The role of protection in industrialisation policy

Protection of domestic industry by means of restricting imports has been widely employed as a means of promoting industrialisation. Experience among less developed countries has shown that, while this often produces a short "exuberant" period of rapid industrial growth, it is likely to lead eventually to chronic balance of payments difficulties and other constraints on growth that inhibit sustained progress in industrialisation. This is partly because of the biases in the system of protection that inevitably govern when it originates as a response to a balance of payments problem. Even deliberately planned protection for industrialisation, however, is likely to fail if it takes the form of import restriction. The traditional arguments for such protection (infant industry, et. al.) have virtuallv no economic merit - not that the market failures they identify are not real enough, but because the remedy is inappropriate and costly. A more rational protection system would avoid the biases of traditional protection against exports, against backward linkage, against employment, and against the processing of domestic raw products. At the same time it would correct the market failures that inhibit successful industrialisation in less developed countries. The most important of these market failures stem from factor price disequilibrium, infant industry cases, terms of trade effects and the interdependence of investment decisions. Such a more rational system could be based on a combination of a uniform tariff, a domestic value added tax system, and direct subsidies. It would be not only self-financing, but also far easier to administer than any existing set of industrilisation policies.