Nineteenth-century Britain upset many countries, in particular Germany and the USA, which regarded Britain’s preaching of virtues of free trade as hypocrisy, given that during the eighteenth century Britain used infant industry protection measures more strongly than any other country. The same sentiment might be expressed today, when American trade negotiators preach the virtues of free trade to the developing countries, or when Swiss pharmaceutical firms argue for strong protection of intellectual property rights.
2.4.2. ‘Not by tariff alone’: diverse models of infant industry promotion
As has been shown above, virtually all successful NDCs used infant industry protection during their catching-up periods. Of course, this does not allow us to conclude that such policies therefore automatically guarantee economic success. We know of too many examples from history and contemporary experience that contradict such a naive proposition. However, there is a remarkably persistent historical pattern, stretching from eighteenth-century Britain to late twentieth-century Korea, in which successful economic development was achieved through infant industry protection measures. This pattern is simply too strong to be dismissed as a fluke. Therefore, those who believe in the virtues of free trade and laissez-faire ITT policies for currently developing countries need to explain why they believe this historical pattern is no longer relevant (more on this in chapter 4).
Important as tariff protection may have been in the development of most NDCs, it was – I repeat – by no means the only, nor even necessarily the most important, policy tool used by these countries in promoting infant industries. There were many other tools, such as export subsidies, tariff rebates on inputs used for exports, conferring of monopoly rights, cartel arrangements, directed credits, investment planning, manpower planning, R&D supports and the promotion of institutions that allow public-private cooperation. Tariffs were not, and are not, the only policy tool available to a state intent on developing new industries or upgrading old ones. In some countries, such as Germany up to the late nineteenth century or Japan before the restoration of its tariff autonomy in 1911, tariff protection was not even the most important tool for infant industry promotion.
Indeed, there was a considerable degree of diversity among the NDCs in terms of their policy mix, depending on their objectives and the conditions they faced. For example, the USA used tariff protection more actively than Germany, but the German state played a much more extensive and direct role in infant industry promotion than its US counterpart. As another example, Sweden relied upon public-private joint activity schemes far more than, say, Britain did.
Thus, despite some remarkably strong historical patterns, there is also considerable diversity in the exact mix of policy tools used for industrial promotion across countries. This, in turn, implies that there is no ‘one-size-fits-all’ model for industrial development – only broad guiding principles and various examples from which to learn.
2.4.3. Comparison with today’s developing countries
Discussions of trade policy by those who are sceptical of activist ITT policies rarely acknowledge the importance of tariff protection in the economic development of the NDCs.[241] Even those few which do so dismiss the relevance of that historical evidence by pointing out that the levels of protection found in the NDCs in earlier times are substantially lower than those that have prevailed in today’s developing countries.
Little et al. argue that ‘[a]part from Russia, the United States, Spain, and Portugal, it does not appear that tariff levels in the first quarter of the twentieth century, when they were certainly higher for most countries than in the nineteenth century, usually afforded degrees of protection that were much higher than the sort of degrees of promotion for industry which we have seen, in the previous chapter, to be possibly justifiable for developing countries today [which they argue to be at most 20 per cent even for the poorest countries and virtually zero for the more advanced developing countries],.[242] Similarly, the World Bank argues that ‘[a]lthough industrial countries did benefit from higher natural protection before transport costs declined, the average tariff for twelve industrial countries ranged from 11 to 32 per cent from 1820 to 1980 … In contrast, the average tariff on manufactures in developing countries is 34 per cent’.[243]
This argument sounds reasonable enough, especially when we consider the fact that tariff figures are likely to underestimate the degree of infant industry promotion in today’s developing countries when compared to those for the NDCs in earlier times. As I pointed out at the beginning of the chapter (section 2.1), limited fiscal capabilities and lack of regulatory power of the state seriously limited the scope for ITT policies other than tariff policy in the NDCs in earlier times. Governments in today’s developing countries tend to use a wider range of policy tools for infant industry promotion, although some of these tools (e.g., export subsidies except for the poorest countries) have been ‘outlawed’ by the WTO.[244]
However, this argument is highly misleading in one important sense. The problem is that the productivity gap between today’s developed countries and developing countries is much greater than that which used to exist between the more developed and less developed NDCs in earlier times. This means that today’s developing countries need to impose much higher rates of tariff than those used by the NDCs in the past, if they are to provide the same degree of actual protection to their industries as that once accorded to the NDC industries.[245] In other words, given the greater productivity gap they face, today’s developing countries need to use much higher tariffs compared to the NDCs in earlier times, just to get the same protective effects.
Before we show this, we must admit that it is not simple to measure international productivity gaps. Per capita income figures are obvious, although rough, proxies, but it is worth debating whether to use incomes measured in current dollars or in purchasing power parity (PPP) terms. Incomes measured in current dollars are arguably better reflections of the productivity gap in the tradeable sector, which is more relevant in determining tariff levels. However, they are subject to the vagaries of exchange-rate fluctuations that may have nothing to do with productivity differentials. PPP income figures are better reflections of a country’s overall productivity, but they tend to underestimate, often greatly, the productivity differentials in the tradeable sector: In what follows, I have used PPP income figures, partly because they provide a better measure of an economy’s overall productivity and partly because the best available historical estimate of NDC incomes by Maddison uses them.[246]
According to Maddison’s estimate, throughout the nineteenth century the ratio of per capita income in PPP terms between the poorest NDCs (say, Japan and Finland) and the richest NDCs (say, the Netherlands and the UK) was about 2 or 4 to 1.[247] Nowhere is this as big as the gap between today’s developing and developed countries. Recent data from the World Bank website show that in 1999 the difference in per capita income in PPP terms between the most developed countries (e.g., Switzerland, Japan, the USA) and the least developed ones (e.g., Ethiopia, Malawi, Tanzania) is in the region of 50 or 60 to 1.[248] Middle-level developing countries like Nicaragua ($2,060), India ($2,230) and Zimbabwe ($2,690) have to contend with productivity gaps in the region of 10 or 15 to 1. Even for quite advanced developing countries like Brazil ($6,840) or Columbia ($5,580), the productivity gap with the top industrial countries is about 5 to 1.
241
Little et al. 1970, pp. 162-9 and World Bank 1991, pp. 97-8, are the two notable exceptions.
243
World Bank 1991, p. 97, box 5.2. The twelve countries in question are Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, the UK and the USA.
244
For an assessment of the additional constraints imposed by the WTO agreement on policy choice by developing country governments, see Akyuz et al. 1998; Amsden 2000; Chang and Cheema 2002.
245
Note that up to Second World War, virtually none of today’s developing countries had trade policy autonomy due to their colonial status or unequal treaties. So it is meaningless to discuss them at the same level as today’s developing countries. See section 2.3.2 for further details.
247
For example, per capita incomes measured in 1990 dollars in Japan and Finland in 1820 were $704 and $759 respectively, while those in the UK and the Netherlands were $1,756 and $1,561 – a ratio of less than 2.5 to 1. By 1913, the gap between Japan ($1,334) or Portugal ($1,354) and the UK ($5,032) or the USA ($5,505) increased to a ratio of around 4 to 1. For further details from Maddison’s historical income estimates, see table 3.7 in Chapter 3 of the present volume.
248
In purchasing power parity terms (in 1999 dollars), per capita income in the USA, Switzerland, and Japan were $31,910, $28,760, and $25,170 respectively, whereas those in Tanzania and Malawi were $500 and $570 respectively. In terms of current dollars, the gap is in the region of 100 or 400 to 1. In current dollars, 1999 per capita incomes were $38,380 in Switzerland, $32,030 in Japan, and’$31,910 in the USA, while they were $100 in Ethiopia, $180 in Malawi, and $260 in Tanzania.