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Infant Industry Argument: Theoretical Framework And 3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032 INFANT INDUSTRY ARGUMENT: THEORETICAL FRAMEWORK AND CURRENT OPPORTUNITY OF ADOPTION Mamdouh Abdelkader yiwaFiahimaS Department of Economics, Department of Economics, Faculty of Commerce, Faculty of Economics and Political Sceinces, Damanhour University, Egypt Cario University , Egypta Gordon Fisher Gamal Atallah Department of Economics, Department of Economics, Faculty of Social Sciences, University of Concordia, Canada. University of Ottawa Canada. Abstract---- This paper verifies the possibility of countries focus on technology intensive industries. using Infant industry protection strategy to In addition, developing countries can exploit the improve manufacturing competitiveness in increasing number of Regional Trade Agreements developing countries. The main theoretical bases (RTAs) to support their infant industries. RTAs of this strategy are: its significant role in creating extend the market size that may help infant dynamic comparative advantages in industries to develop their competitiveness manufacturing sector. This protection also gives through achieving economies of scale, learning by the industry time to learn by doing and achieve its doing and supporting backward and forward positive externalities. In addition, infant industry linkages. protection can be a virtual solution to market Keywords---- Infant Industry Arguments, failure which may impedes the establishment of Competitiveness, Industry Protection. such industry. This study supports infant industry 1. Introduction argument validity by showing successful One of the most important approaches to improving experiences of some countries at various times in manufacturing competitiveness of a certain country is history. It is found that most countries used such to protect its infant industries. Friedrich List (1841) policy to reach their industrialization. Some defines the infant industry " as a type of industry studies tried to refute the infant industry which is in its early stages of development; argument but they based their criticism mainly on potentially in need of some form of protective the failure of some developing countries to measures in order to survive and successfully correctly apply this policy, not on their theoretical compete with (foreign) mature competitors" (Govers, justification. Despite current WTO restriction to 2012). Because it is in its early stage of development, use infant industry, the paper argues that the the infant industry has high initial costs compared to chance of adopting this strategy still exists. This its well-established foreign counterparts; therefore, it can be mainly achieved by some policy space of needs time to achieve its competitive advantage. WTO rules to adopt this policy, especially if these Entrepreneurs do not have incentives to establish this 49 3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032 industry due to its initial high costs, so it needs book The National System of Political Economy temporary government protection to survive and (1841), List began by criticizing the classical compete internationally (Ali, 2013). However, to economics doctrine of Cosmopolitan Economics deserve such protection, the infant industry should (based on the laissez-faire principle), which supports have strong potentials allow it to increase its the necessity of government intervention in order to efficiency and cause its costs to decline, eventually to prioritize national interests. He argued that reach a competitive state. These potentials should government intervention is important to establish the involve achieving its dynamics such as learning by productive power1 of the country. This temporary doing, economies of scale, and externalities (Kruger intervention should concentrate mainly on Infant- & Tuncer, 1982). It is also not necessary to associate Industry protection, because of the lack of experience Infant Industry protection with Import Substitution and high risks involved in its establishment (Kicsi & Strategy; it can be used to achieve Export Oriented Buta, 2010, and Shin, 2015). Protection policies industrialization. East Asian countries adopted infant should not be limited to trade, but must include industries to upgrade their export oriented strategy in macroeconomic policies to enhance the socio- addition to import substitution. Bustelo (1996) economic environment. List was not against free reported that South Korea and Taiwan, for example, trade; he argued that protection was only permissible used protection not only to substitute imports but also when counties showed uneven levels of development, to enhance export sectors. In this paper, we will because free trade would make industrial present the theortical debate regarding Infant Industry development in the developing nation difficult and Argument (section 2), as well as the criticism of such maintain the country at an unvarying developmental policy (section3). It is also important to verify stage. In such a case, the protection of Infant- whether currently developed countries have adopted Industries would be necessary for industrial such policies (section 4). Section 5 shows the current development. When all trade parties show similar restrective WTO rules of using infant industry levels of development, free trade represents gains for strategy. In section 6, we will illustrate if currently all countries as the differences in their natural and developing countries are able to use infant industry human resources offer more benefits. policy under the World Trade Organization rules and In this section, we will review theoretical arguments current global environment. of Infant Industry Strategy: 2. Infant Industry: Theoretical Arguments A. Dynamic comparative advantage The argument of infant industry was first Ricardo‟s concept of comparative advantage (1817) theoretically formulated by Friedrich List (1789- depends on inherited factors of production over a 1864) in Germany, who was influenced by the ideas given period: i.e. it is a static concept. The main of Alexander Hamilton (1755-1804) and Henry Cary weakness of this static comparative advantage is its (1793-1879) in the USA, List based his theory on the historical experiences of different countries and then 1 List indicated that the productive power in a country is introduced some new theoretical arguments. In his determined by many factors. These factors involve political and social institutions, natural and human resources, an industrial base, and public work. 50 3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032 disregard for the structural context in developing industrialization was interrupted in its early stages. countries. In most cases, the static advantage of these Consequently, most developing countries reverted to countries lies in agriculture or natural resources. net export of raw materials and net import of Relying on these activities alone may inhibit industrial goods. Meanwhile, developed countries industrialization and higher economic development. focused on increased return activities such as The prices of agricultural goods and raw material manufacturing and knowledge-intensive products suffer from large natural fluctuations both upward (Zambakari, 2012). Many developing countries may and downward. GDP fluctuates accordingly, and have dynamic comparative advantages in some developing countries cannot reduce the extent of industries, but depending on static advantages alone these fluctuations. Furthermore, agriculture and makes it impossible for them to compete natural resources require skills and experience that do internationally. Protection is necessary for them to do not correspond to industrial activities. Thus, focus on so in the long run (Alavi, 1996). such activities hampers industrialization. In addition, To make matters worse, developed countries agriculture and natural resources have diminishing increasingly support their agriculture sector which returns to scale, which lead to deterioration in means that developing countries quickly lose their productivity, unlike specialization in activities that comparative advantages in that sector. Nguyen have increasing returns to scale such as (2008) showed that EU countries and the USA manufacturing. Erik (1996)2 indicated that, extensively support agriculture which makes historically, no country has ever achieved economic producers able to export at lower than their real costs. progress by depending only on diminishing returns to It also ensures that developing countries will be scale activities. unable to compete with those products at home or However, the theory of comparative advantage has internationally. In 2002, for example, the cost of not completely ignored factors of production growth; agricultural production in Europe was two or three but, it has left it entirely to market forces. This does times more than that of South Africa. However, EU not guarantee acceleration in economic development, subsidies for farmers make this cost just one-third of and it also deviates resources from industrialization that of South Africa. (Shafaeddin, 2000). Developing countries are also To not continue specializing only in agriculture and unable to deal with important dynamic issues such as natural resources, it is necessary to
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