Do protectionist policies benefit emerging economies?

[IMfez]

With my business background I’ve learned that open economies generally benefit everyone.

However, finding myself in Asia, I notice that almost all the poorer countries have protectionist policies in place particularly in real estate. I’ve read that they do this to avoid having their “core assets” captured and inflated in value by outside investors from rich countries who could theoretically collectively buy up large swaths of a poorer country.

Is there any truth to this idea, or are they just further hurting their ability to grow particularly in real estate?

[bldysabba]

@IMfez

With my business background I’ve learned that open economies generally benefit everyone.

However, finding myself in Asia, I notice that almost all the poorer countries have protectionist policies in place particularly in real estate. I’ve read that they do this to avoid having their “core assets” captured and inflated in value by outside investors from rich countries who could theoretically collectively buy up large swaths of a poorer country.

Is there any truth to this idea, or are they just further hurting their ability to grow particularly in real estate?

Early stage protectionism has been a huge part of the growth of almost all the advanced economies, including the US. The latest ‘miracle’ growth stories in Asia - Japan, S. Korea, China have all relied on(and still rely on) a great deal of protectionism. The tricky part is to strike the balance between having your industries be competitive with others in the world, while at the same time preventing your protectionist policies from becoming too entrenched and changing the actors in your economy from being productive to rent seeking. The US managed that transition. It is not clear whether Japan did, or China will. There are also some more sophisticated arguments and models, based on societal evolution and the equilibriums involved therein, that also advocate progressively reducing protectionism.

I’m not at all sure how these ideas apply to real estate though, which is, almost by definition, a rent seeking sector. My expectation is that, given a large enough domestic financial market, protectionism would not hurt real estate to any large degree. My assumption here is that real estate has only one main factor of production - capital.

[guesswhoiam]

Other examples from history:

The British Navigation Acts (a series of very protective measures) were often cited as a major factor in the later British dominance in trade

The US had way higher tariff than European countries, before it became a superpower and the biggest economy after WW I

[Chen019]

@IMfez

With my business background I’ve learned that open economies generally benefit everyone.

However, finding myself in Asia, I notice that almost all the poorer countries have protectionist policies in place particularly in real estate. I’ve read that they do this to avoid having their “core assets” captured and inflated in value by outside investors from rich countries who could theoretically collectively buy up large swaths of a poorer country.

Is there any truth to this idea, or are they just further hurting their ability to grow particularly in real estate?

No, I think that it makes sense in terms of real estate to have some level of protection to enable local people access to affordable housing.

More generally there is a good case for protectionism for emerging economies in relation to developing manufacturing. Ha Joon Chang is a major advocate of this:

he extent of this mythical history when it comes to the development trajectory of today’s rich countries is quite staggering. For example, the United States is the country that actually invented the infant industry argument. They made the argument that governments in relatively backward economies need to protect and nurture their young industries so they can grow up and compete with producers from more economically advanced nations. That theory was invented by someone most Americans see almost on a daily basis in their wallets — Alexander Hamilton, the guy whose face is on the $10 bill and who was the first Treasury Secretary. Through Hamilton’s influence, basically for about 120 years, up until the Second World War, the United States remained the most protectionist country in the world.

The same with Britain. When you read the Economist magazine, you might think that free trade was invented by Britain and protectionism was invented by France. But if anything, the picture is the reverse. For about a century, until it opened up its borders the mid-1800s, Britain was one of the most protective nations in the world. I can go on and on with this story, as I do in Bad Samaritans. But basically the point is, in every policy area — international trade, foreign investment or intellectual property rights — what the rich countries think their ancestors did, and what the rich countries tell the developing countries to do today, is almost diametrically opposed to what their ancestors really did. Hardly any country succeeded with even one or two elements of the policies recommended to developing countries today…
The Japanese first set up their car industry in the 1930s, protected through very high tariffs. Foreign investors were kicked out in the late 1930s. The government injected public money into Toyota in 1949 because it was about to go bankrupt, and subsequently provided massive amounts of direct and indirect support.

Even with all this, it was only in the 1970s that the Japanese companies became internationally competitive — and at that only in small car markets. In the early 1980s, the Japanese car companies announced they wanted to move into the luxury market, and other people said, “Isn’t that an oxymoron, a Japanese luxury car?” and they laughed it off. But another 20 years and they were there.

For example, when South Korea first tried to set up a steel mill in the late 1960s and went to the World Bank, the World Bank said, “Are you out of your mind?” I probably would have agreed with the World Bank if I were there, because at the time South Korea’s main exports were fish and wigs made with human hair. And they didn’t even produce any of the raw materials for steel, like iron ore or coking coal.

The government said, “We have to run it as a state-owned monopoly because there is no private investor willing to take the risk.” In that situation, the World Bank said, “Sorry we are not giving you money.” The Korean government managed to get loans from a few Japanese banks, built a steel mill, which started production in 1973, and eventually became the most efficient steel producer in the world. So you can have situations where the government is the only agent that can do certain things.

[Little_Nemo]

In my opinion, protectionism can benefit an emerging economy. But the important point is that the economy has to be emerging. Protectionism can create an environment in which local businesses can develop to the point where they can compete openly against foreign competition and protection can be withdrawn - that’s good. But protectionism can be an ongoing means of blocking foreign competition and local businesses can use that as an excuse to not develop - and that’s bad. Protectionism should always be seen as a temporary tool whose proper use should lead to its own demise. If you don’t have a plan for when you’re going to cancel the protection, you’re doing it wrong.