State Power and Economic Crisis Research Paper

Introduction

The power of the state as reflected in the political system is related to the economic development of most countries. Modern development economists believe that quick and robust economic growth is a function of the political system of the day.

At the international level, most developed countries are now using their state powers and economic strength to influence the global economy. In particular, they influence the economic development in the underdeveloped world through their state powers and economic strength.

Most developed countries such as the US and the UK in conjunction with IMF and World Bank are playing an active role in determining the fiscal and monetary policies in developing countries (Willmann 51). At the center of their proposal is the abandonment of protectionist policies in favor of a free trade and open market system (Willmann 52).

However, empirical evidence from historical analysis reveals that no country has ever developed without protecting its infant industries. Thus this paper seeks to confirm the thesis that infant industry protection is essential for developing countries. The paper will review Ha-Joong Chang’s Publication on Bad Samaritans.

Literature Review

The proponents of capitalism and neo-liberal free trade such as Milton and Thomas Freidman, believes that countries should open up for free trade irrespective of their development stages. At the center of their argument is the condemnation of the protectionist policies (Chiang 5).

The protectionist policies are those deliberately set by the government to protect their emerging industries from cut-throat competition emanating from the developed world. The policies seek to give a chance to the infant industries to grow steadily and mature before being allowed to compete at the international level (Willmann 53).

However, Freidman believes that such polices only help developing countries to achieve sluggish growth. Besides, free trade economists cite the large international market as a clear advantage of the free trade. Over the years, developing countries have tried to embrace the free trade ideology. However, they have often failed and this can be explained by the following reasons.

Weaknesses of Free Trade and Open Market System

First, developing countries have not been able to compete with their developed counterparts over the years despite efforts by both local governments and the developed world to promote free trade. One of the reasons for their inability to compete is economic backwardness (Chiang 8).

Most developing countries in Africa and South America are still using outdated technologies for production. Due to their poor production techniques, they are not able to produce at the same level as their competitors from the developed world. America and Britain for example, have mechanized their production while in Africa manual labor is still a common practice in production centers (Carbaugh and Praule 67). Consequently, the production costs in the developing countries are far much higher as compared to that in developed countries.

In the context of competition, the developing countries are not able to compete since their products are very expensive at the international market. This means that developing countries have only two choices in a free trade system.

They either lose the competition to large multinational corporations or remain in the competition and get exploited by the large international corporations (Carbaugh and Praule 67). A good example is the case of Shell which benefits from the oil in Nigeria at the expense of the country’s oil industry (Willmann 56). Chiang thus notes that it is not worth embarking on free trade in developing countries since it will only benefit the developed world.

Second, according to Chiang historical analysis reveals that the systematic transition from a state of poor economic growth and underdevelopment to economic mighty has never been through free trade. He argues that developed countries did not achieve their economic power because their governments did not interfere with the free market system (Chiang 9).

In the contrary, countries like US and Britain achieved their economic strength through active government participation in the economy. Even though America and Britain oppose protection of infant industries in developing countries, the concept actually originated from their economies and is responsible for their robust growth in their earlier days (Chiang 10). China which is currently among the fastest growing economies is pursuing the protectionist policies through government intervention.

This means that the only way to stimulate growth in developing countries is to allow the government to support its emerging industries. The role of the government is to identify the industries that make significant contributions to its GDP growth and the ones whose contributions are less significant.

For example, the machine and tool industry in US is critical to economic growth (Carbaugh and Praule 68). This is not only because it provides adequate job opportunities, but also because it supports the entire manufacturing industry through the supply of appropriate machinery.

Once identified, the government enhances growth of such industries through a variety of incentives. The government can provide subsidies to lower the costs of production in order to reduce the price of the final product. High import duties can be charged on imported goods with the aim of making them more expensive as compared to the locally manufactured ones (Carbaugh and Praule 68). Active regulation at the industry level can also be used to promote high product quality.

Third, proponents of free trade argue that exposing developing countries to competition at an early stage will make them focus on efficiency and high productivity (Chiang 12). However, countries that have tried the free trade policies proposed by the IMF and World Bank have ended up becoming poorer than they were before.

The local industries have always collapsed due to their inability to compete with the foreign ones. In most cases, the straggling local industries especially in Africa are bought by the multinationals or are shut down in order to prevent further loses.

Thus the economy operates at the mercy of foreign corporations. This leads to sever reduction in wages as multinational corporations pay less in wages in order to increase production at low costs (Willmann 56). The middle-class which normally stimulates growth through high consumption becomes poorer. Consequently, the developed countries remain poor as their resources are used by multinationals in the name of free trade.

Fourth, the standards used at the international market have always favored the developed countries (Willmann 57). The standards of product quality set by the WTO are in most cases too high to be met by the developing countries. Due to their inability to meet the international standards, the developing countries are often barred from exporting to the developed nations.

However, they are expected to open their markets to products from the developed countries which in most cases are cheaper than the local products (Willmann 57). This means that free trade has always been characterized by lack of reciprocity. It has been used by the developed world to expand their markets and to dominate the developing world, thereby denying the later a chance to grow. In some cases, the products from the developed world are considered to be of poor quality even though they might be of high quality.

The aircraft manufacturer in Brazil, EMBRAER, could not have made it if it was privatized at its infant stage. Under government ownership, the aircraft manufacturer was able to benefit from subsidies and protection from intense competition from the developed world. It is for this reason that Chiang opposes privatization of state owned corporations. According to Chiang, infant industries that have limited chances of growing should be owned by the government and helped to grow through protection (Chiang 13). Such corporations should only be privatized once they are able to compete effectively.

Apart from setting high standards, the developing countries also practice double standards in the free trade system. Chiang points out the use of patents to limit the competition of developing countries. Most research and development are done in developed countries which have the technology and the resources to support such research work.

The research and development leads to discovery of production techniques which lower production costs and raise the quality of products (Carbaugh and Praule 69). However, such discoveries or innovations are protected through patents which are not affordable to developing countries.

While patents should be protected from abuse, their prices should be controlled in order to increase their accessibility. This has not been possible, thus denying developing countries an opportunity to use advanced technology. Most developed countries, especially the US run budget deficits as they borrow from the public and other financiers such as the IMF to fund their development agendas. However, the developing countries are not allowed to do the same.

The IMF for instance, requires “developing countries to balance their books in order to qualify for loans” (Carbaugh and Praule 70). Free trade can thus not succeed if the rules are bent in favor of one party. In most cases, the developed world has been favored by the WTO and IMF in regard to free trade.

Finally, the free trade system destroys democracy in developing countries. In a democratic system of governance, the government represents the people and speaks for them (Chiang 14). The multinational corporations have always used their financial resources to gag the governments in developing countries.

The multinationals have always been found to bribe local governments to implement trade policies that favor them. Besides, most multinationals involved in unethical business practices use bribes in order to exploit the citizens through low wages and poor product quality (Willmann 60).

Thus the concept of “one-man-one-vote has changed to one-dollar-one-vote” (Willmann 61). Democracy has been progressively replaced with fascism in developing countries as the interests of the states are fused with those of corporations. Historical evidence indicates that strong economic growth through capitalism can only be achieved through a democratic government that focuses on industry regulation (Chiang 15).

The developed nations through their multinational corporations and free trade concept have denied developing countries a chance to nature their democracy in order to develop. A good example is the case of China and Sudan. China as the main stakeholder in Sudan’s oil industry has always promoted war in Sudan through the sale of cheap weapons to the Sudan government its rebels (Willmann 63). Consequently, Sudan has not been able to take charge of its oil industry as China continues to benefit from it.

The above discussion illustrates the demerits of free trade in the context of the developed countries verses the developed countries. As suggested by Friedman, an open market can promote economic growth. However, the short term opportunities it offers the developing countries limits such countries’ future growth potentials (Willmann 63). This means that the poor countries engaged in free trade end up becoming poorer in the long term. This leads to the hypothesis:

• Protectionist policies are the surest way of promoting quick economic growth.

This hypothesis can be tested by analyzing the origin of the concept of protecting infant industries and its application in the early days of the developed world. Thus the above hypothesis will be tested by evaluating economic development in US.

Case Study: Infant Industry Protection and the US Economy

The concept of infant industry and the need to protect it from external competition can be traced to the early days of the US economy. The concept was particularly initiated by Alexander Hamilton during his tenure as the US secretary of treasury.

He noted that it was in the interest of US famers to get subsidies as an encouragement for production (Carbaugh and Praule 72). Besides, the famers were interested in maintaining low prices through high import duties that would increase the price of imports.

The manufacturers on the other hand were interested in accessing cheap raw materials especially from their domestic market. This means that the two main factors need to transform an infant industry to an economic icon is “cheap raw materials and protection from foreign competition” (Carbaugh and Praule 72). In order to achieve these objectives, Hamilton recommended the following measures.

Protecting Duties

He proposed the use of high import taxation on foreign goods. He suggested that goods from foreign countries which are similar to those produced in US should be heavily taxed. The rationale behind this policy was that high import duties would make imports more expensive as compared to local products (Willmann 64). Thus the local producers would sell more as compared to their foreign counterparts in the domestic market. This policy would thus boost the productivity of the local firms at the expense of the foreign ones (Chiang13).

Prohibition of Imports or Duties Equivalent to Imports

Hamilton suggested that in order to protect local industries, the government should ban the importation of goods which are already being produced in US (Carbaugh and Praule 74). The aim was to give the local firms a monopoly over the domestic market. This would enable them to avoid high competition from foreign firms especially from Britain. Lack of high competition would thus enable the firms to maintain stable prices and high profits to facilitate further growth and investment. The high import duties were meant to discourage foreign firms from joining the American market.

Prohibition of Export of Raw Materials

As was discussed earlier, cheap raw materials are essential for quick economic growth. Hamilton having realized this proposed that raw materials used in strategic manufacturing sectors should not be exported to other countries (Carbaugh and Praule 74).

Exporting such raw materials would increase their demand thereby increasing their prices at the domestic market. This would then lead to high cost of production, high prices of finished goods and low demand. Besides, selling the raw materials to the competitors of US would increase their (competitors) productivity (Willmann 65). Thus the aim of this policy was to help American firms to maintain low cost of production. It was also meant to help them use their unique resources in order to produce superior goods.

Direct Financial Subsidies

Providing financial assistance to firms in the form of subsidies has a direct and immediate impact on their growth. The financial assistance is used to acquire the inputs or factors of production which is usually a main barrier to growth in many industries. When firms are able to acquire the factors of production, they are also able to increase their production capacities rapidly and this results into high GDP in the country (Chiang 12).

Incentives for Innovation

The producers need to be encouraged to use innovative techniques in production in order to improve their competitiveness. Innovation is particularly important in improving the quality of products (Willmann 65). It is also important for improving the efficiency of production thus lowering the overall costs of production. In order to promote innovation, Hamilton pointed out the need to reward producers for the use of out-standing skills in production.

The rewards are to be given only to the firms that are highly performing in their industries. The rewards can be in the form of honoraria or acknowledgement of special contribution to advancement in production technology (Willmann 65). Such incentives are thus effective ways of exciting the producers to increase their productivity. The essence of embracing innovation was to prepare the local firms for future competition in the international market.

Exempting Imported Raw Materials from Import Duty

Just like any other country, America realized that it did not have all the raw materials for its manufacturing needs. However, it needed to access the raw materials at low costs (Willmann 66). Thus in order to reduce the cost of importing raw materials, Hamilton suggested the removal of import duty on materials used by the country’s manufacturers.

Inventions and Discovery

The discovery of new technologies that lead to production of new products and improving the quality of existing ones has also been the focus of US. In order to achieve this objective, it was suggested that the government should provide incentives that encourage manufacturers to make new inventions.

This recommendation required the government to facilitate the invention process through research and development. This means that the government was expected to increase its investment in research and development in order to benefit the local firms (Carbaugh and Praule 74). Local manufacturers would thus outperform their foreign counterparts through high quality products and efficiency in production. The need to involve the government in the invention process is based on the fact that the infant industries lacked enough funds to invest in research and development.

Judicious Regulation of Industries

Commodities were expected to be inspected and their production was to be regulated in order to ensure high quality. Thus a uniform inspection at the port level was suggested to ensure that all goods meet the basic standards set by the government (Willmann 67). This was not only meant to boost social welfare through high quality goods but was meant to improve the competitiveness of locally produced goods at the international market. The American goods would have high demand if they were of high quality.

Transport Infrastructure

It was essential that the goods produced in the US reach the targeted market at the right. Besides, the goods had to be transported at low costs with the aim of reducing the consumer prices (Willmann 68). Consequently, it was necessary for the government to invest in adequate and efficient transportation systems such as railways, roads and sea transportation.

The above analysis indicates the importance of government participation in regard to encouraging infant industries to become large corporations. The US Congress having realized the benefits of Hamilton’s recommendations decided to implement them.

To begin with, the Congress increased the import duty for manufactured goods to 12.5% up from 5% in the 1700s (Carbaugh and Praule 75). The import duty was further raised to 25% following the 1812 war (Carbaugh and Praule 76). The high tariffs helped American firms to recover from the effects of the war. Abraham Lincoln’s regime increased the import duties to 50% in order to protect the American firms from the effects of the Civil war.

In the 1990s, the government contributed as high as 70% of the funds needed to support research and development in the country (Carbaugh and Praule 76). During this period the GDP grew at a much higher rate than today. Clinton and G. W. Bush opened up the country to free trade and this accounts for the slow growth rate. Unemployment has increased as corporations embark on cheap labor from abroad. The local firms have become less competitive.

For example, Wal-Mart that imports majority of its merchandise from China has been criticized for contributing to the collapse of American industries (Carbaugh and Praule 77). The above discussion clearly indicates that protectionist policies originated from America which now condemns them. Besides, the country owes its economic mighty to the protectionist policies. This confirms the validity of the hypothesis: protectionist policies are the surest way of promoting quick economic growth.

Conclusion

The above discussion reveals that free trade is not appropriate for the developing nations. As pointed out by Chiang, developing countries are not able to compete with their developed counterparts simply because their industries are not yet mature for competition (Chiang 15).

Besides, the terms and conditions of the free trade proposed by the developed countries are biased and work against the developing countries. As history reveals, the concept of protecting infant industries originated from the developed world and it actually helped them to develop (Willmann 66).

Countries that tried to pursue the free trade strategies have always failed in their economic development. This means that protecting infant industries is a proven development strategy that has the potential of generating wealth and ensuring better social welfare. Thus the developing countries especially in Africa, Asia and South America should be given a chance to protect their infant industries until such industries are able to compete at the international level. The above discussion thus confirms the thesis that infant industry protection is essential for developing countries.

Works Cited

Carbaugh, Robert and Tyler Praule. “The temptation for protectionism and American trade policy.” World Economics 11(2010): 61-78.

Chiang, Ha-Joong. Bad Samaritans: the myth of free trade and the secret history of capitalism. London: Bloodnsbury Press, 2009.Print.

Willmann, Gerald. “Substitutability and protectionism: Latin America’s trade polciy and imports from China and India.” World Economics 10 (2007): 50-71.