Friday, August 28, 2009

Rationale of a Protectionist Policy in a Developing Economy

There is no doubt that historically speaking protection was an instrument used by industrially backward countries to catch up with the advanced counties. The USA as well as the countries of the European continent adopted the policy of protection against the United Kingdom which was industrially ahead of them. Their industries could not face the British competition since they had entered the race of the industrialisation later. The force of “infant industry argument” was admitted even by eminent English economist like Alfred Marshall, although the English economists have as a rule favoured free trade as against protection.

Now protection is being given extended application in developing countries. They are not back ward generally in economic development. Protection may be needed even by farm products. The developing economics are desirous of registering economic advance in all sectors of the economy of course. In accordance with a scheme of priorities. Fresh economic development can not obviously last if exposed to the withering competition from abroad. There is a period during which newly gained economic gains must be protected and considered. ‘Nurse the baby protects the child and frees the adult’ is a maxim which still holds good.

In all plans of economic development protection occupies an important place. What is generally done is that when a certain industrial project is taken up as a part of the economic development plan, the imports of competing manufactured goods are substantially curtailed or totally banned for some years so that the field is left free for domestic manufacturers. The home market is thus preserved by protection for home manufacturers. If this is not done all investment in the new lines of manufacture may go to waste, because foreign competition will not allow the home manufacturers to acquire a foot hold in the home market. Unless there is prospect of protection for the new product, no investor will come forward and make investment in that particular field. As a consequence the development plans will fall through of.

Fiscal policy is now being used as in instrument planning. It plays a vital role in economic development. It must be such as to encourage saving and investment in the country. Fiscal policy can be used as a device to bring about greater investment and increase in income and employment in the country. It can also be used for reducing inequalities of income and wealth in the country which is desirable objective of economic development. A developing country has very carefully to work out import policy to be pursued from year to year. Imports are strictly controlled and quotas fixed. While fixing quotas, the main consideration is the availability of foreign exchange. As a rule, where the country has the capacity to meet entire domestic demand, tarrifs are increased even up to hundred percent. When the home industry can meet home demand practically, the imports are regulated by quotas. As for exports, export promotion drive is launched. Export incentives are provided by removal or reduction of export duties and by giving several concessions to exporters.

Thus protection is of special value, say an urgent necessity, for the under-developed and developing countries. We indicate below in a summarize form why so.

(i) The ‘infant industry argument’ specially indicates the need for protection for the developing countries. But it should be selective or of discriminating type.

(ii) Pigou observes “The case for protection with a view to building up productive power is strong in any agricultural country which seems to possess natural advantages for manufacturers. It is especially the case for under-developed, predominantly agricultural countries like Pakistan.

(iii) Protection preserves the available foreign exchange for the import of capital equipment, essential raw material and the technical know-how so urgently needed to give a push to the development process.

(iv) Protection strengthens the economy of under-developed countries and increases the GNP and eventually results in the expansion of international trade.

(v) Protection will strengthen defence and promote self-sufficiency and full employment in such countries. This is all the more necessary in a world of political uncertainty.

(vi) Protection is an essential ingredient of planned economic development for which control and regulation of all economic activity are so very necessary.

Thus protectionist policy plays a vital role in developing economics to bring about rapid economic development.

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