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Bryan Caplan has a superb post [2] at EconLog on (some of) the problems with the so-called “infant-industry” argument for protectionism. Do read it all.
One of the arguments (indeed, the chief argument) offered by proponents of infant-industry protection is that government-supplied protection from foreign competition will intensify the incentives of the owners and managers of the protected firms to improve their efficiency – to improve the quality of their outputs and to achieve maximum possible efficiencies in production and distribution. As Bryan points out, this argument is very weak.
Here’s a slightly expanded version of a comment that I added to Bryan’s post:
Bryan,
As usual, great post.
Here’s a mental experiment that I share with students in my International Economic Policy course when we get to the topic of infant-industry protection:
Suppose that I, as teacher of the course, were to tell each of you students that on each exam and paper that you submit for the course, I’ll raise the grade you earn by one letter grade. So a student who earns a C+ on a mid-term exam will be recorded in my Excel spreadsheet as having earned on that exam a B+. A student who earned a B on a paper will be recorded in my spreadsheet as having earned on that paper an A.
I explain that my grading policy is meant to encourage each student to study harder and, thus, to better learn the material. My reasoning is that a student who senses that he or she, with ordinary studying, is destined only to earn, say, a C- will feel that it’s not worthwhile to study harder if the likely result will be only a C or a C+. The improved outcome isn’t worth the effort. But if by studying harder this student understands that the C+ he thereby earns will be raised by me to a B+, the result suddenly does seem worth the effort.
What could be simpler?!
Even my students understand that, were I really to make such a promise to artificially raise their grades, the result would be less studying rather than more – and, hence, less learning rather than more. Similarly, of course, were government to use tariffs or other protective measures to artificially increase demand for certain firms’ outputs, the result would be less effort to improve output quality and productivity – and, hence, less economic growth in the country.