Protection of Home Industries and LDCs | International Economics

In the LDCs, the policy of protection is strongly supported because it can lead to accelerated growth.

The main arguments in support of protecting the home industries in the LDCs are as follows:

(i) Growth of Infant Industries:

As the LDCs initiate the programme of industrial development, it is necessary that newly started industries or the infant industries are protected from destructive competition from the industries of developed countries.

(ii) Diversification of Industries:

The industrialisation of the economies of LDCs can be possible only if tariff and other restrictions are imposed upon the import of foreign produced goods. The cessation of the flow of foreign products allows time for expanding not only the consumer goods industries but also the intermediate goods and capital industries, exports industries, import substitution industries, agriculture-based industries, defence industries and several other industries allied to above categories of industries.

(iii) Greater Domestic Capital Formation:

The imposition of tariff on foreign produced luxury consumer products will reduce their consumption in LDCs. As a consequence, savings will increase. The increased saving can be employed for stepping up investment within the home countries. Alternatively, the foreign exchange conserved through import restrictions can be expended for importing capital goods. Thus, increased saving and home investment due to protection policies can step up the rate of domestic capital formation in these countries.

(iv) Inflow of Foreign Capital:

When the LDCs impose import restrictions, the foreign producers, in order to escape them, decide to set up tariff factories either directly or in collaboration with the local industrialists within the LDCs. Thus, protection provides strong impetus to the inflow of foreign direct investments into the LDCs.

(v) Increase in Govt. Revenues:

Custom duties constitute a significant proportion of tax revenues of the governments in LDCs. The yield from direct taxes is quite low in these countries due to low levels of personal income, under­development of corporate sector, low tax coverage, existence of vast non-market sector, complicated direct tax laws, inefficient and corrupt tax administration etc. The protection to industries can make a sizeable addition to the revenues of the government.

(vi) Improvement in TOT:

The terms of trade are often unfavourable for the LDCs. As protective tariffs are enforced on the imported products, the demand for foreign products in the home market gets reduced and the TOT becomes favourable for the tariff-imposing home country.

(vii) Redistribution of Factors:

As protection is extended to industries in LDCs, imports from foreign countries get reduced and home industries find opportunities to expand and absorb the surplus labour diverted from agriculture. It causes an increase in the marginal productivity of labour in agriculture which was earlier zero or close to zero. Thus, tariff facilitates a growth-oriented redistribution of factors in the developing countries.

(viii) Creation of External Economies:

The policy of protection to industries in the LDCs create external economics such as the growth of allied and complementary industries, expansion of demand for factor inputs, increased competition among home producers, lowering of costs of indigenously produced goods and improvement in the quality of products. The external economies, generated by the policy of protection, have stimulating effect upon the overall growth of the economy.

(ix) Enlargement of Market:

When protective tariff is enforced by the home country, the imports from abroad get restricted. The home producers meet the demand for products within their country. Thus, the extent of market gets enlarged for the indigenously produced goods.

(x) Off-Setting of Balance of Payments Deficit:

The LDCs are faced with chronic balance of payments deficit. When tariffs are imposed upon foreign products, imports become costly and importers have to curtail the imports of those products. It can lead to the off-setting of the balance of payments deficit.

This line of thinking is based upon quite strong reasoning that tariffs assist in the growth of infant industries, in industrial diversification, in attracting foreign capital, in securing more revenues, in promoting factor redistribution, in enlarging the extent of market, in raising the rates of domestic saving and investment and in creating external economies.

In this connection, it must, however, be pointed out that excessive resort to protectionist policy has not led to rapid growth either in the advanced or the LDCs. On the opposite, tariffs can have adverse effect on growth for the various reasons. Firstly, the absence of competition from foreign producers leads only to accumulation of inefficiency in the industrial sector.

Secondly, there is lack of capital, skilled manpower, dynamic entrepreneurship and economic and social overheads in the LDCs that keep the process of growth in general and industrial or agricultural expansion in particular completely hindered. Tariffs cannot remove all these obstacles to growth.

Thirdly, tariffs result in switch of demand from foreign consumer goods to home- produced consumer goods. In such a situation, it is difficult to generate more savings and raise the rate of investment.

Fourthly, if the switch of demand towards domestic products causes an excess demand, the country may be engulfed by inflationary pressures that impede economic growth.

Fifthly, the reduction in exports, consequent upon the restraints upon the products of other countries, restricts the size of market and affects growth in an adverse manner.

Sixthly, if tariffs result in increased demand for consumer goods and a rise in their prices, there may be diversion of investible resources from the capital goods to consumer goods sector causing a serious setback to the long run growth process in a developing country.

Seventhly, tariffs may generate some additional revenues to the government but these may get dissipated in the provision of subsidies to exports to check the contraction of exports.

Eighthly, the imposition of tariffs alone cannot lead to the productive utilisation of surplus manpower in the agricultural sector of the less developed economies.

Ninthly, the tariffs invariably result in emergence of monopolies, high costs and inferior varieties of products, which can hardly ensure steady growth in a country. Finally, the tariffs generally cause a reduction in the volume of trade and the developing countries may find it difficult to get rid of payments deficits. The persistently increasing balance of payments deficit can have serious adverse implication for growth.

The protective commercial policy has far more justification for the LDCs as they are the late­comers in development. From the point of view of these countries, the restricted international trade is certainly better than the unrestricted trade.