Monthly Archives: February 2015

The poverty of protectionism

By Tunde Obadina

Many western supporters of poor nations advocate nationalist economic policies for these countries while rejecting the same for their own economies. Left-leaning development organisations condemn the racist agendas of right-wing groups like the UK Independent Party (UKIP) and France’s Nationalist Front, yet they encourage developing countries to embrace similar programmes. Anti-immigration and trade restriction regulations castigated as regressive for one part of the world are applauded as progressive when applied in another part.

This inconsistency stems partly from moral relativism. Bigotry on the part of the rich and powerful is regarded as wrong but xenophobia among the poor and powerless is excused as warranted. This duality partly stems from a view that rich and poor economies are different in nature. Behaviour that is detrimental to an industrialised system is assumed to be enhancing for an industrialising one.

This is a dangerous fallacy. Rich and poor economies are different to the extent that one has lots more produced assets than the other. The natural laws of economics, as relating to such matters as the division of labour, the relations between demand and supply, pricing, investment etc., apply equally to all economies. In many ways the distinction between developed and developing societies is superfluous. All economies, regardless of GDP size, are dynamic and constantly evolving. The UK is not the same today as it was in 1960. It has undergone numerous economic changes, which have been as transformative for its inhabitants as have the changes experienced by people in Nigeria or India during the same period.

Nationalism is detrimental to economic development, wherever it occurs. Policies that seek to exclude outsiders from the economy are often rationalised as advancing the national interest. But national interest is a bogus concept stemming from a flawed understanding of what constitutes an economy. A national economy is an aggregation of the markets existing within a given geo-political space, while markets are aggregates of all transactions between individuals in specific spheres of activity, such as banking, shoes production, healthcare etc. So basically, a national economy comprises of all the transactions that take place within a country.

Neither a nation nor an economy has a single interest or set of interests. They are not entities capable of experiencing gain or loss. Only individuals have such interests, as only they can benefit or incur loss. So when government legislates against importation of certain foreign goods, its dictate will benefit some in society and hurt others. Clearly, the owners and workers at local companies that produce goods similar to the banned items may gain from the curtailment of competition. They can sell to captive consumers who otherwise may have side-stepped their products. State-protected sellers can charge prices well above what would have been possible in an open market. It is also clear that consumers who are coerced into buying from local producers at often higher prices incur loses, both financially and in infringement of their property rights. The trade barrier is definitely not in their interest.

The extra money consumers spend on buying goods from protected producers is money they could have used for other products or saved. For example, the extra $10 a household is compelled to outlay on clothes because of trade restriction is money it can no longer spend on furniture or on visits to the cinema. This means that as local garment makers are profiting from government intervention local carpenters and entertainment providers are losing sales opportunities. The government is serving the interest of one industry at the expense of others.

When the state erects trade restrictions it invariably creates incentive for smuggling. Legitimate importers are driven out of business, replaced by traders who are more willing to assume the risk of flouting the law. Protectionism robs one group of traders of their livelihood while creating opportunity for another.

Similar considerations come into play when the state prevents entry to foreigner workers. Some local workers are able to maintain jobs they would not have in a free market. However, employers will incur higher costs as a result of being forced to engage workers who not most cost-effect. It also entails consumer losing the extra value which employment of the prohibited foreign workers could have provided. For example, if a immigrant worker would have created net value of $1,000 a year, while the local substitute creates $800, the $200 foregone value will mostly be borne by consumers in higher than necessary prices.

Proponents of protectionism sometimes present statistics to show the gains of state intervention. These might, for instance, show that import bans on rice or wheat created or sustained so many jobs. But protectionists rarely, if ever, present figures showing the number of job opportunities lost as a result of trade restrictions. And even if the gains can be shown to outweigh the losses, it remains the case that the individuals who benefit are mostly not the same individuals who lose.

Policymakers almost always present protectionist policies as pro-poor. This is nonsense – a disingenuous rationalisation of policies that disproportionately benefit the wealthy and often at the expense of the poor. The general effect of protectionism, whether its import bans or punitive tariffs, is to raise prices of consumer goods. Most of the goods affected are items consumed by people of all income groups, such as textiles, medication, wheat and rice. It goes without saying that higher prices hurt low-income earners more than the rich. Pushing up bread prices by restricting wheat imports may enable local bakers to profit and secure the wages of a few thousand bakery workers, but dearer bread means millions of poor people must either go hungry or spend more of their meagre income to stay nourished.

Protectionism also drives the poor to black markets to meet their needs, making them vulnerable to rogue traders. For example, in Nigeria import of some widely used pharmaceuticals, such as paracetamol and aspirin, is prohibited. The bans have contributed the growth in black markets in medication products, a large proportion of which are fake and dangerous. Low income earners are much more likely to use black market medicine than are the rich, who can afford the premium for genuine items. So while protecting the local pharmaceutical industry the state is puts at risk the health of millions of poor consumers.

Poverty reduction results from either an increase in real income or/and a fall in living costs. By driving up prices protectionism renders low income people poorer. Whereas, in pushing down prices international trade enriches the poor by enabling them to obtain greater value from their meagre wealth. Much of the reduction in global poverty over the past five centuries has been due to international trade lowering the cost of a widening range of goods and services – giving poorer people to access markets which were previously beyond their reach.