The costs and hidden hand-outs of protectionism [The Fiji Times, 14 August 2002]

 Which “handout” is the hardest to stop?

Not the one that Mr Mac Patel was talking about at the recent NZ-Fiji Business Council meeting.

Probably the hardest “hand-out” for any government (SVT, Peoples’ Coalition, or the SDL)  to stop is the protection of “local” products.

Because cheaper imports would then flood in, replacing the local products. Local workers would accuse government of destroying their jobs and incomes.

Local manufacturers would accuse government of favoring foreign multinationals against our own local entrepreneurs.

Opposition parties and other critics, with media support,  would accuse government of giving in to pressure from the IMF, the World Bank or the WTO.

So, politically, it is easier for governments to give in, and increase protection again.

Which, unfortunately, in most cases is not good for the economy.

Why protection?

For decades, like other developing countries, Fiji has been encouraging local manufacturing industries, by imposing high duties on imports of “locally made” products.

As a result, prices of the imported goods increased and consumers were forced to buy the local products, but at much higher prices.

Some local jobs were created.

Protection has been provided for tinned fish, cooking oil, margarine, cement, matches, rice, flour, milk powder, to name a few.

The strategy was called “import substitution” for growth, by helping the “infant” industries, supposedly until they “grew up”.

But make no mistake, the high duty resulted in a “hand-out” from consumers who paid extra.

Without the hand-out of duty protection, there would be no local industry, no profits, and no jobs in these areas.

Less protectionism today

  But nowadays, governments everywhere are reducing duty protection for their locally manufactured products.

The IMF, World Bank  and the ADB have called for the reduction of protectionism. Most countries have now signed agreements with the World Trade Organisation (WTO) agreeing to reduce import duties and protectionism.

But many economists also believe that reducing protectionism is good economic policy in itself.

Developed country hypocrisy?

  Unfortunately, the historical evidence is that most developed countries like United States, Germany, Japan, and the countries of the EU,  also built up their own new industries by protecting them against cheaper imports.

Today, they want our companies to compete on “level playing fields”, when we know there is no “level playing field” for our manufacturers and products.

The developed country companies are larger than ours, and easily more efficient.  They have the latest technology, helped by large research programs. They have the best scientists and skilled workers (some attracted from our countries).

They have well developed infrastructure such as roads, airports, ports, electricity, water, and communications networks.  Therefore, our local manufacturers just cannot compete with the large foreign companies.

Most of our local products use largely imported inputs, not local.  And our protected “infant” industries are unlikely to ever “grow up” and compete internationally.

But developed countries still protect?

  It is even more unfair that developed countries, today,  still protect some of their inefficient industries, for political reasons, against their own economistss’ advice.

For instance, both the European Union and US give large subsidies and protection to their agricultural sector.  (Although this benefits the Fiji sugar industry).

Should we copy their protectionist behaviour?

The tough answer is “no”.

Reducing protectionism is a better policy for our economies, because the costs of protection are bigger than the benefits.

Costs of protection bigger than benefits

  Suppose that duties are completely removed from tinned fish imports.

Imported tinned mackerel may become 20 cents cheaper and be bought, not the local ones.

If Fiji consumes 10 million tins of fish per year, the total saving for consumers may be $2 million per year.

Suppose that one hundred local workers, each earning five thousand dollars a year, lose their jobs.  The total jobs benefit lost would amount to only $500 thousand per year.

This is far less than the $2 million that consumers would save.

Put simply, if import duties on tinned fish were removed, consumers could pay the hundred workers to stay at home on full pay, and still gain by one and a half million dollars.

Similar arguments apply to most of our local products, especially those using mostly imported inputs.

Difficult politically

  But the removal of import duties is hard for government.  Because those who would be hurt, hurt a lot, complain a lot, easily get media attention,  and put enormous countervailing pressure on government.

Some local manufacturer may go out of business, immediately losing millions of dollars of profit a year.   He is usually a contributor to the important political parties.  He will pressure the political parties.

Local workers (with families to support) lose their jobs and incomes.  The unions and media attack government for being inhumane.  Will government risk losing these important votes?

Gainers keep quiet

  In contrast, consumers who would benefit from reduced import duties do not put political pressure on government. Why not?

The savings per family from duty reduction on tinned fish imports, may be less than one dollar per week.  Why bother?  And some may even support the protection.

Ordinary consumer also do not understand that if government reduced duties on most consumer goods, prices and the cost of living would be lower.  Real wages for everybody would be higher. Producers, especially exporters, would benefit.  And overall employment would tend to rise.

But all these benefits would tend to occur in the future, not immediately, and they would be almost un-noticed.  While the costs of removing protection are obvious.

It is quite understandable that governments give in, and maintain protection and high duties.  Which is a pity.

A different future?

  Of course, we should not reduce protection without regard to displaced workers.

We would need to re-train and re-deploy workers to industries that are going to be compatible with the WTO world order.

 

Economists advise that we should focus on our “comparative advantages”, our natural assets, and produce goods and services that we are good at, that the rest of the world wants.

 

Tourism based on our land and sea environment, and perceptions of friendly service.  Export agriculture.  Forestry, fisheries and related industries.  Services of all kinds, including looking after the retired people from Japan, US, Australia and NZ.

 

These are goods and services that the world’s growing population find scarcer and scarcer elsewhere.

 

Useful also for political stability, is that Fiji’s comparative advantages are largely in the areas where indigenous Fijians can stand to benefit most.

 

But which government will dare to bite this bullet?