Costs of Protectionism:How Indian Consumers & Workers Lost Out

Liberty Institute Briefing Paper on Trade and Development titled Costs of Protectionism:How Indian Consumers & Workers Lost Out was published in November 1999

In 1947, India's share of the world trade was 1.5%.
In 1998, it was estimated to be 0.8%.
Per capita income in 1998 was approximately $400 ($900 under PPP)
Indian Economic Philosophy for the Past 50 years
• National self-sufficiency
• Import substitution
• Trade is a zero-sum game
Basic rationale for restricting trade:
• Protecting domestic manufacturers
• Encouraging domestic manufacturing and employment
• Ensuring quality and safety for the benefit of consumers
• Promoting indigenous growth of knowledge and technology
Consequences of protectionism:
• High price, low quality
• Low levels of competition
• Technological stagnation
• Knowhow dependent on policy of subsidies
• Smaller market, lower volumes
• Perpetual Scarcity
Loss to consumers - Choice, Price, Quality, Access
Characteristics of the Protected Domestic Market:
Organised sector -
o Entry barrier (licence and permit raj or rule, now being partly dismantled)
o Higher fiscal and regulatory costs of operating in the formal market (while tariffs and taxes may be falling, regulatory, legal and transaction costs are increasing)
Growth of small / informal and even illegal sectors (particularly in established manufacturing areas) (fly-by-night operators)
o Policies induce companies to stay small!!
o Fewer people are employed, minimal benefits accrue to communities
o Companies avoid regulatory costs incurred by those that play by the rules
o - Low quality
o - Low price
o - High transaction costs for consumers
Rise of vested interests
• Formal sectors - seek legal protection
• Informal sectors - seek administrative collusion
• Illegal sectors - seek continuation of protectionist policies to ensure their own high profits
Consequences of distorting trade -
• International Trade: Smuggling
• Domestics market: Black-market
• International relations: Political tension is common among countries that do not trade. (India and Pakistan barely trades, and are permanently under the cloud of war.)
Result:
• Social level:
- Loss of respect for laws
- Creation of established channels of smuggling, black marketing and racketeering
- Use of these same channels for many other more insidious activities (terrorism)
• Economic level:
- Economic inefficiency
- Flouting of economic regulations - loss to exchequer
• Environmental level:
- Environmental inefficiency / degradation
- Flouting of environment regulations, free riding
Trade Restriction is a Negative Sum Game
• Consumers lose out on better quality, lower prices and low transaction costs associated with brand products.
• Manufacturers lose out by failing to capture larger markets with better share, having less opportunities to innovate or introduce new products Traders lose out on account of small size of the market
• Service sector lose out for similar reasons
• Workers lose out as there are fewer jobs on offer
Required Policy Direction:
If the interest of consumers are to be paramount, and since all parties in an economy are also consumers in their private capacities, then policies must reflect the following objectives.
• Free trade
• Elimination of tariffs
• Reduction of regulatory costs
• Unrestrained imports (even second hand goods or waste products)
Economic consequences of Free Trade:
• Advantages of economies of scale
• A more dynamic and competitive domestic economy
• Inflow of new innovations and technology
• Economic efficiency will boost environmental quality
• Realisation that domestic manufacturing are not the prime source of employment
• More employment in the area of trade and services outside the organised sectors
• Substantial investments are attracted to open and expanding markets
Conclusion:
• Free trade is a positive sum game.
• Producers compete to improve their products at lower prices
• Consumers have a wide range of choices.
• A competitive market economy improves the social and environmental conditions.
• Free trade is fair trade
Consumer is truly the King in an open market. Greater the choice, the more powerful the consumer becomes.
In contrast, creating protectionist barriers, at the international and domestic levels, have led to high cost and inefficient economy, where the consumer has become the pauper.