Kicking Away the Ladder. Development Strategy in Historical Perspective

Important as tariff protection may have been in the development of most NDCs, it was – I repeat – by no means the only, nor even necessarily the most important, policy tool used by these countries in promoting infant industries. There were many other tools, such as export subsidies, tariff rebates on inputs used for exports, conferring of monopoly rights, cartel arrangements, directed credits, investment planning, manpower planning, R&D supports and the promotion of institutions that allow public-private cooperation. Tariffs were not, and are not, the only policy tool available to a state intent on developing new industries or upgrading old ones. In some countries, such as Germany up to the late nineteenth century or Japan before the restoration of its tariff autonomy in 1911, tariff protection was not even the most important tool for infant industry promotion.

Indeed, there was a considerable degree of diversity among the NDCs in terms of their policy mix, depending on their objectives and the conditions they faced. For example, the USA used tariff protection more actively than Germany, but the German state played a much more extensive and direct role in infant industry promotion than its US counterpart. As another example, Sweden relied upon public-private joint activity schemes far more than, say, Britain did.

Thus, despite some remarkably strong historical patterns, there is also considerable diversity in the exact mix of policy tools used for industrial promotion across countries. This, in turn, implies that there is no ‘one-size-fits-all’ model for industrial development – only broad guiding principles and various examples from which to learn.

2.4.3. Comparison with today’s developing countries

Discussions of trade policy by those who are sceptical of activist ITT policies rarely acknowledge the importance of tariff protection in the economic development of the NDCs.[241] Even those few which do so dismiss the relevance of that historical evidence by pointing out that the levels of protection found in the NDCs in earlier times are substantially lower than those that have prevailed in today’s developing countries.

Little et al. argue that ‘[a]part from Russia, the United States, Spain, and Portugal, it does not appear that tariff levels in the first quarter of the twentieth century, when they were certainly higher for most countries than in the nineteenth century, usually afforded degrees of protection that were much higher than the sort of degrees of promotion for industry which we have seen, in the previous chapter, to be possibly justifiable for developing countries today [which they argue to be at most 20 per cent even for the poorest countries and virtually zero for the more advanced developing countries],.[242] Similarly, the World Bank argues that ‘[a]lthough industrial countries did benefit from higher natural protection before transport costs declined, the average tariff for twelve industrial countries ranged from 11 to 32 per cent from 1820 to 1980 … In contrast, the average tariff on manufactures in developing countries is 34 per cent’.[243]

This argument sounds reasonable enough, especially when we consider the fact that tariff figures are likely to underestimate the degree of infant industry promotion in today’s developing countries when compared to those for the NDCs in earlier times. As I pointed out at the beginning of the chapter (section 2.1), limited fiscal capabilities and lack of regulatory power of the state seriously limited the scope for ITT policies other than tariff policy in the NDCs in earlier times. Governments in today’s developing countries tend to use a wider range of policy tools for infant industry promotion, although some of these tools (e.g., export subsidies except for the poorest countries) have been ‘outlawed’ by the WTO.[244]

However, this argument is highly misleading in one important sense. The problem is that the productivity gap between today’s developed countries and developing countries is much greater than that which used to exist between the more developed and less developed NDCs in earlier times. This means that today’s developing countries need to impose much higher rates of tariff than those used by the NDCs in the past, if they are to provide the same degree of actual protection to their industries as that once accorded to the NDC industries.[245] In other words, given the greater productivity gap they face, today’s developing countries need to use much higher tariffs compared to the NDCs in earlier times, just to get the same protective effects.