Protectionism

Society Business and Career
1

As i understand, the term protectionism refers to the imposing of hurdles (in the form of tariffs, duties and certain non-tariff barriers too) and barriers to entry for certain industries. Apparently this is done in an attempt to help grow the nascent domestic industries during their early years as this is the period when they are moving up the learning curve. Soon enough, in the normal course of events, these local industries move up the curve in terms of efficiency and expertise and are able to compete regionally and then globally. This is a classic case where protectionism works for the betterment of the local industry.

This is the case that was witnessed in the closed South African economy as well. As Levi Strauss and a couple of other global brands entered the land of surprises after the apartheid in 1986, they were pleasantly surprised at the domestic prowess, skill level and infrastructure support. This i am presenting as an example where protectionism worked for the improvement of the domestic industries.

Come to Pakistan. Here, a similar argument was applied to automobile industry and a couple of other industries. Sad as it may seem, even after almost 10 years of protectionism, the consumers are unable to get their money’s true worth in terms of a) perceived value of the product b) deletion levels (i.e. the percentage of product that is actually made locally) and c) lower prices as a result of improving product volumes and efficiencies

I am sure several arguments can be presented to justify this dismal performance level, however that is not my concern.

Please note the two words presented in bold above: help and early. I want to understand a)How much help (in the form of import duties etc.) is necessary, and b) for what period of time this should be provided?

To my mind, there should be a roadmap, a timeframe during which certain identifiable milestones should be set and the actual performance of the industry measured against those milestones to determine if the objectives are really being met and if they are not, where exactly are we falling short and more importantly due to what reasons.

Given a seemingly unending timeframe for protectionsm tends to allow complacency to creep in the local producers. If there is a (rational) sword of time hanging on their heads to achieve certain parameters within an stipulated period of time, then they may actually be compelled to achieve them.

This is actually important from a consumer perspective. We, here in Pakistan are not being allowed to import new and re-conditioned cars only on account of helping to improve the local industry. This means that we as consumers end up paying more for relatively inferior products. Why must we suffer if no immediate comfort is forthcoming in the form of price relief to us from local producers?

Your views please.

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Khanzada ji, I found this great article on protectionsim, although it does’nt really answer your precise questions, but it’s a good read…

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Khanu, you went to painstaking lengths to highlight a tactic which has been the bane of many countries. I will refrain from cut and pastes, which I think in this case, will only speak the obvious without much analytics.

You are bang-on about the lose-lose situation related to long term protectionism. The consumers lose out due to the inferior products and the lack of choice and the manufacturers lose out because of a limited market.

One of the aspects we also have to look at is the impact on innovation. Which in market driven economies is the greatest equalizer. Protectionism hinders Innovation. When licenses are given/held by a small number of players without competition, the resulting situation almost always has resulted in maket where the elasticity of supply is negligible and the resulting pricing controls are mandated to keep industries runing for the sake of employment and political gain.

Such is the story of many PSU's in INdia, Pak, China. It is here where the gov't needs to, in my opinion, take on the red ink and use speed to shut them down while opening up the proposed sectors. The longer you keep these running, the longer the pain cycle is. China's NPA's in PSU's are around 40% of GDP. A daunting challenge.

If you get a chance, do read "India Unbound" by Gurcharan Das. (Former Head of P&G in INdia and head of Global Strategy) He goes though this dilemma from the Indian perspective. Anecdotally, he speaks about the license he had to get in the early 80's to make a new bar of soap which was perfumed. Since perfumed soap was not categorized in the bureaucratic annals of the gov't as soap, he had to wait 3 yrs to get the license. He was told that such a product could be disruptive to the market. there fore the diligence and delay. Furthermore, the patent on the product was not recognized, since esters cannot be patented. :)

India has gone a longway since then, Such protectionism is wilting away. China has done a much better job, but is still ways away from being compared to the likes of the US. To give you an example... In order to start a business (any business with foreign equity majority holding) in India, before 1996, one needed as many as 35 licenses. This number has come down to 10. While in China, this number is 6.

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Thanks Zulfi..that was an informative read.

Matsui: I am assuming perfumed soap would have been classified as fragrance then. The book sounds like an interesting read. Thanks :k:

You have raised a few good points, esp. the innovation bit. The thing is, if we all seem so gung-ho and given that there is no apparent champion in favor of protectionsm, why don’t we drop it already?

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Does the influx of smuggled goods into the country have any impact on this?

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Khanu, I think in certain instances protectionism is good. Let's take china as example. Foregin equity holding in china for the longest time could not exceed 49%, and even that through a local sub. JV's were the norm. Part of this was to protect the fledgling FDI driven and export heavy ecnomiy focusing on soft goods manufacturing. PAT's were required to be reinvested in the ventures and the vision was long term. IN an FDI driven ecnomy capital flight is a huge risk, as you can imagine. Even in loss making enterprises, most of them PSU's, subsidization paved the way for their eventual solvency once the exports picked up.

To give an example... Ralph Lauren, could not sell any clothes in China but could only make them for export purposes for 7 years. Foreign influx of such goods would have killed the local enterprise because they wouldn't have had the cash to compete.

BabaG: I think smuggling has an adverse effect to competitiveness and is the result of more gov't control. The gov't suffers dure to lack of revenue collection, the people suffer because the exhorbitant pricing and the manufacturers suffer because of the artificial pricing.

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Matty: Yar what are PSUs?

I may be digressing a bit, but your reinvestment of profits back into the business has raised a point in my head. From an equity investor’s viewpoint, if profit repatriation is restrained through dividend covenants, then wouldn’t that erode his equity IRR? Why should a foreign investor go into the hassle of going through a holding company/susb/JV route if he aint earning a decent return (in your scenario, no return at all). What good is growing cash if you can’t lay your hands on it? :konfused:

What we do here in Pakistan is that the projects being financed by foreign equity are restricted to repatriate profits (dividends declared but not paid…he can see the cash not touch it..eh, such sadists :hehe: )to sponsors only till such time that the senior lenders are fully paid off (just to have adequate demonstration of sponsors commitment to the project, apart from him being bound together through the project’s contractual framework and ensuing representation and warranties).

Baba G: To my mind, it would have an adverse impact as Mat said. See practically it would have the same impact as allowing import of those protected goods (the only difference being that this is illicit import) and hence this would create cracks in the the artificially supported industry (just as regular imports would). Good point.