Tuesday, December 27, 2016

More Bibliography on Protectionism and Economic Growth

This post here has an interesting discussion of the economic literature on the relationship between protectionism and growth, both for and against.

In essence, the author cites the following literature (given below in chronological order):
De Long, J. Bradford. 1995. “Trade Policy and America’s Standard of Living: An Historical Perspective,” University of California at Berkeley, September, 6th draft

Rodríguez, Francisco and Dani Rodrik. 2000. “Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence,” NBER Macroeconomics Annual 15 (1 January): 261–325.

O’Rourke, Kevin H. 2000. “Tariffs and Growth in the Late 19th Century,” Economic Journal 110.463: 456–483.

Michael A. Clemens and Jeffrey G. Williamson. 2001. “A Tariff-Growth Paradox? Protection’s Impact the World Around 1875–1997,” NBER Working Paper No. 8459, September

Irwin, Douglas A. 2001. “Tariffs and Growth in Late Nineteenth Century America,” World Economy 24.1: 15–30.

Irwin, Douglas A. 2002. “Interpreting the Tariff–Growth Correlation of the Late 19th Century,” American Economic Review 92.2: 165–169.

Clemens, Michael A. and Jeffrey G. Williamson. 2004. “Why Did the Tariff-Growth Correlation Change after 1950?,” Journal of Economic Growth 9.1: 5–46.

Jacks, David S. 2006. “New Results on the Tariff–Growth Paradox,” European Review of Economic History 10.2: 205–230.

Lehmann, Sibylle H. and Kevin H. O’Rourke. 2008. “The Structure of Protection and Growth in the Late 19th Century,” NBER Working Paper No. 14493, November

Tena-Junguito, Antonio. 2009. “Bairoch Revisited: Tariff Structure and Growth in the Late 19th Century,” IDEAS Working Paper Series from RePEc

Lehmann, Sibylle H. and Kevin H. O’Rourke. 2011. “The Structure of Protection and Growth in the Late Nineteenth Century,” Review of Economics and Statistics 93.2: 606–616.

Schularick, Moritz and Solomou, Solomos. 2011. “Tariffs and Economic Growth in the First Era of Globalization,” Journal of Economic Growth 16.1: 33–70.

Nunn N. and D. Trefler. 2010. “The Structure of Tariffs and Long-Term Growth,” American Economic Journal 2.4: 158–194.

Yoon, Yeo Joon. 2013. “The Role of Tariffs in U.S. Development, 1870–1913,” Job Market Paper, October

Juhász, Réka. 2015. “Temporary Protection and Technology Adoption: Evidence from the Napoleonic Blockade,” December 17
To this we can add the following:
Webb, Steven B. 1980. “Tariffs, Cartels, Technology, and Growth in the German Steel Industry, 1879 to 1914,” The Journal of Economic History 40.2: 309–330.

Bils, Mark. 1984. “Tariff Protection and Production in the Early U.S. Cotton Textile Industry,” The Journal of Economic History 44.4: 1033–1045.

Temin, Peter. 1988. “Product Quality and Vertical Integration in the Early Cotton Textile Industry,” The Journal of Economic History 48.4: 891–907.

Harley, C. K. 1992. “The Antebellum American Tariff: Food Exports and Manufacturing,” Explorations in Economic History 29: 375–400.

Bairoch, Paul. 1993. Economics and World History: Myths and Paradoxes. Harvester Wheatsheaf, New York and London.

Irwin, Douglas A. and Peter Temin. 2001. “The Antebellum Tariff on Cotton Textiles Revisited,” Journal of Economic History 61: 777–805.
One of the crucial issues here is Paul Bairoch’s view that protectionism was correlated with strong economic growth in many Western nations in the 19th century (the so-called “19th century growth-tariff paradox”). See Bairoch (1993: 44–56).

That correlation was supported by O’Rourke (2000) and Clemens and Williamson (2001 and 2004), but questioned by Irwin (2002).

Lehmann and O’Rourke (2008 and 2011) in turn disputed Irwin (2002) and, by disaggregating the tariffs and focussing on tariffs on manufacturing goods, showed that these latter tariffs were indeed correlated with industrial growth. See also Jacks (2006) and Tena-Junguito (2009).

The naysayers and free trade fanatics complain that correlation between protectionism and growth doesn’t seem true of all nations, such as the future Third World (e.g., where the correlation is weak) and certain European periphery nations (such as Spain, Russia, and eastern Europe).

But the answer to this is simply that the selected use of tariff protectionism is often *a necessary but not sufficient condition* for industrial take-off. Other factors are required.

Furthermore, the average tariff rate of a nation is not a proper measure of whether efficient infant industry protectionism is being implemented. It is, above all, the structure of tariffs that is the key to successful infant industry protectionism.

Where domestic industries can be developed that in turn generate positive externalities throughout an entire economy, through increasing returns to scale, manufacturing productivity growth, synergies and cluster effects (Reinert 2007), we have efficient infant industry protectionism (see also Kaldor’s Growth Laws and Verdoorn’s Law). That of course means a nation’s early stages of development require selected tariffs on foreign imports, particularly of manufacturing goods.

The crucial point is that the creation of industries that gave increasing returns to scale (generally manufacturing) – rather than dead-end “diminishing returns to scale” – is what marks successful economic development. Once the new manufacturing sectors become internationally competitive, it is possible to reduce or eliminate tariffs. Note also that this policy is perfectly compatible with the fact the other types of tariffs (protecting inefficient rent seekers) or poorly targeted tariffs can be harmful to economic development.

Moreover, there are, obviously, other important factors that are required for industrial take-off, such as:
(1) the ability to get access to and deploy Western technology and production methods in manufacturing, as well as the ability to maintain technological development and productivity growth in manufacturing (a point related to Kaldor’s Growth Laws and Verdoorn’s Law);

(2) a large enough internal market for manufactured goods, or, if this is absent, reliable export markets to achieve export-led growth;

(3) the ability to overcome any balance of payments constraints as the economy develops, and if and when trade deficits occur. This of course means you must take account of Thirlwall’s Law.
It is no doubt true that some nations, because they are so small and face such severe constraints on economic development (e.g., Pacific Island nations), can never achieve an industrialised, rich economy like, say, South Korea. Be that as it may, many Third World nations today probably can with the right use of industrial policy, and massive changes in the international institutional structure.

Yet another piece of economic heresy in recent years was Rodríguez and Rodrik (2000), which questioned whether there is any necessary and positive relation between increasing trade openness and economic growth.

A final point is that so many of the articles by neoclassical economists on the age-old debate between protectionism and free trade assume their absurd general equilibrium models as the foundation of their counterfactual or empirical studies.

Post Keynesians know that general equilibrium theory is worthless. It follows that all general equilibrium models used to support free trade theory – or assumed in counterfactual models of what would have happened if free trade or protectionism had been imposed in any particular nation in the past – cannot be taken seriously. Even if such work using general equilibrium models gets the (for neoclassicals anyway) counterintuitive result that protectionism can work and be beneficial, this outcome would be accidental and not because their models reflect reality.

Further Reading
For my own posts against free trade and in support of infant industry protectionism, see here:
“Kaldor’s Growth Laws and Verdoorn’s Law: An Overview and Bibliography,” October 8, 2016.

“Thirlwall’s Law: An Overview and Bibliography,” October 7, 2016.

“Ha-Joon Chang on the History of Protectionism,” August 14, 2016.

“Robert Murphy’s Debate on Free Trade,” August 7, 2016.

“The Cult of Free Trade in a Nutshell,” July 4, 2016.

“Ricardo’s Argument for Free Trade by Comparative Advantage,” July 5, 2016.

“Erik Reinert versus Ricardo on Free Trade,” July 5, 2016.

“Ha-Joon Chang on Wage Determination in First World Nations,” July 6, 2016.

“A Heterodox and Post Keynesian Bibliography on Trade Theory,” July 7, 2016.

“Erik S. Reinert on Heterodox Development Economics,” July 9, 2016.

“Britain’s Protectionism against Indian Cotton Textiles,” July 12, 2016.

“Those Free Trading British Cotton Textile Manufacturers,” July 13, 2016.

“Friedrich List on English Free Trade and the Colonisation of Germany,” July 22, 2016.

“Mises on the Ricardian Law of Association: The Flaws of Praxeology,” January 25, 2011.

“The Early British Industrial Revolution and Infant Industry Protectionism: The Case of Cotton Textiles,” June 22, 2010.

“Protectionism and US Economic History,” June 8, 2014.

“A Short Bibliography on Protectionism and Industrial Policy,” April 30, 2016.
Reinert, E. S. 2007. How Rich Countries got Rich, and Why Poor Countries Stay Poor. Carroll and Graf, New York.

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  1. Surely the biggest limitation in the real world working of Ricardo's comparative advantage system, is that the prices for the two goods in that system are precisely set to a particular ratio so that the system works. A ratio that suits the two trading parties. But in the real world, prices for two internationally traded goods are arrived at independently in an international market of many participants.

    1. Comparative advantage is a static model. It doesn't consider benefits of technical progress.

    2. Comparative advantage doesn't involve free trade , it involves two parties acting in concert, as , with free trade and free market prices there is no reason to think that the cost of imports would be covered by the price of exports.