Реферат: Infant Industry Argument: Theory and Practice

Infant Industry Argument: Theory and Practice

An Independent Study by Mamurjon Rahimov

The University of Illinois at Chicago — 2004


First of all, itwas very hard to choose a topic for the independent study.  The idea of researching the argument ofinfant industry protection came to me suddenly after reviewing a list of topicsin one economics class.  From my severalyears of experience working in the major infant industry of Uzbekistan – theUzbek automotive industry, I learnt how problematic the argument on infantindustries was.  There are no clearguidelines, accepted practices, limitations, and the like, despite the factthat infant industries persist all over the world, especially in Less DevelopedCountries (LDCs).  I started myindependent study with a hope that I would learn more about this topic to applyit when I go back to my country, and that my experience would allow me betterunderstand the theory.  The argument ofinfant industries remains to be a controversial topic in the worldeconomy.  The fact that it is not welldefined further exacerbates the problems caused by its application.  Infant industry argument remains to be one ofthe major reasons for justifying protectionism in various forms.  Although protectionist measures such astariffs, quotas, multinational agreements are imposed due to various reasons.

 It is very important for me to learn pros and consof this argument, now and here – since scientific literature is one of thestrongly censored aspects of life in Uzbekistan.  In fact, I never saw any mentioning thatUzbek auto industry was an infant industry. Moreover, I never read any local article mentioning problems and/orlosses of the Uzbek auto industry.  Eventhe export revenues of the company were often calculated on the basis ofshipments made out of the country, even though these “shipments” did not sellfor several years.  When I got startedworking with the Uzbek automotive industry, I was a new graduate from aprestigious American business school, and all excited about the opportunity toapply the knowledge that I acquired overseas, as well as to learn new things.  I met all kinds of people — those who did notknow where the industry was going; foreigners who tried to take advantage ofour ignorance, and smart people who were never allowed in decision-making.  I read about infant industries while in businessschool, and at that time, everything seemed logical and simple. 

<span MS Mincho"">.   In my discussions ofthis topic with leading managers, industry ministers, and PhDs in Uzbekistan(especially those working directly in the management of this venture), I feltthat I lacked theoretical and empirical knowledge to base my arguments.  All of those managers, ministers, PhDs havebackground in the old socialist economy, so often neither I nor them learntsomething useful after long and intense discussions.  I remember the excitement of my departmentgeneral manager when I brought a Harvard Business case on The Uzbek autoindustry with me from the United States (actually, while studying in the USA, Iwent to a graduate level class with a permission from a professor toparticipate in its discussion).  He immediatelygot several photocopies of the case and passed on to the higher echelons of themanagement.  I doubt that they learntanything useful from it (business cases generally do not criticize or approvecertain policy), but the very fact that they were eager to get to know whatAmericans think about them was very interesting.  Hence, they might heed if someone who waswell aware of the infant industry argument advised them. 

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<span MS Mincho"">Our marketing department, in which I was an assistant manager, didnot receive funds for basic market research, let alone for scientific,comparative-empirical work.  We could notbuy books, attend seminars, and subscribe to industry magazines, purchasesoftware and databases.  I knew we shouldlearn from other countries’ experience, i.e. we do not need to repeat otherpeople’s mistakes.  I felt that Uzbekautomotive industry could learn from automotive industries of Korea, Malaysiaand other developing countries.  I saydeveloping countries, because developed countries are far ahead of us (LDCs),and at the time they fought with problems similar to ours, they faced acompletely different set of conditions. Developing countries, however, started quite recently from scratch andachieved considerable results, faced similar problems, came up with theirsolutions.

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<span MS Mincho"">One representative of the French automotive group CITROEN askedthe general director Kayumov of Uz-DAEWOO Co., the flagship of the Uzbek autoindustry, the following question: “Why do you subsidize Russian consumers byselling your cars below cost? ”

<span MS Mincho"">An American entrepreneur, who preferred to remain anonymous, saidthat Uzbek top management in the automotive industry acting “penny wise, andpound foolish”.  I am sure he wasreferring the special interest groups that were benefiting from adversesituation of the Uzbek automotive industry under protections.  In another account, Russian dealers who soldUzbek-made cars were stunned when some insider information had been revealed tothem at a closed meeting between Uzbek auto manufacturers and Russian dealersfrom all over the Russian Federation.  Inother words, a lot of things went wrong. There was a whole contingent of problems contributing towards undesiredoutcomes from Uzbek infant industry protection, but I believe that the bottomline was misunderstanding and abuse of the infant industry argument.

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<span MS Mincho"">Background Problem

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<span MS Mincho"">Uzbekistan, from the very beginning of its independence claimed ithad its own way of economic development. This method was even given a name “Uzbek Method” (Karimov, 2000).   Nowhere in this method, it says, “do notlearn from others”.  On the other hand,it also does not state that learning from other developing countries is the keyfactor in our success.

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<span MS Mincho"">When the “UzAUTOSANOAT”, the association of automotive industry ofUzbekistan acting on behalf of the government of Uzbekistan, and Koreanautomotive company DAEWOO signed agreement to produce light cars in 1992, Uzbekgovernment guaranteed protection for the new joint venture until the year 2000(Quelch, 1997).  The year 2000 came, andnothing happened.  The industry continuedto receive subsidies from the government in the form of state guarantees forloans received from foreign export-import banks, as well as continuedtariff/non-tariff barriers.  MeanwhileDAEWOO Corporation went bankrupt and most of its assets went for sale.  Russian financial crises hit hard theeconomies of the former Soviet republics. All these things served as an excuse for the Uzbek automotive industry’sfailures.  According some estimates ofindustry insiders, the Uzbek automotive industry lost around U$ 150 millionannually.  That is almost the amountequal to the cost of the industry’s flagship automotive plant in Ferghanavalley, which is capable of producing 200,000 vehicles every year.  In fact, that kind of scale of production wasnever reached; and the largest volume of production was around 75,000 at onetime.

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<span MS Mincho""> Another barrier to rapiddevelopment of automotive industry, and the whole economy of Uzbekistan isoften cited to be high transportation costs. Uzbekistan is, in fact, theworld's only double landlocked country, i.e. it is the only country whose allneighbors are landlocked, so to reach any seaway you have to cross twointernational borders.  It is verydisadvantageous to be landlocked: other types of transportation are stillextraordinarily high.  However, havingworked in the industry for almost three years, I was a witness how theautomotive industry could not work properly and was losing millions of dollarswithin its domestic market, let alone the neighboring markets. 

In the course ofmy research, I came across various opinions on the infant industryargument.  I divide them into two broadcategories.  The first categoryapproaches to the concept of protectionism from theoretical point of view,using various models and graphs (Magee, 1972). The other category scholars approach to the concept in the light of theeconomic history (Chang, 2002).  Amongboth categories I found some that support protectionism, and some that opposeto it.  Moreover, certain economistsbelieve that the concept of protectionism is obsolete and no more effective inthe modern world economy, whereas some other economists believe that theconcept is not only applicable but also especially promising during the fastpaced technological and economic change of the modern era — if correctlyunderstood and applied (Shafaeddin, 2000). Yet there is another category of economists that do not support tariff andnon-tariff barriers, but advise to use more direct measures in assisting infantindustries. Governments around the world justified and continue justifyingtheir protectionist measures, claiming that these measures, at least in thelong run, benefit their countries' employment level, infant industries, balanceof payments, and the like.  Sometimes twoor several of these benefits are cited by governments to be grounds for activegovernment involvement in the economy not only through protectionism but alsoexport promotion.  From my point of view,infant industry argument comprises in itself all other arguments forprotectionism.

Infant IndustryArgument: Background

The World TradeOrganization officially recognizes infant industries as a legitimate reason fortrade restriction, although it encourages member countries and applicants toend these practices.  Numerous tradepolicy reviews posted on the WTO website shows this attitude of WTO (wto.org,country by country trade policy reviews). It turns out that the argument of infant industries dates back to late18th century.  It was first proposed in1792 by Alexander Hamilton.  At thattime, the newly established industries in America were not competitive withthose of Europe.  European manufacturerswere highly organized with supply and distribution systems already inplace.  Hamilton's argument was thatthese «infant industries » should be given some time and protectionin the form of subsidies, tariff and non-tariff barriers — until they become competitive(Suranovic, 1997).  Another well-knowneconomist, Friedrich List, also argued about appropriateness ofprotectionism.  It is necessary tomention that List, who lived in the United States of America in the beginningof 19th century, was strongly influenced by works of Hamilton.  The United States, which is currently pushingthroughout the world the concept of globalization via free trade, was the placewhere the infant industry protection was in, in fact, extensively used in orderto be able to compete with the rest of the world, especially, its formersovereign (Shafaeddin, 2000).  Listcriticized works of Adam Smith in that they inefficiently highlight theimportance of protection for infant industries. However, List did acknowledge the drawbacks of tariffs, and stated that,«in time, these industries should be able to compete with foreigncompetition successfully.  The policy ofprotection should, however should continue to ensure the further expansion ofthe country's industries» (Shafaeddin, 2000).  List wrote that protection should be selective:“At first – for the reasons we have mentioned- it should attempt to stimulateonly those industries which have an assured home market and appear to have thebest chance of success.” (List, 1837)

 Adam Smith dismissed the infant industryargument stating that, «Just because a country could acquire an industryby means of such protection did not imply it should do so, or that the countrywould be better off for having done so»(Smith, 1776).  Nevertheless, Smith recognized that incertain cases, protectionist measures are necessary.  For instance, he supports the Act ofNavigation that at that time gave the shipping industry of the Great Britainalmost exclusive rights to transport inbound and outbound goods (p.429).  Smith went even further in discussing thetopic of defending domestic industry (the term “infant industry” was not usedby Smith in his Wealth of Nations), and asked about appropriate duration ofsuch protectionist measures: “As there are two cases in which it will generallybe advantageous to lay some burden upon foreign, for encouragement of domesticindustry; so there are two others in which it may sometimes a matter ofdeliberation; in the one, how far it is proper to continue the free importationof certain foreign goods; and in the other, how far, or in what manner, it maybe proper to restore that free importation after it has been for some timeinterrupted.”  The second case, which isof interest hereby, described as “…when particular manufactures, by means ofhigh duties or prohibition upon all foreign goods (sanctions? m.r.) which cancome into competition with them, have been so far extended as to employ a greatmultitude of hands  Humanity in this caserequire that the freedom of trade should be restored only by slow gradations…”(p.435)

Thus the argumenthas a long tradition in the economic history. Numerous scholars since the beginning attempted to shed light into thenature of the infant industry argument. H. G. Johnson’s description of the argument is especially clear: “Whatis involved is an investment in a process of acquisition of knowledge which issocially profitable but privately unprofitable because the private investorcannot appropriate the whole of the social return from his investment. ”   The crucial gain from infant industryprotection is thus the appropriation of knowledge that is privatelyunappropriable in its entirety or in some part (Stern, 1973). 

David Landesmentioned protectionist measures exercised by various countries throughout thehistory.  His work has shown that suchmeasures were often undertaken not for the sake of the infant or strategicindustry itself (I believe, these two things means the same. mr), but forpolitical ambitions of the ruling class. He writes: “ Direct subsidies and aids are only part of the story.  The state’s hand lay everywhere, even wherenot directly manifest.  Even in Britain,government supported and protected overseas trade: the country as a whole paidthe associated security costs of private venturers and adventures in distantseas.  Such indirect subsidy, easy tooverlook, was crucial.” (Landes, 1999)

The«neo-classical» trade theory shows that temporary protection of anindustry can be justified if market failures exist and the Mill-Bastablecriteria are satisfied.  It is necessaryto clarify that Mill criterion requires productivity increase over time so thatindustry becomes competitive enough for free trade, whereas the Bastablecriterion requires the inter-temporal social benefit of protection to exceedthe social costs.  The literature isstill not at ease, so to say, in evaluating the validity and effectiveness ofthe infant industry protection policies. Some of the major shortcomings of the infant industry argument citedare: capturing of policy by special interests, difficulty of identifying infantindustries, lack of competitive pressure keeping «infant» firms frombecoming efficient, time inconsistency of policy, failure of realization ofeconomies of scale due to the small domestic market size.  An analysis of the global dynamics shows thatprotection programs practiced worldwide are unreliable: if an industry isprotected until its goods become competitive in the world market, it is aslikely to fail as to succeed.  Simplifiedmodel of protectionism shows us that for the industry's success to beequilibrium, protection can be removed before an industry reaches the level ofinternational competitiveness (Kaneda, 1999). 

 Although developed countries have abolished ordrastically decreased the level of the most of their protectionist measures, itis noted that they should play major role in spreading the word and action ongradual removal of such barriers to free trade and its benefits.  OECD Trade Committee recommends thatdeveloped countries, OECD countries in particular, should procure technicalassistance to the Newly Independent States (NIS) in reducing existing tariffand non-tariff barriers.  It is importantto note that OECD countries need to work with NIS in developing proper policiesfor reduction of protections, since OECD countries doubtlessly have muchexperience, strong institutions to cope with the myriad of questions andchallenges arising from the implementation of such policies.  On the other hand, OECD countries also havenumerous tariff and non-tariff barriers that inhibit NIS in trading withthem.  Reducing, removing and whennecessary, educating producers from NIS in complying to these regulations wouldin turn make it easier for NIS countries to speed up the process of abolishingtheir own protectionist measures.  Sincemost of the persisting tariff and non-tariff barriers in the OECD countries areconcentrated in «sensitive» sectors such as agriculture, iron andsteel, textiles and apparel, their gradual removal or reduction would make productsand services from NIS services more competitive and thus would makeprotectionist measures unnecessary (OECD, 1994).  In case of Uzbek auto industry, suchnon-tariff barriers in developed countries accounted for a lot of problems withexport plans.  For instance, vehicles tobe sold in Germany had to undergo homologation, a special technical evaluation,and Uzbek automotive representatives were bogged down in paperwork. 

Again, althoughdeveloped countries strongly push free trade, and try to abolish protectionismworldwide, they often retreat and use protectionist measures themselves athome, often when they hit recession.  Forinstance, more recently, talk of “free trade” in the United States gave way tothe “fair” trade.  Fair trade refers tounilateral rules of what is permissible and what is not. (Salvatore,1993).  This implies that infant industryargument can also be quite legitimately used in various cases.  The United States continues to protect quite “mature”products and “mature” industries, such as textiles, automobiles, and etc.  Although OECD countries tried floatingexchange rates, they did not always work as well as good old protectionistmeasures.  I do not know if Uzbekistanlearnt from the experience of the developed countries or not, butinconvertibility of the national currency SOUM hurt the economy real bad, whilesomehow boosting domestic sales of the Uzbek automotive industry.

Costs ofprotectionism were estimated in a number of studies.  These costs include not only direct costssuch as increased prices, but also numerous indirect costs such as lost jobs,freedom of choice, reduced quality.  Itis estimated that protectionism destroys (also, prevents the emergence of) morejobs than it induces.  Quality might alsodecline, if better quality products become scarce or unobtainable due to theprotectionist measures.  Administrativecosts of protectionism (which are paid for by taxpayers and consumers) areanother major issue.  The costs ofprotectionist measures can be further divided into two parts: monetary costsand non-monetary costs.  Numerous studieshave estimated monetary costs of protectionism for various cases.  A Brookings Institution study came up with anestimate for costs for US consumers caused by «voluntary» export restrictionson automobiles in mid-1980s: $14 billion. Estimated foreign deadweight loss was around $3 billion — i.e. althoughforeign automobile manufacturers could increase prices due to the tariffs, theycertainly would be able to sell less than before.  According to another study, in the rubberfootwear industry, it cost $30,000 a year to save a job that pays only $11,460a year, based on 2,000 hour work year (McGee, 1996).  Besides such costs, there are side effects ofinfant industry protection, and one of the most recurring is retaliatory actionby other countries that may be adversely affected by protectionist measures.Smuggling at different levels is also one of the evils caused byprotectionism.  Researchers haveincreasingly studied the cost of these and other costs in comparison to thebenefits that might be realized by partial or complete removal of tariffs andthe like.  Although approaches andmodels, as well assumptions of these estimations varied from study to study,one of the prevalent common methods was the estimation of the deadweight lossesresulting from such protectionist measures (Stern, 1973).  However, these estimations are by far notaccurate in calculating real costs in industries that have effect on numerousother areas of economy; and because of the very fact that the graphs drawn withsupply and demand, tariff and resulting deadweight loss are correct if ceterisparibus (which is never the case).  Ishould mention here that Uzbek government chose to invest into automotiveindustry hoping that flourishing automotive industry would trigger economy widerenaissance (Quelch, 1997).  Then theopposite must be true also.  Whoestimates that? 

It is true thatprotectionism directly and indirectly effects the allocation of resources in thecountry.  During the course of history ofprotectionism, optimal allocation of resources has always been a problem.  Researchers showed that objectives ofprotectionism in several countries could have been achieved with lesssacrifices. Not only that, but much higher gains could have been realized bothqualitatively and quantitatively.  Importsubstitution was another reason to protect and nurture infant industries.  ICOR estimate was used as criterion, i.e.invest and protect industries where ICOR was smallest.  Effective rates of protection (ERP) began tobe calculated in the late 1960s. However, the role of ERPs remains ambiguous.  Tariffs were supplemented by numerousquantitative and direct controls of foreign exchange.  Exchange rates were another widely usedpolicy tool — widespread overvaluation of domestic currency was used to keepdomestic price of capital low.  Policiesdesigned to increase the rate of capital formation backfired in some cases, andcaused underutilization of existing capital. Agriculture, the largest sector in most LDCs was expected to declineover time in relative terms.  Countriesseemingly did not realize that a sluggish agricultural sector would eventuallypenalize protected industries.  When newmanufacturing sectors could not meet their export plans, and turned towardstheir domestic market, the market could not absorb the products due to the factthat deteriorated economic situation in the agriculture already had shown itseffect on consumers' pocket.  Due to thelimited ability of the government to plan, administer, and control sensibleplans, often the government was part of the problem rather than part of thesolution.  However, it is essential tonote that government learning from its mistakes and those of others, not governmentminimizing, is the object.  Eventuallysome countries started to move away from import substitution towards outwardorientation, which was closer to free trade than import substitution.  That may be a major reason for outwardorientation still being urged strongly in developing countries by powerfulinstitutions and influential persons.  Itis true that after world war protectionism was widespread and several economic«tigers» emerged around the world. Whereas some economists argue thatprotectionism played important role in the post-war period, others say that«association» is not necessarily «causation» (Bruton,1998). 

Among theexperience of development of all countries in the past century, Koreanexperience is one of a kind.  Economistshave been admiring at the quick development of Korea through industrializingits economy, which certainly had most elements of protectionism.  However, unlike many other governments,Korean government was relatively quick at learning from its own mistakes andthose of other countries.  For instance,the government used direct subsidies to channel finances to the traded goodsector, instead of staying with tariffs. Korea's outward orientation is commonly singled out as the key to itssuccess, whereas positive world economic environment was also a key element forsuccess.  Since the ultimate goal of anyeconomic policy is development of the country, Koreans approached thischallenge wholeheartedly.  Education wasemphasized, as well as discipline towards work. When excessive government intervention in allocating resources startedcausing problems, the government was willing to relax some of its controls overthe economy.  Relatively large domesticmarket was also beneficial for its economic policies.  Korea's growth pattern and its comparisonwith other countries implies how similar measures could produce variousoutcomes depending on numerous variables such as unemployment level, structureof the economy, elasticity of supply and demand in various sectors of theeconomy, timing of various policies, education level of the workforce, and etc(Dornbusch, 1987). 

Scholars andresearchers often put import substitution and export promotion (both of which,in fact, could be used to support infant industries) on two opposite sides. Theconcept of learning curve, or learning-by-doing economies of scale as somestate, enforces validity of the infant industry-argument.  Market imperfections are also often cited tobe another reason for protectionist behavior of some countries.  (Panagariya, 1999).    In some country cases, government policytowards protecting infant industry through import-substitution shifted towardsexport promotion (Dornbusch, 1987).

Some researcherstrongly believe that imposition of free trade towards LDCs by developedcountries such as the USA, western European countries, and UK has produceddiscouraging results.  LDCs developedmuch faster before they abandoned protectionist policies and followed the IMF,World Bank, and Western think-tanks that vehemently push free trade.  One of the researchers who reached the aboveconclusion is Ha-Joon Chang, a professor of economics at Cambridge University,and the author of numerous books on this topic such as “Kicking Away theLadder: Development Strategy in Historical Perspective”, London, 2002.  This metaphorical title comes from FriedrichList, which wrote in 1841: “It is very common device that when anyone hasattained the summit of greatness, he kicks away the ladder by which he hasclimbed up, in order to deprive others of the means of climbing up after him…”  He blames that developed countries such asthe USA, Germany, and UK have passed the period of protectionism of their own,and do not want LDCs to catch-up using the same methods.  In other words, Chang believes that developedcountries are engaging in “Do as we say, not as we did” behavior.  “When they were in catching-up positions, theNDCs (now-developed countries) protected infant industries, poached skilledworkers, and smuggled contraband machines from more developed countries,engaged in industrial espionage, and willfully violated patents and trademarks,”says Chang.  “However, once they joinedthe league of the most developed nations, they began to advocate free trade andprevent the outflow of skilled workers and technologies; they also becamestrong protectors of patents and trademarks. In this way, the poachers appear to have turned gamekeepers withdisturbing regularity.” (Lind, 2002)

Concluding remarksand suggestions

<span MS Mincho"">I started out with the hope to find out more about the infant autoindustry of Uzbekistan, but the lack of reliable data was a huge barrier.  The official web sites of both Uz-DAEWOO andUzbek Ministry of Macroeconomics and Statistics have been dysfunctional.  Not that Uzbek officials underestimate theimportance of disseminating economic information to attract direct foreigninvestment, but they are reluctant to divulge many statistics. Moreover, eventhe web cites of an Uzbek think-tank, Center for Economic Research, set up byUNDP was not any useful in backing up the research with facts.  Knowing that DAEWOO was the largest foreigninvestor into Uzbek economy, one might ask, why is it impossible to find anyarticles in the archives of a UNDP-supported think-tank?  The fact remains that the lack of reliableinformation has been one of the main phenomenon in LDCS, and Uzbekistan is notan exception.  Therefore, I had toinclude much from what I learnt personally during almost two and a half yearsof work with the Uzbek automotive industry and my personal conversations(should I call “interviews” of top industry insiders?).

The fact that Ihave worked in a major infant industry of Uzbekistan for several years, closeto the decision making headquarters, has helped me to better understand theliterature on this topic, whereas my access to various economic literature, websites gave me a lot of theoretical basis for analysis.  While working in the automotive industry, Iattended several corporate meetings and seminars, which were closed for mediaand outsiders.  Also, I had personalencounters with the top decision-making people of the industry.  Hence, I also have my own way of thinkingabout this topic, based on my personal experience. 

Nowhere in thetextbooks, nor in professional literature, one can see some optimal period thatshould be given for infant industry to grow up. That in turn implies that those who run the country can extend infantindustry protection indefinitely, trying to make some profit out of complex deals.  This is especially true about LDCs, wheregovernment is free to do practically anything regardless of the publicdiscontent.  LDCs lack strong and freemedia, economic and political think-tanks to shed light on problems, chaos, andanarchy in the economy.  Besides, many ofthe LDCs are from former socialistic block, which did not have things likecompetition at all.  Thus, completeprotection of one or several industries seems «normal» to almosteveryone.

Internationalagencies and organizations such WTO, IMF, World Bank, and many others cancriticize as much as they want, and foreign economists in leading educationaland research institutions can write up many critical reports and business cases- but until the people in those LDCs, especially people in decision-makingpositions, understand that things are going wrong and the infant industry isnot growing up «healthy» — certain economic and political forces inLDCs are going to continue to abuse this concept and continue to make it workfor their narrow benefits.  In otherwords, I believe in the “inside out” kind of change.

Of course, as ithad happened numerous times with numerous countries, Uzbekistan in particular,international agencies may exert pressure on governments to change, toaccelerate transition to free market system. However, we have seen how ignorant governments react to this: simplymake up statistics that leave western analysts and international aid and tradeagencies happy with the situation.  Incase of Uzbekistan, this caused several international agencies, such as IMF andWTO, to stop receiving statistical information from the Ministry ofMacroeconomic Statistics of Uzbekistan.

I was surprisednot to find   any notion of implicitgovernment guarantees, formally and/or informally given to supportinfant-industries.  In other words, Uzbekgovernment’s clout always has been by itself a guarantee while its pamperedinfant industry was borrowing from foreign financial institutions.   In the case of Uzbekistan, surprisingly, Isaw the combination of almost all protectionist measures (that I found in theliterature on this topic) being used almost simultaneously.  It seems to me that the Uzbek Government wastrying, by all means possible, make sure the new automotive industry did not fail.  Sadly, the venture brought nothing but lossesso far.  As an insider, I estimated theselosses were several hundred million US dollars per year.  I cannot even guess how these losses caused “dominoeffect” in all other fields of the Uzbek economy.  The information about the continuing lossesof the Uzbek auto industry is so classified that even there was no mention ofit neither in official nor unofficial media. Meanwhile, huge funds are being channeled to this venture in hopes topreserve it, plus protectionist measures are also showing their negativeeffect.  Informed people that I spokewith believe that these losses are continuing to be incurred only due to thepolitical reputation of the current President of Uzbekistan.

I personallysupport the infant industry argument as a temporary means towards economicdevelopment.  I think that it is time todraw, at least, general guidelines for protection of infant industries — sincethe world had had over 200 years of experience on this matter.  In my view this should be carried out on thelevel of WTO.  Since the practice ofprotecting infant industries is still prevalent in the modern world economy andis costing the world economy astronomic figures, this matter deserves formationof a separate committee or group of practitioners and scholars under theauspices of WTO. Protectionist policies should allow for quick and decisivechanges, when circumstances require.  Inother words, instead of developing one rigid 10-year plan for development ofparticular industry's potential, a series of smaller steps with variousspecific conditions could be devised. For instance, a government could tell the infant industry to achieve tenpercent decrease in manufacturing and administrative costs within the nextthree years, or achieve certain ROI (return on investment) in order to qualifyfor further tax holidays and/or subsidies. This would, in my view, compensate for the lack of competition for theinfant industries.  Governments shouldplay the most active role in nurturing the strategic and long-term goals, whichof course will cost some sacrifices.  Ihave met a number of businessmen from now-developed countries that did notregret that at one period of their lives they had to give up their economicfreedom and well-being so that to provide a prosperous future for the nextgenerations.  However, it must beemphasized that such losses have to be forecasted before they occur — in orderto undertake necessary measures to minimize them.  After all, no pain, no gain…

I intend to goback after graduation, and I will see the people that I worked with.  Uzbeks generally fear authority, and do nottalk what they know straight to the face of someone one level higher.  Here, in the USA, despite the far distancefrom home, I have made good friends among a number of Uzbek and othereconomists.  We organized discussiongroups and brought up many issues, including the Automotive industry ofUzbekistan.  We have our own views, muchdifferent than that of current policy makers. Most of the scholars from Uzbekistan who study abroad came through thePresident’s Program “UMID” (translated as hope), and our nation has placedtheir hope on us to deal with social, political, and economical problems of ournewly independent motherland.  I would bevery happy, and I am very hopeful, that with works like these we moved one stepcloser towards more developed Uzbekistan.

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Cited Literature

1.   Dorbusch,Ruduger.  “Korean Growth Policy.”Brookings Papers on Economic Activity, vol. 1987, No. 2, pp. 389-454.

2.   Bruton,Henry.  “A reconsideration of ImportSubstitution.”  J. of Econ. Literature,vol. 36, No. 2 (June, 1998), pp. 903-936.

3.   Kaneda,Mitsuhiro “Mitch”.  “WarrantedScepticism: A Dynamic Model of Infant Industry Protection.”  Georgetown University, August, 1999.

4.   McGee,Robert.  “The Philosophy of TradeProtectionism, Its Costs and Its Implications.” The Dumont Institute for Public Policy Research, No. 10, July, 1996.

5.   OECD, Centrefor Co-operation with the Economies in Transition.  “Barriers to trade with the economies intransition.”  Paris, 1994.

6.   Panagariya,Arvind.  “Evaluating the case for exportsubsidies.”  World Bank EXCOMPETE, March,1999.

7.   Stern,Robert.  “Tariffs and other measures oftrade control: a survey of recent developments.”  J. of Economic Literature, vol. 11, No. 3(Sep., 1973), pp. 857-888.

8.   Lind,Michael.  “Do as we say, not as we did.”  Japan Policy Research Institute, JPRICritique, Vol. IX, No. 6 (Dec. 2002).

9.   Magee,Stephen.  “The welfare effects ofrestrictions on U.S. trade.”  Brookingspapers on Economic Activity, Vol. 1972, No. 3 (1972), pp.645-707.

10.Suranovic,Steven. Internationalecon.com (G. Washington University). 1997.

<span Times New Roman"">11.Smith, Adam. “An inquiry into the nature and causes of the wealth of nations.”  Oxford: Clarendon Press, 1976.

<span Times New Roman"">12.List, Friedrich. “The Natural System ofPolitical Economy. 1837”  London, FrankCass, 1983.

<span Times New Roman"">13.Salvatore, Dominick. “Protectinism and WorldWelfare.” Cambridge University Press, 1993.

<span Times New Roman"">14.World Trade Organization. wto.org.  Country reports. 2003.

<span Times New Roman"">15.Landes, David. “The Wealth and Poverty ofNations: why some are so rich and some so poor.” New York, Norton, 1999.

<span Times New Roman"">16.Quelch, John A. et al. “DAEWOO’s Globalization:Uz-DAEWOO Auto Project.”  HarvardBusiness Case, 1997.

<span Times New Roman"">17.Official corporate web site.  www.Uzdaewoo.com. “About the Company.”2000.

<span Times New Roman"">18.Karimov, Islam. “Uzbekistan at the Threshold ofthe Twenty-first Century”. Tashkent, 2000.

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