THE POLITICAL ECONOMY OF PROTECTIONISM

Abstract

Protectionism is a feature that plagues both the developed and developing countries. Why has it been so persistent when it has been economically analyzed to be against the national interest in most situations? Within the pure theory of economics, it is assumed that national concerns guide policy-makers in their determination of trade policy. Thus, it is assumed that they would adopt the welfare-maximizing policies proposed by economists. With this theory, it would be difficult to explain the persistence of protectionism. To gain a better understanding of the decision-making process, in the field of trade policy, economists have begun to look beyond the confines of their discipline, and consider the political processes involved in the determination and implementation of trade policy. This study uses the public choice theory to explain how protectionist policies are determined by the political process. Within this theory, the methods used to analyze economic behaviour in the private marketplace are applied to the political marketplace, and it is assumed that interest groups play an important pa.it in the conduct of trade policy. Chapter One provides an overview of political economy and elaborates on the public choice theory. The new developments in the theory of international trade are considered in Chapter Two. Moving away from the old assumptions of perfect competition, homogeneous products and constant returns, it is explained in this chapter that protectionism may be economically justifiable under conditions of monopolistic competition, differentiated products and increasing returns. This chapter finally considers whether these explanations provide a case for governments to adopt protectionist policies. In Chapter Three, public choice theory is used to explain the conduct of trade policy. This chapter begins by considering the assumptions under which free trade would be unambiguously favoured through the voting process. Then, be relaxing the assumptions and moving closer to reality, it is explained why there is the tendency for protectionist measures to be chosen instead. The rest of this chapter looks at rent-seeking activities and the political process. This part explains how government intervention in economic activity produces rent-seeking opportunities and responses. It also considers why politicians tend to be susceptible to the pressures exerted by interest groups. This part also explains why producers tend to form more effective lobby groups than consumers. Empirical evidence with regard to the political economy of protectionism is provided in Chapters Four and Five. Chapter Four draws on the evidence from developing countries. The first part explains why protectionism has been rising in developed nations. The reasons given include high unemployment levels in the industrial countries, the economic ascendancy of Japan, the competitive pressures from the newly industrializing countries (NICs) and the newly-exporting countries (NECs), and the decline of American dominance. The rest of this chapter is devoted to empirical evidence. The cases considered are the Textile Bill and the Trigger Price Mechanism in the United States, and agricultural policy in the European Community. Chapter Five considers the relevance of the political economy approach in explaining protectionism in developing countries. The first part of this chapter suggests why organization of interest groups in developing countries does not parallel that of developed countries. This chapter considers the structure of protection in India, Indonesia, South Korea, Taiwan and Singapore, to explain the applicability of the political economy approach. The final chapter summarizes the lessons learnt and considers certain strategies that could be used to promote trade liberalization.