Monday, January 2, 2017

Interesting infant industry experiment from Noah Smith


Noah Smith - infant industry and Napoleon. Wait, you're doing what now?:

The first known proponent of this idea was Alexander Hamilton. He suggested subsidies -- which he called “bounties” -- as the best tool for helping young manufacturing industries, as opposed to tariffs. Casual observation would suggest that Hamilton’s strategy worked well, or at least didn’t hurt too much, as the U.S. became an industrial powerhouse. However, in the middle of the 20th century, the doctrine came under attack from economists. Studies of industrial policies in places like Turkey showed disappointing results. Productivity in the shielded industries didn’t even go up. Infant-industry protection was broadly rejected along with other economic heresies.

This dismissal was premature. Arguments from theory can break down in any number of ways. And examples like Turkey’s aren’t true random experiments -- for example, countries might try to use protectionism to shore up industries that were uncompetitive to begin with, and which had little hope of ever flourishing. Policy decisions don’t just drive economic conditions, they’re also driven by them. To really know whether infant-industry protection is effective, we’d need some kind of random event that affected the competitive environment.

Economist Reka Juhasz, of Princeton and Columbia, combed through the historical record to find such a random event. And she found one: the Napoleonic Wars. It seems doubtful that Napoleon’s conquest of Europe was an elaborate scheme to protect failing French manufacturing industries, so it’s probably safe to consider its effects as akin to an act of God.

During his wars with Britain, Napoleon tried (unsuccessfully) to bring his island nemesis to its knees by cutting it off from European markets. The move protected industries within the sprawling Napoleonic domains that competed heavily with Britain. The prime example was mechanized cotton spinning, a very high-tech industry for its time, and a locus of intense competition between early industrial nations like Britain and France. With detailed historical records, Juhasz was able to identify how much different regions saw their trade costs with Britain go up as the result of Napoleon’s embargo, and to see whether cotton spinners in those areas flourished.

They did. Juhasz found that in the short term, profits of protected cotton spinners rose, and their size and productivity increased more in the long run. Decades later, these regions were exporting more, relative to less-protected regions, showing that companies in the shielded areas were eventually able to compete in global markets -- just as the infant-industry argument would predict.

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