Geriatric infants in the professional sector

I am not discussing human infants, who need society's affection and complete care. The focus here is on "infant industries", a jargon in trade economics for new businesses and industries in the international marketplace. Like human infants, the argument goes, they have to be protected until they grow up and so are able to compete with established firms in the industry. The presumption was that newly set up industries would face high average costs of production but, through learning by doing, as time passes, they would manage to reduce production costs enough in order to contend with established players. Sounds logical, nonetheless it raises a host of questions.

Since the propagation of the post-War Prebisch-Singer hypothesis of import-substituting industrialisation for developing economies, the strategy of protecting "infant industries" on the road of industrialisation became the bread and butter approach generally in most developing countries seeking transition from agrarian to professional predominance.

That which was left unclear in this specific approach to industrialisation was "how long" an industry was to be looked at an infant industry. Human infants pass through pretty much defined stages of childhood, adolescence and adulthood, however the literature on trade theory and policy has given us no such guidance about the periodicity governing infant industries. The annals of industrial protection in the last 75 years has revealed that protection, once introduced, falls into the grip of inherent inertia, making it difficult to come out of it. Global research reveals how the policy of protection creates vested interest groups who would devote time and resources to maintaining high examples of protection unless public policy intervenes to lessen it. In consequence, in most economies, the protection regime gathers its momentum to secure greater longevity. Sadly, Bangladesh is among those where commercial protection has taken a life of its own, seemingly without any end in sight.

The other unanswered question is "just how much" protection is appropriate. While protectionist bans and restrictions on competing imports has been virtually eliminated under WTO rules-based world trade, tariffs remain the orthodox instruments of protection. Again, trade theory and policy will not offer any guidance how high tariffs (or para-tariffs) could be raised to safeguard industries.

Globally, tariffs have come down significantly in the last 50 years and customs duties (CD) of 15 percent is known as a "tariff peak", but this is simply not a legally mandated upper limit, so no one follows it. Bangladesh maintains a high CD rate of twenty five percent (unchanged since 2005) complemented by other duties like supplementary and regulatory duties (SD, RD) on imports. These latter band of trade taxes, termed para-tariffs, are additional means of bolstering protection. Although income is ostensibly the main argument for applying these para-tariffs, research from the Policy Research Institute of Bangladesh implies that, more often than not, SD serves as a musical instrument of protection in our economy.

Typically, any consumer good created in Bangladesh is at the mercy of tariff protection at the highest CD rate of twenty five percent, topped up by various rates of RD and SD. While all domestic manufacturers of consumer goods get protective CD of twenty five percent, and most get three percent RD and 20 percent SD, a few industries are selected for higher protection giving them "extra" SD of 45, 60 as well as 100 percent. We know that automobiles, alcohol consumption and tobacco are subject to the best rates of tariffs and para-tariffs (up to 650 percent), but that's clearly for mobilising income or discouraging consumption, not for protection.

So we have a confluence of three underlying issues in protection highly relevant to the Bangladesh context-magnitude, sectoral variation and periodicity. Together, they provide a significant conundrum in the pursuance of protection policy.

First, in the absence of any theoretical help with the magnitude of tariff protection, Bangladesh appears to follow a path of "high" protection in comparison with other developing economies. Note that in principle, a protective tariff is the same as a subsidy on import substitute production, similar to a cash subsidy on exports. A World Bank comparison of average tariffs shows Bangladesh is leading in this sector. It turns out that Bangladesh's average tariff (CD) of 13.5 is higher than that of lower middle class countries (7.2) or upper middle class countries (3.2). It increases the question of how high tariffs have to be for protection to work.

Second, if the case for protection is manufactured, why not provide equitable or uniform protection to all or any import substitutes? There is no theoretical basis for giving higher protection for some and lower protection to others. For instance, just how do we justify that leather shoes and ceramics are singled out for higher protective tariffs over leather bags and plastic chairs? Just how variable protection has been meted out appears to suggest that those sectors or associations that contain greater influence or can lobby harder have the advantage of extra protection.

Third, our protection policy makes no mention of how long the high tariffs would last or if they would start being scaled down. Nor is high or low protection ever associated with performance (output or employment) or made time-bound. Due to this fact, the presumption of entrepreneurs is that tariff protection, once granted, will be everlasting. Simple logic tells us that in such instances, producers become complacent. There is a lack incentive to become more efficient and keep your charges down, and become globally competitive and capture job-creating export markets.

More importantly, and what's seldom recognised, is that it's consumers who actually pay the protection tax-the price increase caused by tariffs on competing imports as well as domestically produced import substitutes. As such, this is a transfer of resources from consumers to producers and the federal government. In letting protection last indefinitely, consumers are made to bear the responsibility without being told if they might desire to see domestic prices of consumer goods reflect lower international prices, not forgetting appearing out of the limited selection of imports that is connected with protective tariffs. Until then, it appears Bangladeshi individuals are left without choice but to pay prices of consumer goods at least 50 to 75 percent above international prices.

To be certain, the practice of ad infinitum protection to industries cannot be taken as policy support to infant industries because so lots of the protected industries have been around in business for many years. Promising industries like agro-food processing, footwear and leather products, electrical gadgets, plastics and ceramics have export potential but high tariff protection, making domestic sales more lucrative and discouraging exports. Whenever we talk of export diversification, the focus is on these industries, furthermore to jute goods, electronics, pharmaceuticals and light engineering products. Emerging industries established recently, like bicycles, motorcycles, cell phones, ac units and refrigerators indeed fall in to the category of infant industries, to be supported with tariffs and other incentive measures available. But simple logic (bolstered by trade theory and policy) shows that such support measures must be made time-bound or performance-based to be effective in developing efficient and competitive industries. This is how a few of the successful developing economies managed their industrial development. Eventually, these were able to pare down protective tariffs and compete in the global marketplace.

The practice of perpetual protection, instead of building robust competitive industries into the future, could become a way to nowhere, besides creating and sustaining industries that will probably need life support till the cows get back. If industries require high protective tariffs after being in business for 20, 30 or 40 years, they cannot be thought to be infant industries but could possibly be referred to as "geriatric" infants. Unfortunately, the set of geriatric infants in our professional sector is large and only getting larger. Rapid scaling down of protection for such industries is in the national interest, and in the long-term interests of the industries concerned, and will be of immense benefit to the average consumer in Bangladesh.