Institute for Development Studies, University of Nairobi
Abstract
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
