Deregulation or Protectionism: A Comment

Deregulation or protectionism: A Comment
Introduction: Protectionism is an economic policy to restrain certain trade through measures such as tariffs, quotas and regulations. It is often used to discourage imports of certain goods and to protect domestic markets in various ways.
Protectionism is often regarded as a barrier to free trade. The word seems to conjure up negative images of isolationism and subsidizing industries that could otherwise not compete fairly against others.
Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces. Deregulation does not mean elimination of laws against fraud or property rights but eliminating or reducing government control of how business is done, thereby moving toward a more laissez-faire, free market. It is different from liberalization, where more players enter in the market, but continues the regulation and guarantee of consumer rights and maximum and minimum prices.
Deregulation attempts to free economic activity from binding rules from the state. As a basis of free trade amongst nations, the idea is to allow competition to ensure the most efficient practices prevail, which should average out and benefit everyone.
However, deregulation, when applied to wider parts of society can be at the expense of people in that nation or region if that deregulation means relaxation of environmental rules, health and educational services, etc. In the context of corporate globalization it also risks stifling domestically grown industries as multinational corporations are more likely to have the resources to outcompete local ones.
The stated rationale for deregulation is often that fewer and simpler regulations will lead to a raised level of competitiveness, therefore higher productivity, more efficiency and lower prices overall. A parallel development with deregulation has been organized, ongoing programs to review regulatory initiatives with a view to minimizing, simplifying, and making more cost effective regulations. Such efforts, given impetus by the Regulatory Flexibility Act of 1980, are embodied in the United States Office of Management and Budget's Office of Information and Regulatory Affairs, and the United Kingdom's Better Regulation Commission.
Deregulation vis-à-vis Protectionism: International Perspective
Argentina
Argentina underwent heavy economic deregulation, privatization, and had a fixed exchange rate during the Menem administration (1989–1999).
Australia
Having announced a wide range of deregulatory policies, Labor Prime Minister Bob Hawke announced the policy of 'Minimum Effective Regulation' in 1986.
European Union
· 2003 Corrections to EU directive about software patents.
· Deregulation of the air industry in Europe in 1992 gave carriers from one EU country the right to operate scheduled services between other EU states.
Republic of Ireland
The taxi industry was deregulated in Ireland leading to an influx of new taxis. This was due to the price of a license dropping overnight. The number of taxis increased dramatically.
United Kingdom
The Conservative government of Margaret Thatcher started a program of deregulation and privatization after the general election of 1979. These included express coach (Transport Act 1980), British Telecom (completed in 1984), privatization of London bus services (1984), local bus services (Transport Act 1985) and the railways (1993).
Since 1997 the Labour governments of Tony Blair and Gordon Brown developed a programme of better regulation. This included a general programme for government departments to review, simplify or abolish their existing regulations, and a "one in, one out" approach to new regulations. In 2006, new primary legislation (the Legislative and Regulatory Reform Act 2006) was introduced to establish statutory principles and a code of practice.
Japan
The Japanese government has seen deregulation as an effective way to lift its economy.
Russia
Russia went through wide-ranging deregulation (and concomitant privatization) efforts in the late 1990s under Boris Yeltsin.
United States
Many industries in the United States became regulated by the federal government in the late 19th and early 20th century. With entry of competitors highly restricted, monopoly situations were created, necessitating price and economic controls to protect the public. One problem that encouraged deregulation was the way in which the regulated industries often controlled the government regulatory agencies, using them to serve the industries' interests. During the Progressive Era (1890s–1920s), Presidents Theodore Roosevelt, William Howard Taft, and Woodrow Wilson instituted regulation on parts of the American economy, most notably in regulating big business and industry.
Regulations remained mainly in place till Nixon Administration. Deregulation gained momentum in the 1970s, influenced by research at the University of Chicago and the theories of Ludwig von Mises, Friedrich von Hayek, and Milton Friedman, among others. The first comprehensive proposal to deregulate a major industry in the United States, transportation, originated in the Richard Nixon Administration and was forwarded to Congress in late 1971. In various other industries too, deregulation took place.
The financial sector in the U.S. has evolved a great deal in recent decades, during which there have been some regulatory changes and the creation of new financial products such as the securitization of loan obligations of various sorts and credit default swaps. Among the most important of the regulatory changes was the Gramm-Leach-Biley Act in 1999. This 1999 Act took down barriers to competition between traditional banks, investment banks, and insurance companies, and allowed firms to participate in all three markets in some circumstances.
Some believe that this deregulation contributed to the U.S. financial crisis of 2007-2009 and the Global financial crisis of 2008-2009. However, others dispute this assertion, and a lively debate on the causes of financial crisis is still under way as of August, 2009.
Deregulation and Protectionism: Debate
The deregulation movement of the late 20th century had substantial economic effects and engendered substantial controversy. The movement toward greater reliance on market forces has been closely related to the growth of economic and institutional globalization between about 1950 and 2010. There are certain risks involved with deregulation.
Much as the state plays an important role through issues such as property rights, appropriate regulation is argued by some to be "crucial to realize the benefits of service liberalization". Regulation can play an important role in the following situations:
Creating a level playing field and ensuring competition;
Maintaining quality standards for services;
Protecting consumers (e.g. from fraud);
Ensuring sufficient provision of information (e.g. about the features of competing services);
Preventing environmental degradation (e.g. arising from high levels of tourist development);
Guaranteeing wide access to services (e.g. ensuring poorer areas where profit margins are lower are also provided with electricity and health services); and,
Preventing financial instability and protecting consumer savings from excessive risk-taking by financial institutions.
These issues can cause high levels of market distortions and barriers to entry. For instance, regulation ensuring that specific qualifications are needed to provide a service can be problematic for foreign firms wishing to invest, when those qualifications are provided only by domestic institutions. Thus, regulation must be carefully implemented and respond to any issues that develop to ensure that liberalization delivers the expected benefits, for instance by creating mutual recognition agreements (MRAs) of qualifications or cross-border harmonization of rules. Regulation often involves a complex balancing act between market and social objectives and it is argued policy space is required to ensure regulation can constantly be adjusted and adapted to changing market and social realities.
Regarding the argument advanced for protecting industries in development, Mises writes:
“Its supporters assert that temporary protection is needed in order to develop processing industries in places in which natural conditions for their operation are more favorable or, at least, no less favorable than in the areas in which the already established competitors are located. These older industries have acquired an advantage by their early start. They are now fostered by a merely historical, accidental, and manifestly "irrational" factor. This advantage prevents the establishment of competing plants in areas the conditions of which give promise of becoming able to produce more cheaply than, or at least as cheaply as, the old ones. It may be admitted that protection for infant industries is temporarily expensive. But the sacrifices made will be more than repaid by the gains to be reaped later. The truth is that the establishment of an infant industry is advantageous from the economic point of view only if the superiority of the new location is so momentous that it outweighs the disadvantages resulting from the abandonment of nonconvertible and nontransferable capital goods invested in the already established plants. If this is the case, the new plants will be able to compete successfully with the old ones without any aid given by the government. If it is not the case, the protection granted to them is wasteful, even if it is only temporary and enables the new industry to hold its own at a later period. The tariff amounts virtually to a subsidy which the consumers are forced to pay as a compensation for the employment of scarce factors of production for the replacement of still utilizable capital goods to be scrapped and the withholding of these scarce factors from other employments in which they could render services valued higher by the consumers. The consumers are deprived of the opportunity to satisfy certain wants because the capital goods required are directed toward the production of goods which were already available to them in the absence of tariffs.”
Protectionism from competition abroad is treated more different than domestic subsidization, but both erect artificial barriers to entry and both promote economic inefficiency.
Neither seems to answer the notion of fairness, though. Often those nations that promote free trade for all, want protectionism for themselves. While free trade could be a possible way forward for fair trade, it can only be fair and free if large, developed nations do not continue protectionist practices for some of their industries, while hypocritically requiring (sometimes forcing) developing nations to abandon such measures, to the effect that it tips the trading balance unfairly in their favor.
Some aspects of how protectionism can be used by rich countries include
intervention in things like technology transfer, or distorting market functions
providing vast subsidies to local industries (for example, textiles, agriculture, etc.) while asking others to deregulate and become subject to the market’s natural force of supply and demand
one-sided trade agreements
Even military expeditions to open and expand resource access.
For young industries, protecting and nurturing them can be a positive step, and historically this is how practically all industrialized nations have developed.
Rich countries preach liberalization to poor countries. The concern is that the developed nations are pressuring developing nations to aggressively abandon any protectionism, before their economies are ready to enter the global markets. A common misconception in the mainstream (and even dissenting circles) is that one has to be either pro-market or against markets. However, less discussed is how power conflict affects the ideals of a market-based approach or what some of the fundamental problems are in a market or state approaches. Free Trade as an ideology or theory has many valuable and powerful points that have attracted countless supporters. The reality (or what politicians and others might call free trade) can be very different. The following quote summarizes quite well that a fundamental issue, such as being pro-poor, transcends a limited debate of being simply pro-market or pro-state:
“Consider, for example, the work and philosophy of SEWA, the Self Employed Women’s Association, which operates in Gujarat State in India. SEWA grew out of the long history of organizing textile workers in Ahmedabad, but applied and modified those lessons to organizing women in the informal sector. Starting from an urban base, it has now also expanded to organizing in rural areas. SEWA’s ground level campaigns, and their national advocacy work, reflects a pragmatism which eschews ideological positions on “state versus market”. They have supported certain types of trade liberalization because they increase the demand for the output and labor of their members. But they have opposed other types of trade liberalization when they hurt, for example, the employment and incomes of the husbands and brothers and fathers of their members. They are strong supporters of deregulating the control of the Gujarat State Forestry Commission on the livelihoods of their members. But they oppose deregulation of the pharmaceutical industry because of the devastating impact of these on basic drug prices, and they support increased regulation in Export Processing Zones to ensure that labor standards are met. Is SEWA pro-state or pro-market? It is difficult to say. What is clear is that SEWA is pro-poor. One of their best known pamphlets is in fact entitled “Liberalizing for the Poor.”
Adam Smith, often regarded as the founder or father of modern free market capitalism with his famous 1776 book, The Wealth of Nations describes England at that time undergoing a transformation and identifying how free markets in some scenarios were very beneficial to prosperity. He also described how mercantilism, big business as well as big government were often detrimental in many cases. Yet, while Imperial Britain may have claimed to take on free market ideology, the free trade imperialism that it was was to the detriment of other nations, including America that suffered under its policies of imperialism abroad, which allowed free trade to flourish somewhat domestically.
Depressions resulting in part from laissez faire capitalism and mercantilism led to many European nations turning to protectionism in order to keep competing between themselves.
It seems difficult to get the right balance between deregulation and protectionism especially between developed and developing nations. Too much deregulation of certain vital services, some of which could be seen as fundamental rights (such as health and education services) could lead to the inability to provide standards for the full range of the population and less protection for domestic industries against often larger or transnational corporations. On the other hand, too much protectionism could stifle innovation and even foreign investment. The reverse could sometimes occur as well, as many other issues come into play.
It has been rightfully put by Brenden Martin when he writes:
“For the neo-liberal, individuals make rational economic and social choices only through the market. For the statist, the state is the sole custodian of society’s interests, and its decisions their only reliable expression, with or without free elections. While the one ideology seeks to subordinate state to market, and the other the market to the state, what both succeed in doing is subordinating society’s will and the means of its expression. The alternative is that both state and market should be the servants of society rather than society being the servant of either. Whether the next century will be marked by unity and harmony rather than division and conflict depends in no small part on what democracy and citizenship are to mean in the age of globalization.”
J. W. Smith is quite critical of the current policy of free trade. Power politics continue to play.
“Instead of developing the Third World, it is clear that the Third World dependency is a policy of the major powers, and the world leaders insist on restricting consumer buying power in the Third World as a price for what is essentially maintenance loans. Meanwhile, these same leaders easily agreed that West Germany must put $1 trillion into the former East Germany to simultaneously build industry, social infrastructure, and markets. And when the relatively poorer countries of Greece, Portugal, and Spain wanted to join the Common Market, these leaders “implemented a 15-year plan which included massive transfers of direct aid, designed to accelerate development, raise wages, regularize safety and environmental standards, and improve living conditions in poorer nations.”… Emerging former colonies receive no such care for their economies to become viable.”
Rich countries practice protectionism when it suits. At the beginning of March, 2002, U.S. President George Bush announced tariffs on imported steel from the European Union. He said “We’re a free-trading nation, and in order to remain a free-trading nation, we must enforce law. And that’s exactly what I did. I decided that imports were severely affecting … an important industry.” This is quite remarkable a series of sentences, because on the one hand he is supporting “free trade” but on the other hand, he wishes to protect his industries (which can be an understandable concern), which goes against the notions of free trade! In Europe, this of course has raised a lot of concern, especially when the U.S. has been most vocal in the international arena about getting other countries to open up their markets and embrace free trade.
New York Times columnist and professor, Paul Krugman, a free market supporter, and often a harsh critic of anti-corporate globalization protest movements, has been quite critical of U.S. policies, which he describes quite bluntly as being protectionist. Chief researcher of the international development organization Oxfam, Kevin Watkins, has been very critical of U.S., European and Japanese trade policies, even charging them with hypocrisy for preaching free trade but practicing mercantilism.
Rich countries often use protectionism as trade bargaining chip. A strategy for developing countries may be in deciding which industries to nurture (temporarily) and which sectors to further liberalize sooner. Developing countries may have a case for nurturing some of their industries rather than opening their economies to competition with multi-nationals. However, in some scenarios this could also be inefficient.
For example, mobile phone companies are helping people throughout Africa to connect to each other and even stimulate economic activity. For most African countries it perhaps makes sense to let such businesses in, rather than trying to develop their own, due to lack of resources and technological base. Yet, at the same time, if this is followed, how will African nations break out of that chain? What if African nations could be more economically efficient with this technology?
There is often talk of technology transfer and partnerships between a multinational company and a local business/industry. However, would a multinational want to create real competition for itself and risk shutting itself out of a market, or having to compete with a local business that might be better placed to respond to the local customs and culture?
However, many developing countries are suspicious of first world nations’ intentions, whether it is geopolitics, help with debt, foreign aid, or more.
Conclusion: It is submitted that for Poor countries, careful and temporary protectionism can help nurture industries.
Yilmaz Akyuz notes a number of different stages:
(a) Sectoral specialization: An early stage of industrialization, exploiting natural resources and typically requiring unskilled labor.
(b) Diversification: This occurs as technologically more advanced activities are undertaken.
(c) Increased internal integration: this follows on from the continual diversification, through a dense set of linkages among sectors.
(d) Industrial maturity: When this finally occurs, there is almost a completion of a circle, where there is again a move towards sectoral specialization, but this time at the top end of the technology ladder.
It is rightly stated:
“World markets are a source of technology and capital; it would be silly for the developing world not to exploit these opportunities. But globalization is not a short cut to development. Successful development strategies have always required a judicious blend of imported practices with domestic institutional innovations. Policy makers need to forge a domestic growth strategy, relying on domestic investors and domestic institutions. The most costly downside of the integrationist faith is that it is crowding out serious thinking and efforts along such lines.”[1]
If history can be any indicator, developing nations of today could benefit from some aspects of protectionism until they are at the point where they have a good foundation from which to start deregulating certain aspects (not always all) and trade more freely with other nations and regions with a similar foundation, adhering to rules of fairness and some forms of regulation that would ultimately benefit everyone, not just greedy elites!

Submitted To:
Mr. Gurdeepak Singh
Submitted By:
Arwinder Kaur Bajwa
Class: M.B.A. -I
Section: A