Protectionism Infant Industry

Joining the dots on carbon

One of the architects of Australia's reform era, Garnaut is more bearish than the Treasury and Reserve Bank, which argue that Australia's record high terms of trade will ease only gradually over the next decade.

Garnaut offers that he has been "the world's biggest bull for 25 years on growth in the big developing economies". Rather than weaker China demand, the story is on the supply side.

Coal and iron-ore prices have soared because China caught the global mining industry by surprise. As supply belatedly responded Australia "jumped the queue", because it is easier to dig massive new mines here than in developing countries, even those with higher-quality resources.

That's so far concentrated the global mining investment boom in Australia. But as global supply catches up with demand, commodity export prices could fall by one-third.

"My instinct is that the Treasury forecast of gently declining terms of trade is probably underdone," Garnaut tells The Australian. Rather than stabilise at record highs, Australia's mining investment will go into a "big decline" several years out as commodity prices come off.

"Now that resources investment has become such a big part of our economy, just stepping down has a fairly big economic effect," Garnaut says. "Instead of a big plus for growth from business investment you get a big minus."

That is, the mining boom supports for Australia's modern prosperity are partly fleeting.

These are "the best of times" Garnaut says, even if Australians do not realise it.

"If we are spending the high incomes now then we will have to adjust to lower incomes when the boom ends," he warns. "That is always hard to adjust to."

Instead of the world paying more and more for our exports over the past decade, some of our income boom will be taken back as our terms of trade correct.

After being pumped up by huge mine expansions, the economy will be deflated by an investment slump. Garnaut suggests the downside will be more painful because we have spent too much of the boom rather than saving it, including in budget surpluses.

The dollar would fall amid this mining bust, paring back Australian prosperity but stabilising the economy by reviving industries previously squeezed out by the boom.

This would include low-emissions investment as the lower exchange rate pushes up the Australian dollar price of internationally traded emissions permits. "So that is when you get your low emissions energy boom, not now," Garnaut says.

Social Democracy for the 21st Century: A Post Keynesian ...

Anyway, one of Ha Joon Chang's terrible arguments in one of his papers that I read was that because the Republic of India had a weighted average tarriff rate of 71% in the 1960s, it was a "free trade" country. Because this tarriff rate was lower than that of 19th century United States. A comparison that does not apply given that United States benefitted from large British foreign investment. http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=7499864 India, on the other hand, was not a beneficiary of much foreign investment, given that it was very expensive and very risky to do business in such a Third World region as India. Not US, which had a much stronger body of property law inherited back from UK and much more convenient geographic position. And calling a 71% weighted average tarriff a free trade level of protectionism is so absurd, it would indicate unimaginable confirmation bias from Ha Joon Chang. And it still does not consider that 71% tarriff on highly price elastic capital equipment is different from a 150% tarriff on a price inelastic consumer good, such as clothing and textiles.

His argument is still sound. India had lower tariffs and no wide-spread industrial plan, like America had. What Ha-Joon Chang says is that contrary to free-market propaganda, America used a lot of protectionism and built up its educational system and so on first. And it wasn't just America, but Taiwan, South Korea, Japan, and other countries that did as well. Furthermore, nobody invested in India because it was a weak country. After democratic reform in 1949 they pushed through a privatize plan (Watkins) that privatized most industries and 10 years later half of the people were in poverty. A famine occurred during this time and Truman refused to send any aid, such as grain. After this, they did not take Ha-Joon Chang prescriptions but played around with supply-side economics for the next several decades, losing more people every 8 years than the Great Chinese Famine.

Prof. Chang is great. If I may ask, which economic school could he be said to belong to? His own words seems to indicate that he takes a "dog's breakfast" approach to economics, borrowing and assimilating ideas from all kinds of schools of thought, from Hayek to Marx. However, from what I can see he is perhaps closest to the Institutionalist School.

Foreign trade reforms and development strategy

International trade and economic growth

Problems of to-day, a discussion of protective tariffs, taxation, and monopolies

The political economy of environmental protectionism

Economic adjustment, policies and problems : papers presented at a seminar held in Wellington, New Zealand, February 17-19, 1986