around 4% for the US. Other nations in Europe as well have moved ahead with higher rates of growth with loosening of labor and other governmental restrictions.



How much investment would a company make if it had no competitors? And if investments were made, would they be made efficiently or wastefully into areas where a product could be purchased from a better foreign provider? Protectionism can lead to misdirected resources. Take for example the Proton car produced in Malaysia. Instead of allowing cheaper and better foreign imports to come into the country easily, the government and investors are wasting engineering talent, manufacturing labor and capital, etc into a shoddy car.



That wouldn't explain a 4% gap in growth rates. True, there are other issues that can explain much of the gap, but much of China's growth is due to it being a base for low cost manufacturing, infrastructure is one crucial area. But rigid labor laws nationally as well as at the state and local levels deter job creation, such as making it harder to get rid of workers, and imposing stricter guidelines for companies hiring larger numbers of workers. This puts a dent in high growth manufacturing areas.

How, exactly, is a country supposed to grow encouraging low-skilled labor industrialization?

Being a market for the lowest common denominator of work because of comparative 'advantage' doesn't change the fact that your comparative 'advantage' is being a shit hole with poorly trained labor. If all you do is cater to low-skill assembly line work, you're never going to take higher end jobs from the West, just shit jobs.

Let's resurrect this thread!

For once Y2A, I completely agree with you on this issue.

That's for sure.

God damn I've forgotten a lot of econ over the year.

I don't like this arguement at all, the way I look at it, is that these underdeveloped countries should be able to go through periods of shitty labour laws for the maximisation of profit and industrial growth to provide a major boom for the economy and push it forward to 'developed' status. Remember, on the world economic forum these people are not on an even keel when it comes to trade and growth.

I think every country will go through this type of phase if they haven't already before becoming industrialised.



Because it can build on that and invest into other industries and then gradually bring up the standards of labour to adequate levels.

I would like to point out that South Korea, China, Japan, Taiwan and now India all have large scale IT industries, as well as manufacturing and shipbuilding industries to boot.

Those large scale IT industries didn't develop in free, unprotected conditions, Ryan...

I didn't say they did? I'm an advocate for protectionism for underdeveloped countries to develop indigenious industries IF it works. We'll just have to wait and see.

ok then

carry on