THE ECONOMICS OF PROTECTION IN MALAYSIA : A NEW GENERAL EQUILIBRIUM APPROACH

Abstract

This exercise deals with the economic effects of protection in Malaysia. As in many other places, the effects of protection have not yet been systematically analyzed and understood in Malaysia. The visible benefits and hidden costs continue to make protection politically attractive. It is ironical that protection is not effective in delivering its stated objectives in almost all cases. For example, if employment is to be boosted in the import-competing sector, it can be better achieved through other measures, such as, by cutting wages or by subsidising employment. To a first approximation, protection involves transfers (of income) which are a zero-sum game, and when we include the effect of the deadweight losses also, the net effect is negative. As a result, if one sector is given protection, this necessarily implies the unintended outcome of hurting the unprotected sectors. This study high1ights these implicit or hidden costs of protection in Malaysia. Chapter I introduces the problem specific to the Malaysian context. We study the incidence of protection in Chapter 2 by surveying the literature at a theoretical level. In this chapter, we attempt to spell out the costs of protection in terms of factors and sectors. The general finding in this chapter is that protection always breeds undesirable consequences. Chapter 3 deals with estimating the reduction in the volume of exports due to import protection. We attempt to exploit the simple idea that trade balance equilibrium implies that any reduction in imports due to protection concurrently causes exports to fall. The results indicate that a 10% uniform tariff, for example, will reduce the physical volume of trade by about 6%. Chapter 4 analyses the transfers among sectors which arise as a result of protection in Malaysia. We find that exporters lose about 4.2 % of GDP in 1989. As GDP for 1989 was $72079 million, this loss is equivalent to about $3034.5 million in 1989. The income lost by exporters is transferred to consumers and the government. Finally, in Chapter 5, we summarise the study.