A Short Bibliography on Protectionism and Industrial Policy

The issue of protectionism – and the related issue of industrial policy – is back on the political agenda, mainly because of the current US election season.

Some very good books and articles relevant here are as follows:

Amsden, Alice. 1989. Asia’s Next Giant: South Korea and Late Industrialization. Oxford University Press, New York.

Amsden, Alice. 1990. “East Asia’s Challenge – to Standard Economics,” American Prospect 2 (Summer): 71–77.

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

Chang, Ha-Joon. 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective. Anthem Press, London.

Chang, Ha-Joon (ed.). 2003. Rethinking Development Economics. Anthem Press, London.

Chang, Ha-Joon. 2005. The East Asian Development Experience: The Miracle, the Crisis and the Future. Zed, London.

Chang, Ha-Joon. 2008. Bad Samaritans: Rich Nations, Poor Policies, and the Threat to the Developing World. Random House Business, London.

Chang, Ha-Joon. 2011. 23 Things They Don’t Tell You about Capitalism. Bloomsbury Press, New York and London.

Chang, Ha-Joon. 2014. Economics: The User’s Guide. Bloomsbury Press, New York, NY.

Reinert, Erik S. 2007. How Rich Countries Got Rich, and Why Poor Countries Stay Poor. Carroll & Graf, New York.

Prestowitz, Clyde V. 2005. “China as No. 1,” American Prospect, February 21
http://www.prospect.org/cs/articles?article=china_as_no_1

Prestowitz, Clyde V. 2015. “Our Incoherent China Policy,” American Prospect Fall
http://prospect.org/article/our-incoherent-china-policy-fall-preview

Prestowitz, C. V. 2010. The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How we Must Compete in the Post-Dollar Era, Free Press, New York and London.

Galbraith, J. K. 2008. The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too. Free Press, New York.

Some interesting articles on the role of infant industry protectionism in the US in the early 19th century are as follows:

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.

Irwin, Douglas A. and Peter Temin. 2001. “The Antebellum Tariff on Cotton Textiles Revisited,” Journal of Economic History 61: 777–805.

Industrial Policy in Meiji Japan

Japan’s industrial development is an interesting subject. Japan’s rapid period of industrial take-off came after 1911:

“Industrial production almost doubled between 1914 and 1919 and average profit rates for industry increased sharply … Japan thus emerged as an industrial nation during the Taisho period with a doubling of GNP from 1910 to 1930, and a quadrupling of real output of mining and manufacturing, and of employment in heavy and chemical industries” (Sorensen 2002: 92).

But even the foundation and early development of the industrial revolution in Meiji era Japan (1868–1912) in the 19th century involved significant state intervention (Noland and Pack 2003: 23).

From 1859 and 1869, Japan had been subjected to a number of unequal treaties forcing a liberal trade policy on it, in which tariffs had to be kept below 5%.

I recently had the interesting experience of arguing with a libertarian who attributed Japan’s proto-industrialisation under the Meiji to trade liberalisation in the 19th century: the trouble is that the treaties that opened up Japan were imposed by the threat of force, such as the expedition of Matthew Calbraith Perry (1794–1858) in 1854, leading to the Convention of Kanagawa (March 31, 1854). A number of other treaties followed:

(1) Anglo-Japanese Friendship Treaty, signed October 14, 1854 in Nagasaki.

(2) Ansei Treaties or the Ansei Five-Power Treaties, signed in 1858.

(3) Treaty of Amity and Commerce or the Harris Treaty between the US and Japan, signed on July 29, 1858.

(4) Treaty of Amity and Commerce between France and Japan followed on October 9, 1858.

(5) The Anglo-Japanese Treaty of Amity and Commerce, signed on August 26, 1858.

One of the most important terms of some of these treaties was to impose low import-export duties, even subject to international control, which went as low as 5% in the 1860s.

It is quite bizarre to see libertarian ideologues normally so insistent on opposing force defending trade liberalisation imposed by European and American coercion. In fact, the Japanese opposition to the “Unequal Treaties” (as they were called) was a major reason for the Meiji revolution in 1868 that overthrew the Shogun.

What was the result of the treaties imposed on Japan? The answer is as follows:

“… immediately after 1859, a flood of imports, unchecked by tariffs, soon devastated the domestic economy. Japan immediately faced a balance-of-payments problem because it depended heavily on imports of raw materials and capital goods indispensable for early industrialization. While the price of rice soared, the outflow of gold that followed was aggravated by the silver standard which Japan adopted, because the price of silver steadily fell vis-à-vis gold throughout the second half of the nineteenth century. Naturally, trade revision was a continuing issue in the early Meiji years.” (Sohn 2005: 22).

Because their hands were tied by treaties forcing a low tariff policy, the Meiji rulers sought to develop Japan’s economy by other means: what we would now call state industrial policy.

One of the architects of this industrial policy was Okubo Toshimichi (Beasley 2000: 103–104), who was head of the Home Ministry (内務省 Naimu-shō), a government department under the Meiji government founded in 1873 that was responsible for economic development, until various aspects of that policy were transferred to separate departments, such as the Department of Agriculture and Commerce (created in 1881), the Railroad Ministry (created in 1890), and the Communications Ministry (1892).

One of the first concerns of the Meiji state was to boost exports to stop the outflow of gold. To this end, the Meiji government increased production of tea and silk, by introducing domestic manufacturers to Western technology (Beasley 2000: 104). Shipping services also received government subsidies and patronage (Beasley 2000: 104).

The government also abolished the various currencies of the feudal lords, and by the New Currency Act (1871) created the yen as a national currency. A national central bank was created in 1882, with a monopoly on controlling the money supply in 1884.

The Meiji government also promoted industry and economic development in the following ways:

(1) The government created and built the fundamental public infrastructure in Japan underlying the modern economy: the postal service, railroads and telegraph (Flath 2005: 190). The postal service and the foundations of the railway system were the creation of the state (Beasley 2000: 104).

(2) The Meiji rulers had created industries in the most important areas of industry in that era: iron foundries, arsenals, and some shipbuilding. By 1880, government enterprises included 3 shipyards, 5 munitions works, 10 mines, and 52 factories (Flath 2005: 190). Modern cotton spinning mills were set up by the government in 1881 when the state acquired the latest English technology (Norman 2000: 129).

(3) The government initiated the development of chemical, glass and cement industries, which were then sold off to the private sector when they became profitable (Norman 2000: 127). With this privatisation program after 1882, Japan’s economic development came to have a larger role for private enterprise.

(4) The government used subsidies to other key industries. An important sector, as seen above, was marine transportation and shipbuilding, which received 75% of all subsidies from 1897 to 1913 (Flath 2005: 192). When tariff autonomy was attained again in 1911, Japan raised tariffs on foreign ships from 5% to 15% (Flath 2005: 192). To obtain revenue the government had introduced an agriculture tax in the Land Tax Reform of 1873, and in fact Japan’s state-directed economic development did not depend on foreign capital to a great extent in the Meiji era.

(5) The government created three state-controlled banks by the end of 19th century to direct credit to industrial development (Flath 2005: 192). Between 1885 and 1915 government spending accounted for 35% of capital investment, mainly in the crucial areas of steel, ships and railways (Flath 2005: 192). Throughout the late 19th century, outside agriculture, government provided about 50% of capital investment in Japan (Nafziger 1995: 63).

Although the evidence shows an important role for private enterprise from the 1880s, this was directed and supported by government policy, exactly the same as in Japan’s post-1945 industrial policy.

In short, these Meiji industrial policies set the foundation for Japan’s take-off after 1911.


BIBLIOGRAPHY

Beasley, W. G. 2000. The Rise of Modern Japan (3rd rev. edn.), Weidenfeld & Nicolson, London.

Flath, David. 2005. The Japanese Economy (2nd edn.), Oxford University Press, Oxford.

Nafziger, E. Wayne. 1995. Learning from the Japanese: Japan’s Pre-War Development and the Third World, M. E. Sharpe, New York.

Noland, M. and H. Pack. 2003. Industrial Policy in an Era of Globalization: Lessons from Asia, Institute for International Economics, Washington, D.C.

Norman, E. Herbert. 2000. Japan’s Emergence as a Modern State: Political and Economic Problems of the Meiji Period (ed. L. T. Woods), UBC Press, Vancouver.

Miles Fletcher, W. 1996. “The Japan Spinners Association: Creating Industrial Policy in Meiji Japan,” Journal of Japanese Studies 22.1: 49–75.

Sohn, Yul. 2005. Japanese Industrial Governance: Protectionism and the Licencing State, RoutledgeCurzon, London.

Sorensen, A. 2002. The Making of Urban Japan: Cities and Planning from Edo to the Twenty-First Century, Routledge, London and New York.

Wilds, Kevin Mark. 2003. Meiji Industrial Development: A Case Study, Dissert. California State University, Fresno.

Automation and Robotics: The Future of Manufacturing?

First, let me offer a caveat: this post contains some speculative musings of mine on the future of manufacturing. No doubt various criticisms of it could be made.

Countries like the US and the UK are badly in need of trade and industrial policies to rebuild manufacturing. Very large trade deficits are potentially unsustainable. Such deficits often make a country dependent on foreign investment for the capital account surpluses needed to pay for current account deficits.

The crucial factor now, however, is that technology must be used to increase manufacturing productivity and cut costs.

If we want to decrease the trade deficits of the US or the UK, I would suggest an industrial policy to domestically manufacture things imported from China and East Asia.

Strong use of automation and technology to increase productivity and to lower price is necessary. This process can be made faster and more efficient through public R&D programs, and state transfer of new technology to domestic manufacturers.

In an earlier post, I drew attention to a very interesting initiative in the US called the “Save Your Factory movement,” launched by a company called Fanuc Robotics America Inc.

There is an absolutely excellent analysis of this in a 2005 issue of Manufacturing Engineering magazine. It shows how automation can cut costs and even beat low wage countries like China::

Rick Schneider, “Robotic Automation can cut costs,” Manufacturing Engineering 135.6 (December 2005): 65–72.

The US federal government needs to take up these ideas and implement this sort of policy at a federal level – which would make it more effective.

Moreover, the article cited above points out that from 1995 to 2002 the global labour force actually lost 22 million manufacturing jobs because of labour-reducing productivity gains through automation and robotics.

I would argue that it is extremely likely that the 21st century will see manufacturing employment as a percentage of the world labour force decline to a level as low as agricultural employment in most developed nations (2 or 3%).

Will this be a bad thing? Not necessarily. If output massively increases, prices are much lower and Western current account deficits fall or go into surplus, this will be a very good thing, and we will have an abundance of cheap goods.

But we will have to face the fact that, because of automation and technology, employment in tradable goods and services in many countries will probably fall dramatically. Our employment future will probably be mainly in services, education, and most probably in government-sector jobs or employment programs funded by government. There will probably be a great reduction in the hours that people need to work as well.

No doubt additional jobs will be created in new private industries as well, but government can step in and provide employment for those who are unemployed. It might well be that much of the government-funded labour force will be in education (e.g., universities), research or other services. A much greater labour force working in basic sciences and applied R&D in physics, chemistry, geology, biology, genetics, engineering and medicine would mean a much more rapid advancement of science and technology too – a virtuous circle.

In other words, in the face of massive productivity and output gains and cost reductions in many goods and services through technology, the government must use policies for full employment to maintain demand for such goods. The point is that should production go down the route of radical automation in the course of this century, then equally radical Keynesian demand management will be necessary to maintain demand for goods and services and ensure continuing rises in living standards.

Industrial Policy: A Brief Comment

Most recently, I have debated the blogger Cynicus Economicus on Keynesianism and industrial policy in a very thoughtful debate from both sides here:

http://cynicuseconomicus.blogspot.com/2010/06/post-keynesian-solutions-reply-to.html#comment-form

I have argued, in response to comments that seem to doubt not just the success of industrial policy but its very existence, that Cynicus’ blog has repeatedly described China’s industrial policy. He refers to it as “mercantilism.”

I asked him whether he denied the existence – and effectiveness – of this mercantilist industrial policy. Although I may be incorrect, and he has not said so directly in any of his comments, he seems to suggest that industrial policy can never work or has never been successfully done anywhere. I then posed the question: doesn’t China’s success with its particular type of industrial policy show such policy exists and can work?

In response, Cynicus states:

So what we are coming to is a belief that mercantilism might work for the developed world? Do I understand this correctly?

The anwser is “no”. I was simply asking whether Cynicus was willing to concede what he so frequently seems to say in other posts: that China’s mercantilism is an obvious example of the success of one kind of industrial policy. There are many kinds, of course.

Having one obvious example of the success of a type of industrial policy in China, one wonders why in other comments Cynicus seems to suggest that he knows of no example of industrial policy and thinks that the idea is “vaguely defined” or has never been implemented anywhere in real countries.

Yet the literature on economic history is filled with works on industrial policy in real countries, for example, post-WWII France, South Korea, Taiwan and Japan.

As I have said in other posts on the Cynicus Economicus blog, in the 19th century there was an early type of industrial policy that was called “infant industry protectionism” (usually involving tariffs) in countries like Germany or the US.

Note that this policy was not simply the adoption of tariffs on all imports or an endorsement of endless protectionism through tariffs, but selected tariffs on imports of high value added manufactured goods when domestic manufacturing was in its early stages of development, particularly where the creation of these industries gave increasing returns to scale, rather than dead-end “diminishing returns to scale.” Once these sectors became internationally competitive, it was possible to reduce or eliminate tariffs. Note also that this policy is perfectly compatible with the fact the other types of tariffs or poorly targeted tariffs can be harmful to economic development.

It should be noted that many apologists for free trade cannot – or refuse to – even properly understand the “infant industry” argument. Instead they present a caricature of it. Henry Hazlitt’s criticisms of protectionism in his book Economics in One Lesson are a good example of this.

I give a very brief sample of some specialist work on 19th-century infant industry protectionism below:

(1) Mark Bils, “Tariff Protection and Production in the Early U.S. Cotton Textile Industry,” Journal of Economic History 44 (December 1984): 1033–1045.

Mark Bils concludes:

Cotton textiles constituted nearly two-thirds of value added in large-scale manufacturing in New England in the 1830s. The removal of the tariff, according to my results, would have reduced value added in textiles by, at a minimum, three-quarters. The implication is that about half of the industrial sector of New England would have been bankrupted.

(2) Paul Bairoch, Economics and World History: Myths and Paradoxes, University of Chicago Press, Chicago, 1993, ch. 4.

(3) Antonio Tena, “Tariff Structure and Institutions in the Late 19th Century. New Perspectives on the Tariff Growth Paradox,”
Paper presented to the Seventh Conference of the European Historical Economics Society Lund, 29 June - 1 July 2007
http://www.ekh.lu.se/ehes/paper/Antonio%20Tena%202%202%20(EHS%20Lund)%20(2).pdf

Tena concludes:

We assume that high tariffs only have a positive relation with growth if they protect those sectors which generate positive externalities in the economy in general. So, in the relation between trade policy and growth what is significant is not just average tariffs, but the structure of tariffs. The causal mechanism between tariffs and growth is better explained by the structure of tariffs.

(4) Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective, London, 2002.
Ha-Joon Chang, Bad Samaritans: Rich Nations, Poor Policies, and the Threat to the Developing World, London, 2007.

Ha-Joon Chang demonstrates that many Western nations industrialized through infant industry protectionism. It is a complete myth that industrial development occurred through free trade and free markets in many Western countries.

In the era after WWII, infant-industry protectionism was replaced with a new, more radical form of industrial policy called import-substitution industrialization (ISI), which was now given a theoretical basis in development economics.

The east Asian states of Japan, South Korea, and Taiwan used a radical type of ISI to become economic giants. Access to the US market, a fundamental element of these countries export-led economic growth, is also a feature of China’s new model of industrial policy.

The classic policies of ISI were:

(1) policies to subsidize and create industries producing manufactured goods
(2) protective barriers to trade (e.g. tariffs or non-tariff barriers)
(3) an overvalued currency assisting manufacturers to import capital goods (heavy machinery), at least initially in industrial development.

In South Korea, Taiwan and Japan, there were also these additional elements of ISI:

(4) Export led growth = outward-oriented ISI
(5) direction of subsidies and investment to industries producing goods for export
(6) some use of an undervalued local currency to stimulate exports.

One can note that China certainly practises (1), (4), (5), and (6). (2) is also achieved by the undervalued currency. China is an exception to (3).

The conclusion is clear: China uses a similar type of industrial policy to that pursued earlier in Japan, South Korea and Taiwan.

I hope to address the issue of industrial policy soon on this blog and in more detail.