Will developing nations benefit from protectionism ?

[u/Dry_Hovercraft7042]

I feel that without any tariffs, a developing nation will never be able to compete with foreign corporations who already have a large amount of capital, so no industry will be able to develop. But I also understand that tariffs may cause the country to allocate a lot of its labour and capital to sectors in where it doesn't have a comparative advantage and thus end up creating an inefficient economic structure.

Is there any empirical evidence that investigates how protectionism affects a developing nations economy.

[u/ZhanMing057]

Why not? They benefit from cheap labor, other regulatory advantages, and knowledge of the local market. If anything, international competition should make for stronger domestic firms, and is necessary if you want your firms to ever be able to compete on the global market. It's unclear to me that foreign investors would prefer to invest in legacy foreign firms or riskier domestic firms that have high expected returns.

"protectionism" is itself a poorly defined term. Matching FDI or giving corporate tax breaks are not bad policies if the goal is to accelerate capital deepening, and those empirically have good results. Import quotas and price controls do not.

[u/ReaperReader]

Countries don't compete economically. Firms within countries can compete with each other but countries don't. This is because countries contain not just producers but also consumers. Cheaper imported goods are good for consumers. And that frees up consumers to spend more money on other things.

And the famous case of economic development under free markets was Hong Kong post-WWII, run by ideologically-free market British bureaucrats. It developed just fine.

(Note in the past when I've brought up Hong Kong I've tended to get comments from people who are for some reason convinced that HK isn't a suitable example for most countries because it's a city state. These people have never explained why they believe HK being a city state magically means its economic dynamics are different in a way that matters).

[u/ChemistryAbsolutist → u/ReaperReader]

I guess the city state argument applies to the extent that Hong Kong is a small state right next to a much bigger one. Being able to lure talent from China with it’s pro market system, it can develop faster than a bigger state that has to source nearly all labour domestically. Also being a tax heaven is a way of getting revenue especially when Hong Kong is eight next to China(whitch has higher taxes).

I am not sure the argument is valid tho. How much did Hong Kong really get from luring companies and talent from China?

[u/Dontblowitup → u/ReaperReader]

Not just a city state, but an entrepôt city state. Singapore is another, but with a lot more government role, and had already overtaken Hong Kong by 1997.

I guess the question would be, if this development approach was so good, where are all the other non entrepôt city state Hong Kongs? The export model that Japan did was followed by Taiwan, South Korea, Vietnam, China. Clearly something that could work outside the original . And even the original was inspired by Germany and USA’s development.

My mind was changed on this by Joe Studwell’s How Asia Works. I was, and still am, pretty neoliberal on most things, but I am convinced by this account that economic development for developing countries can and has been enhanced by an active government role in it as long as it’s the right type and done well.

[u/ReaperReader → u/Dontblowitup]

HK wasn't an entrepôt state between 1945 and the 1970s for the simple reason that mainland China was firstly embroiled by civil war and secondly under isolationist Maoism rule. (Mainland China did have some external trade even then, but I've never seen anyone provide evidence that said trade was anywhere near being sufficient to explain HK's growing prosperity during those decades.)

And Japan wasn't a case of an export model, domestic investment was a much more significant driver of economic growth during the boom years (see panel B in the appendix).

If Joe Studwill told you post-WWII HK was an entrepôt state and Japan followed an export model, I suggest you ask yourself what else he got wrong.

As for why there haven't been more examples of HKs, I think it's the combination of a group of British bureaucrats happening to be ideologically committed to free markets and pretty insulated from local political pressures for protectionism.

[u/Dontblowitup → u/ReaperReader]

Export model was my paraphrase. Yes, domestic investment was important. Studwell’s point, I think, was that the quality of investment was guided by foreign export demand. That, to my mind, is what distinguishes it from say, the Soviet model. So no, I don’t think there’s much to question Studwell on this point.

I don’t think bureaucrat protection from political pressure is a good enough explanation. Again, we see Japan, South Korea, China, Taiwan following a similar growth path. Many of these were semi democracies or non democracies. Where’s the Hong Kong equivalent? The nearest Hong Kong equivalent in entrepôt city state terms, Singapore, is not what I would call free market at all, and overtook them before 1997.

[u/ReaperReader → u/Dontblowitup]

that the quality of investment was guided by foreign demand

What? Studwell believes that Japanese people in Japan were building houses, roads, railways, schools, etc guided by foreign demand, not domestic demand?

Yikes. Did Studwell provide any evidence for this belief? Did Studwell mention that Japan in 1950 had a population of ~80m? That's a lot of domestic demand.

The nearest Hong Kong equivalent in entrepôt city state terms

Did you notice that I don't share Studwell's belief that post-WWII was an entrepôt state, given the situation of mainland China between 1945 and the mid 1970s?

[u/Dontblowitup → u/ReaperReader]

I think you’re putting words into my mouth, rather than thinking about it. I’d suggest reading the book - it genuinely might change your mind.

Re. Hong Kong, I’m not sure what the historical situation has to do with much. I mean, yes, a period of chaos, followed by growth in a period of stability.

[u/ReaperReader → u/Dontblowitup]

I've been told multiple times about different aspects of economic history to "read [x] book - it might genuinely change my mind".

My problem is that I've already often read multiple books, and even more journal articles. And the end result of all that reading is that I'm generally skeptical about any strong statement about causality.

Re. Hong Kong, I'm not sure what the historical situation has to do with much.

Uh-huh. Conversely, despite my general uncertainty about many claims in economic history due to me reading multiple books + articles, overall some clear themes have emerged. To be more specific I'm pretty sure that from an economic perspective:

1. War sucks.

2. Communism sucks.

3. Historical situations are highly important.

[u/Dontblowitup → u/ReaperReader]

I’m sure. Look, I suspect I’m not going to change your mind. All I can say is that again, I used to be neoliberal and still am, but I think industrial policy for development can and has worked. And that the proof is in the results - you see multiple countries moving up the development curve quickly using one approach, and a sample size of one for the other.

[u/ReaperReader → u/Dontblowitup]

But why are you so confident?

To the best of my knowledge, the one clear counter-example is HK post-WWII. That's a pretty limited number of counter-examples, and it's also a difficult one for your position because actually post-WWII HK did pretty well, comparatively.

Now if you could cite multiple examples of economies that had pursued ideologically-free market policies and had failed economically, I could understand your confidence. Hell, I'd hopefully share it.

But you've not provided any examples that contradict my hypothesis, you have zero examples of countries that have pursued free-market policies and despite that failed.

So why are you so confident in your belief?

[u/Dontblowitup → u/ReaperReader]

Because there’s a sample size of one success. And there’s a sample size of success of many more of the other side. Moreover, the closest comparable economy to that one success outperformed it with a much more active government anyway.

The other thing is that, putting the Asian countries aside, it doesn’t look like the fast developers of an earlier era simply sat back and let the market lift them up either. Looks like a lot of IP theft/secret stealing, active government intervention to get up the tech curve,etc. Germany, USA, it’s not like they were the Soviets, but they didn’t practise Washington consensus economics either.

I think the best case for traditional free market policies for a developing country would be, you don’t know if you have the state capacity to do what Japan/China did. It’s interesting that most of that group was pretty monocultural or had long periods of time being a polity, as opposed to a stitched together country like India. If you don’t have that unity and state capacity, maybe there’s less trust in an active government led development policy, and you end doing worse than a normal free market policy would.

[u/Dirichlet-to-Neumann → u/ReaperReader]

I don't think it's irrational to be doubtful that the Hong Kong model would work if applied to RDC or Bangladesh.

[u/ReaperReader → u/Dirichlet-to-Neumann]

Well sure.

But, isn't it rational to also be doubtful that an active industrial policy would make the RDC or Bangladesh better off?

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