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Tuesday, February 26, 2013

Import-substituting industrialization - Prof. Paul Krugman

Prof. Paul Krugman posted this piece titled "WWS 543, International Trade Policy: Class 6" in his blog. The paper itself is titled "Import-substituting industrialization".

I take it that those are notes for a lecture he gave. I also take it from the notes that he is arguing against import substitution as a strategy to increase industrialization. He seems to question the concept of 'infant industry protection'.

I now find myself in the curious situation where I, as a convinced free marketer, support elements of a planned economy which even the most liberal Prof. Krugman criticizes. The only point is: I don't call it a 'planned economy'; I call it a 'managed economy'.

How can one possibly expect a country like Greece, not having much of an industrial history to begin with and having been decapacitated in recent years, to walk into world markets and announce 'hey, we'll now compete with your industrial production'?

I liken it to a very talented regional soccer player in Greece whose talent is recognized and who is transferred to Real Madrid to compete with the stars (and once he gets used to the standard of living there, he is told to shape up his game or else be kicked out of the team). That can't work! The right way to do it would be to first send him to a top team in Greece, wait for him to become a star there and then move on and only then have him compete with other stars.

One has to learn to walk before one can learn to run!

I think 'infant industry protection' with a focus on import substitution is the only way for the Greek economy to have a fair chance of getting itself into competitive shape in the near term. It can only work if it is 'managed' well, i. e. if it is employed to achieve longer-term objectives. If it is employed to achieve short-term profits for clever domestic profit-makers, then it wouldn't work.


  1. I agree with you.

    Certainly Korea and Malaysia benefitted from protecting their industries while they grew them. I find this a good example for your argument.

    Pre-Papandreaou and pre-EU, Greece also had tariffs and protections. The economy didn't boom, but our industries did well and provided a great deal of skilled employment which evaporated inside the EU. Our textiles could not compete with Asian prices (though better quality) for example. The resulting wind-down of industry led a lot of families to seek employment for at least one of its members in the new employment sector: the government!

    The economist Doxiadis (Alexios I believe) wrote a very good analysis 3?4? years ago of the post-industry, Papandreaou economic & employment situation in Greece, available through the DRASI website.

    1. The immediate killer-argument to my proposal is: that's against EU laws! (free movement of goods and capital). Yes, it is. But there are ways to structure it so that it is just within the letter of the law (albeit not in the spirit). Austria has an 'environmental tax' on all cars. About 20%. Pains were taken to explain that this had nothing to do with import taxes. But when all your cars are imported, what else is it?

      And, as a last resort: no laws are carved in stone. One can approve temporary exceptions if there is a will and if the exceptions carry a benefit for all involved. The better an economy that can be developed in Greece, the less transfers foreigners will have to make to Greece. That is mathematics and not economics.

      Again, the one big problem with 'infant industry protection' is that it is misused for the wrong purposes. Personally, I think that this could be managed and controlled. At the same time, Greeks do seem to have an unbelievable talent to convert what is meant to be a benefit for all into one's own benefit.