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7. Protectionist Pmmlise?

by Jim Powell

P
roponents of trade restrictions usually Argentina
believe that their policies somehow will
create more and better paying jobs for Argentina stands out as one of the few 2Oth-
Americans. They believe that if American century instances of a country going from rich-
consumers are forced to buy goods and ser- es to rags. Between about 1880 and World War
vices produced by other Americans, the econ- I, Argentina ranked among the worlds most
oly~wlll be stronger. prosperous nations. Only Australia, Canada,
But protectionists in other countries have and the United States were believed to be more
held similar beliefs and put similar policies prosp.xos.
to effect. The results have been disastrous.
,<estrictions on imports prevent customers
from protecting their interests by turning to Wealthy Land
suppliers abroad when domestic suppliers fail
to till their needs. Suppliers that depend on Earlier in this century a common phrase to
imports for components or raw materials for denote wealth was rich as an Argentine.
their products become less competitive. Put Lavish buildings in Buenos Aires date from the
simply, without competition there is little late 19th and early 20th centuries. They include
incentive for suppliers to become competi- towering, ornately embellished monuments in
tive. the classical style, such as Banco de la Naci6n
Protectionism prevents people from mini- (lZSS),PalacioMunicipal(l891), CasaRosada
mizing or escaping the consequences of the (1894). and the National Congress (19%). The
unsound policies of their own government. Colon Opera House (1907) rivals La Scala in
High taxes and heavy-handed government Milan. Avenida 9 de Julio is wider than the
regulations, for instance, might undermine Champs l?lys&s in Paris.
domestic suppliers. If cstomerS can still sat- British author James Bryce offered the fol-
isfy their needs by purchasing from abroad, lowing enthusiastic account in 1916:
they can reduce those effects. But protection- All is modem and new; all belongs to the pros-
ism cuts off the escape route, and removes a perous present and betokens a still more pros-
incentive for governments to repeal failed perous future. Argentina is like western North
policies. America. The swift and steady increase in its
The experiences of Argentina, India, agricultural production, with an increase core
Europe, and Japan give Americans a preview spondingly large in means of internal trans-
of what they can expect if American protec- portation, is what gives its importance to the
tionist forces continue to restrict freedom to country and shows that it will have a great part
ade. to play in the world. It is the United States of
the Southern Hemisphere.
Thhe aurhor ir editor of Laissez Faire Bookr nnd con- Argentina boomed for several reasons. It
fribibuting editor m rhe Freeman had a vast plain (la Pampa) with some of the

51
worlds most fertile agricultural land. After and natural fibers. Argentina retained a buy
1880, the country was at peace. Taxes were national policy that favored local suppliera, 4
low, and the peso was convertible into gold. even when their goods were as much as 60 i
There were no major restrictions on the move- percent more expensive than those of altern, ;
ment of people, goods, or capital. As a destina- tive suppliers overseas. Argentina banned i
tion for immigrants, Argentina was second competition in many industries, such as insur. t
only to the United States. More than 9 million ante and airlines.
Europeans, principally Spanish, Italian, and Such restrictions made it difficult for or-
Gem~an, staried new lives in Argentina, accel- genrines to cooperate with their neighbors,.
crating the countrys economic expansion. In Argentine companies long paid about 25 per-
1895, almost 85 percent of individual compa- cent more for tin than did rival U.S. cornpa.
nies were owned by foreign-born Argentines. nies, although nearby Bolivia could supply that
Foreign investment financed railroads, commodity at quite a low cost. Similarly,
industry, and agriculture. During the early Argentine companies paid 40 percent more for
20th century, it was estimated that Argentina copper wire than U.S. companies, although
accounted for half the railroad mileage in Argentina shared a 2,500~mile-long border
South America. Argentines proved to be with copper-rich Chile.
among ihe most efficient cattlemen anywhere, In the name of protecting strategically
and with the advent of refrigeration, they important domestic industries, the Argentine
grew rich serving distant markets. Argentines government prevented its citizens from gain-
became world-class exporters of wheat, beef, ing access to state-of-the-art electronics avail-
and wool. The country reported the highest able from suppliers abroad. Manuel J. Tanoira,
literacy rate on the South American continent. Secretary of Growth Promotion during the
1980s. reported:
The local electronics industry is protected by
P&ms Protectionist Path surcharges on all imported equipment. As a
result of this regulation, local users must pay 3
After World War I, the Argentine govem- to 4 times the international price for foreign-
ment increasingly interfered with business, a made computers, video cassette recorders, and
trend that accelerated with the Great other modern electronic equipment. The
Depression. Colonel Juan Per6n, who came to alleged purpose of these surcharges is to pm
power during the mid-1940s, copied the ecc- tect a $100 million industry (built mostly with
nomic policies of his hero, Italian dictator tax money), which manufactures obsolete
Benito Mussolini. The government nationalized equipment in limited production runs. Only the
companies, raised taxes, enforced price controls, very rich could buy a $1,200 video cassette
inthted the curracy, and promoted compulsory recorder or pay $400 for a computer which
unionism. And chief among his statist policies sold for less than $100 in New York City.
was trade protectionism as well as seizure of The lack of computers limited the capabili-
foreign-owned assets and restrictions or out- ties of Argentinas financial companies. The
right prohibitions on foreign ownership. brokerage firm Pardo R&e110 Y Cia, S.A., for
The result, of course, was higher prices and example, in 1991 occupied two floors of a
chronic shortages. Most humiliating, during downtown Buenos Aires office building. It
the late 194Os, was that Argentines endured had dozens of trading desks, each equipped
shortages of two products that best symbol- with a telephone switchboard. On a visit this
ized the productiveness of their country: wheat author observed only one computer screen for
and beef. the entire organization. In contrast, at sophisti-
By 1990, protectionism had isolated Argen- cated financial firms in the United States,
tina from world markets. Tariffs averaged 29 Western Europe, and Japan, each trader typi-
percent, compared with about 3 percent for tally has half a dozen screens that display
the United States. Much higher rates applied prices for different markets.
to imports such as automobiles, automobile
parts, steel, petrochemicals, plastics, and tex-
tile fibers. A licensing system restricted im- Evading Restrictions
ports in some 3,COO product categories, includ-
ing automobiles, sugar, alcoholic beverages, As Argentine import restrictions and other
medicine, pharmaceutical inputs, leather, regulations became increasingly complex, peo-
footwear, wrish+$ches, clothing, and synthetic ple had to waste @emeldous rescurces on com-
pliance or evasion. Hector Massuh, a paper told her husband that the bad news was his leg
company manager, reported: To export is would he amputated. The good news, she said,
complicated. To import is complicated. If you was, Wow you cm make thousands of dollars
mt to pay your light bill, that is complicat- as a front man for Mercedes.
ed..Some resourceful people known as
gestores made money helping others deal with
the regulations. As Tanoira noted: Protectionisms Legacy
Ng, Argentine would think of processing his
own retirement application. or attempting to Businessman Lanus de la Sema summed
register a new car. A gestor, the expert who up well the results of his countrys policies:
knows all the forms and procedures, is hired Non-communications, low production of
to do it:Importing, exporting, and manufac- petroleum, production of coal that nobody
turing require lengthy bureaucratic approval uses or buys, pensions that are insufficient to
procedures. The delays are so long that the live on, air transport policy and the routes that
original product may be obsolete by the time nobody can exploit, petrochemicals projects
approvals are granted. that never get done, violence, bungling and
I$any,~Argentines as a matter of ,course muddle, misinformation from state TV and As Argentine
would. overstate the value of impotts on their radio, welfare systems that serve badly after
invoices. Thts would allow them to evade for- inteoninable waiting, high sulphur iron that import reslrictiom
eign exchange restrictions under the guise of nobody buys or uses, the shipyards that cost
paying for imports, so they could transfer more than they produce, the water supply that and other regula-
funds to safe havens abroad. In the late 1980s. never comes, the untreated effluents, the
the national government relaxed import restric- ancient, inefficient and expensive ports, trans- tions hecame
tions as one way of promoting industrialization port-slow, irregular and antiquated, insecure
in re~mote regions like Tierra de1 Fuego. The and expensive re-insurance. sea freights that increasingly com-
effect,, however, was to create a huge loophole cannut be obtained.
for those wishing to get their money out of the I recent years the Argentine government plex, people had to
counhy. Imports were overinvoiced more than has begun to reverse half a century of policies
O-fold. The financial daily Ambito Finan- that took the country from riches to rags. waste tremendous
-.,ero reported that if invoices were to be be- Ironically, those changes have been instigated
lieved, enough building materials had been by President Carlos Menem, of the Peronist resources on
imported to put a roof over all Tierra de1 party, whose founder led the country to its
Fuego, and the inhabitants could eat 10 steaks sorry state. compliance or
and smoke 45 packs of cigarettes daily. A sin-
gle screw was invoiced at more than $l,ooO. evasion.
Because Argentine regulations allowed hand- India
icapped people to import cars tariff-free, many
of them did it on a large scale, although that was When India gained independence in 1947,
not the intent of the regulations. Handicapped its future seemed promising. The worlds
people without outside income or a drivers largest democracy, India had an extensive tail
license turned out to be the legal owners of network, a reasonably well-trained civil ser-
expensive cars. For instance, Rosa Galasi, a vice, and a vast, low-cost labor force. Yet for
Buenos Aires squatter who was paralyzed by most of the decades since independence,
polio and sold so&s for a living, owned a gray Indias economy has been mired in socialistic
BMW 5201; her brother-in-law drove it. Buenos and protectionist policies that have brought
Aires publishing executive Constancio Vigil suffering rather than prosperity to the coun-
bought a Mercedes from Juan Carlos Albar- trys hundreds of millions of people.
racin, the one-legged elevator operator in his
oftice building; Albanacin himself got about
with a horse-drawn cart. One handicapped per- Stagnant Statism
son was believed to have imported 2,ooO cars,
saving $60 million in import duties. In 1950, Indias per capita annual income
Such deals inspired jokes such as this: A was about $150, and life expectancy WBS 40
xnos Aires police offtcer stopped a driver and years. This compared with about $350 and 50
.ted the driver why he was in a car that be- years in South Korea. India had a substantial-
knged to somebody else, The driver answered, ly greater portion of savings-12 percent of
The owner is blind. There is another: A wife the gross national product, compared with g

59
percent for South Korea. All bets for prosper- A World Bank survey of 133 government
ity were on the Indian Subcontinent, not on enterprises that were operating in India by 1987
peninsular Korea. found that on average, cost ovemms were 82
After three decades, Indian per capita percent, and the projects took 71 percent longer
income was just $230 and life expectancy was than planned. In one case. the government took
55 years. Meanwhile, South Koreas per capita 12 years to expand production capacity at the
income had soared to $2,900, and its life Bokharo steel mill by only 4 million tons.
expectancy increased to 69 years. Not only had In 1989, the Indian Ministry of Programme
South Korea not received foreign aid in more Implementation reported that in 303 gown%
than two decades, but it was able to pay down mat-funded programs involving more than
its foreign debt. India, in conUast, still depend- $12 billion-for steel, railroads, petroleum,
ed on foreign aid, and its foreign debt soared to power generation, and other industries-total
over $60 billion, the fourth largest in the world. delays added up to 515 years. Costs ran 53
Indias suffocating stagnation is the legacy percent over budget.
of its most influential political leaders, Mohandas
Gandhi and his follower Jawaharlal Nehru, the
Although the countrys first Prime Minister, who embraced Protecting Failure
Sovietstyle socialism after World War II.
Indian government India devised five-year plans and nationalized Indian protectionism spread the countrys
industries, protecting them behind the toughest self-imposed economic problems throughout
controls 75 percent import restrictions in the non-Communist the economy by preventing customers from
world. If not an article of commerce had been turning to overseas suppliers. The government
of the countrys brought from outside India, she would be banned more than 300 categories of imports,
today, a land flowing with milk and honey, mostly consumer goods desired by millions of
industrial assets, Gandhi promised. Foreign goods and goods Indians. Other goods were severely restricted
made by means of complicated machinery are, by import quotas and the worlds highest tar-
those assets con- therefore, taboo. iffs, which averaged over 130 percent.
Importers who were not stopped by tarii%
vihute only about encountered Indias byzantine import licensing
Paralyzing Production system. All imports required the appropriate
a third of industrial licenses. That could entail an Advance License,
Government-owned enterprises always Capital Gwds License, Import Passbook License,
production or a become inefi%ent, creating incentives for gov- Special Imprest Import Passbook License,
ernments to restrict competition from imporis. Imprest License, Supplementary License, or
quarter of the gross India is such an example. Before independence, Import Replenishment License. Such licenses
under British rule, the Indian public sector was were issued only if the proposed import was
national product. generally limited to railroads, telegraph, mail deemed essential and could not be obtained
service, and pans. After independence, the from domestic sources. Indian producers were
government sector burgeoned as bureaucracies quick to protest any proposed license that
multiplied. Created were the State Electricity might expose them to competition. In hun-
Board, India Oil Corporation, All India dreds, perhaps thousands, of cases, officials
Handicrafts Board, Central Silk Board, Coir took more than five years to process a license
Board, Village Industries Commission, Vdlage application.
Industries Board, Cashew Corporation of India, B. P. Ada&r, adviser to the Labour, Fiice
Projects and Equipment Corporation of India, and External Affairs ministries, conveyed a
State Trading Corporation, Minerals and vivid sense of how protectionism spreads prob-
Metals Trading Corporation, Industrial Fiiance lems throughout an economy:
Corporation of India, Industrial Development The wild growth of rules and regulations can be
Bank of India, and Indian Reconstruction seen. for example, in the Red Books for
Cotpmtion, among others. Imports and Exports-not Maos red books,
Although the Indian government controls 75 but of the Chief Controller of Imports and
percent of the countrys industrial assets, those Exports! These are clogging the avenues Of
assets contribute only about a third of industial trade-like the water hyacinth overwhelming
production or a quarter of the gross national and destroying vegetation. The corridors of
product. During the past four decades, bureau- Secretariats and of other subordinate offices
crats have wasted more than $120 billion in have become like dharamsalas for mendicant
subsidies on grossly inefficient suppliers. businessmen loitering for beggarly bits of
license worth a few thousand rupees, while a Gut of this, at least 50 percent of the time is
new class of touts and agents has arisen living spent in procedures to satisfy Government
like parasites on the blood of applicants for re@dios. In any 3-year period of such delay,
licenses! Here is indeed a paradise for the little the cost es&ion will be almost 50 percent. In
bureaucrats who simply thrive on the Red our protected economy. the Indian consumer
Books and their endless addenda and conigen- ultimately pys the price for this coat escalation.
da, with cormption, delays, increaing costs of Small businesses suffer as well. Observed
industry, and inefficiency, frustration and bad Bombay entrepreneur Muraji J. Vaidya:
biood all round. There is nothing that a businessman can do
Tata Truck Company executives, for exam without asking for some permit, undergoing
pie, spent four years negotiating a license to Some control or requesting some Government
import a- computer. The executives had officer for soothing or the other. If a shop-
applied for a much bigger computer than they keeper has to deal in a commodity, he must
then needed, figuring they could sell time on have a permit, he must have it entered in his
it if the license came through earlier than sales tax permit stating that he is entitled to
expected. But bureaucrats ruled that Tata have such and such a commodity. He cannot
couId q?t sell time without aother,license. deal in more commodities without entering it Just as the New
Exc&s computer capacity remained idle, in his license.
while computers in India remained scarce. Protectionism ravaged the textile and Delhi government
Exchange controls did even more to cut off apparel Industries, in which low-cost labor
Indians from the outside world, especially was giving India significant competitive closed borders to
since the mid-1950s. Indian citizens were sub- advantages. Inspired no doubt by Gandhis
ject to a 15 percent tax on foreign exchange contempt for modem industry, officials began the outside world,
they took out of the country. Only bureaucrats promoting traditional handlooms in the 1950s.
weti: legally empowered to trade rupees for Although handloom textiles were expensive, it created barriers
other. currencies. Also, they decreed that for- even with low-cost labor. handlooms prolifer-
eign exchange could be spent only on impolrs ated behind Indias closed borders. Mean- within the country.
which they, not individual citizens, considered while, textile entrepreneurs in Hong Kong,
sssen~tial. All other transactions were Taiwan, and South Korea were exposed to
armed. In addition, bureaucrats maintained market forces, so they had to install more
the rupee at artificially high rates that priced efficient power loom-r go out of business.
legal exports out of world markets, further Results were dramatic. In the early 196Os,
turning Indian producers inward. Prospective India accounted for more than half the textiles
foreign investors were excluded by the bur- shipped from developing countries to indus-
dens of.Indias exchange controls. trialized countries; by the 1980s. Indias share
was only 9 percent, an 80 percent plunge.
Taiwan, with less than 3 percent of Indias
Shackles on Businesses population, did more international textile
business. Out of touch behind its closed bor-
Just as the New Delhi government closed ders, India missed the global boom in synthet-
borders to the outside world, it crcatcd barriers ic fabrics.
within the country. No one was permitted to A substantial number of banned or restrict-
start a new industrial enterprise-or expand an ed imports were industrial inputs, such as
existing operation-without explicit govem- cast-iron valves, stainless steel wire meshing,
ment approval. Officials determined who electrical conductor sections, textile machin-
could start a business, where it would locate, ery, and machine tools. By making these items
how much financial support it would get, what harder to get and more costly for their own
its labor policies would be, and much more. manufacturers, officials undermined efforts to
T. Thomas, Chairman of Hindustan Lever promote industrialization.
Ltd., reported:
Trying to set up a new industrial unit in India is
like running au obstacle race, except that in this Punishing People
case, as you go along the obstacles are
increased both in number and complexity We Indian protectionism meant lower living
have estimated that it takes about 7 years from standards for millions of ordinary people. Too
the conceptual stage to the production stage for poor to pay income taxes. they were hit hard
any significant investment to take place in India. by indirect taxes passed along in the form of
high prices charged by domestic suppliers. Europe
During the 196Os, Gujarat Universitys B. R
Shenoy compared the prices of domestically In the industrialized world as well as in
produced goods with banned imports. He poor nations, protectionism spreads problems
found that border restrictions added substan- from domestic suppliers to producers, work-
tially to prices of consumer goods-for in- ers, and consumers. Protectionism was a
stance, 250 percent more for refrigerators and major reason that Western Europe stagnated
328 percent more for sugar. Import barriers during the 1970s and grew much slower than
made life more difficult for peasants, who had the United States in the 1980s. The affliction
to pay 153 percent more for fertilizer, 204 per- came to be called Eumsclerosis. Even when
cent more for pumps, and 222 percent more for business expanded, companies often failed tq
pesticides. Furthermore, restrictions were a create new jobs. The adverse effects of pro-
threat to public health. Domestically produced tectionism also forced the European Com-
penicillin, for instance, cost 1,250 percent munity to remove most of its trade barriers to
more than what could be obtained easily on the other member countries in the 1990s.
world market.
Thanks to protectionism, Indians in need of
a car w&e stock with two domestically pro- Euro-inefficie&
duced models: a Padmini, which was a knock-
off of a 1960s Fiat, or an Ambassador, a Regulations in each count have served as
knockoff of a 1950s Morris Oxford. With a trade barriers. Each European country has had
captive market, producers had little reason to its own product standards, largely to frustrate
invest in research and development that could competitors. That was entailing higher costs,
improve those unreliable, uncomfortable, gas- because manufacturers were losing the eco-
guzzling cars. Consumers could wait as long as nomies of scale that would have been possible
seven years for delivery of a car they ordered. if the same standards applied throughout
And adding insult to injury, taxes accounted Europe. Dow Chemical estimated that the
for half of the high sticker price. maze of product standards added about $50
million a year to its cost of doing business in
Europe.
Corrupt at the Core Each country had distinct professional
licensing regulations, which effectively ex-
Trade restrictions and regulations of virtu- cluded outsiders. We once calculated that to
ally every kind multiplied opportunities for qualify to work as an accountant in all 12
bureaucrats to demand bribes. The Economist nations youd have to go to school for more
Inrelligence Unit reported that businessmen than 50 years, reported European Commis-
commonly estimate that between 5 percent sion staffer Matthew Cocks.
and 7.5 percent of a projects capital cost goes Trucks were not free to carry goods across
to officials before it is approved. Then addi- borders unless they had an official license
tional inducements are required for connect- issued by each country. Because few such
ing electricity, bank loans and other services. licenses were issued, they were expensive-
Entrepreneurs had to make increased efforts so much so that licenses were estimated to
to coddle bureaucrats, rather than improving constitute 20 peIcAlt of total costs for Euro-
their business. One cynical banker remarked, pean tmcking companies.
There are 200 guys in positions of power. Even when trucks had appropriate licenses,
one guy wants money, one wants women, one they were required to stop at each national b&
wants to get drunk everyday, one wants his son der and waste hours as bureaucrats plodded
to go to school in the United States. Black through official forms. Typically, a trucker
money changed hands to provide desired crossing European borders had to present about
favors and grease the levers of power. 75 forms, weighing several pounds.
By the 198Os, there was widespread recog- Airlines were similarly restricted. National
nition that Indias policies were responsible governments blocked airline competition.
for the chronic misery of the people. Liber- Consequently, the privileged carriers charged
alization has since proceeded slowly, because premium rates. It cost about 50 percent more
politically connected special interests have per ton to ship something via air freight in
aggressively defended their protectionist Europe than in the United States.
privileges. Telecommunications was long among the

62

C
most heavily protected industries in the indi- to pay 3 I percent more for life insurance than
vidual European counhies. I West Germany,, in a more open market like Great Britains,
telephones cost twice as much as in other Spanish consumers had to pay 32 percent more
ampcan countries. Italtel, the Italian govern- and Italian consumers, 51 percent more.
ment-pwned telecommunications monopoly, Overall, government regulations enabled
was notorious for its poor service; few calls insurance companies to overcharge consumers
could be placed without repeated dialing. by $2.9 billion annually.
Government monopolies left little incentive Myriad European regulations forced people
to innovate. Consequently, the monopoly to pay higher prices for focd. For example, in
FranCeTelecom, for example, lagged far behind Italy, a law required that pasta be made of
deregulated British T&corn in providing busi- expensive durum wheat rather than varieties
nesses with new services such as cellular tele- that are abax 15 percent cheapx Italy enforced
phones. Because the telecommunications an outright ban against imported pizza and
monopolies were backward looking, they did many other products.
little to upgrade their jointly owned intema- Comprehending, in the 1980s. that they
tional.Telex service, a technology dating from were falling behind the booming economies
tic 1920s. Big, ugly, and noisy Telex mxhines of the United States and East Asia, European Comprehending, in
printed messages in only one typeface on rolls Community leaders developed a ambitious
of narrow paper. agenda to liberalize the continental economy the 19805, that they
When~ private Asia electronics companies, by 1992. They swept away hundreds of cost-
not government telecommunications monopo- ly restrictions. But the advantages of trade were falling behind
ties, offered inexpensive, convenient, and high- liberalization could be short lived as high
quality fax machines, customers scuttled their taxes and other regulations still hold back the booming
chmky Telexes. I the United States, the num- those economies.
her Of Telex subscribers declined fmm 118,000 economies of the
in 1986 to 78,000 in 1988. International fax Japan
machine sales have doubled almost every year, United States and
and fax producers have continued to introduce Some Americans view Japan as a country
,ster, cheaper, smatter machines. that has grown and prospered because of trade East Asia,
protection and subsidies to industries. But in
fact, the Japanese governments mixed eco- European
costs to Consumers nomic policies have produced mixed results.
The industries that have done well are those Community leaders
The biggest losers from the trade restric- most free of government protection, direction,
tions and subsidies of the various European or interference. The most heavily subsidized developed an an&-
countries were the hundreds of millions of and protected industries have fared the WOIS~.
European consumers, denied the freedom to Their market shares and employment declined. tious agenda to lib-
seek the best value for their money. They became a chronic burden to Japanese
Each country had laws that enabled banks customers and taxpayers. eralize the conti-
to avoid paying interest to small depositors.
Other laws prevented foreign banks from nental economy by
opening branches to offer citizens a better deal. Crippled Crops
Similarly, some laws prevented citizens from 1992.
opening bank accounts in other countries. I Early in the 20th century, Japan was a sub-
Britain, France, and West Germany, the spread stantially open market for agriculture; about
between consumer loan rates and money market 90 percent of rice was imported. But the couw
rates was three times greater than in less-regu- by adopted import quotas and high tariffs in
lated Belgium. I West Germany, there was one the 1930s that remain to this day. Further-
credit card for every 23 people; in the United more, the government guarantees that farmers
States, it was a credit card for every 10. receive a minimum price for rice that is well
Consumer loans and other services were also above world market levels.
much harder to get than in the United States. Moreover, the 1952 Agk~ltural Land Law
Millions of European consumers paid outm limited the size of residential farm landhold-
POUS fees for financial services because con- ings and banned nonresidential ownership as a
~mers were not free to shop for better terms. means to prevent the reappearance of a land-
According to a study by the European Com- lord class. As a consequence, the average
mission, consumers in restricted Belgium had Japanese farm is only 2.7 acres, compd with

63
34.5 acres in West Germany, 59.2 acres in few Japanese wholesalers have done that much
France, 158 acres in Britain, and 387.7 acres in business. In Japan, most goods have been bar-
the United States. Although the average died by more than one wholesaler, with each
Japanese farmer has come to depend on rice adding a markup, whereas in the United States,
for only about 6 percent of total income, rice one wholesaler has been the rule. The magni-
protectionism has become politically untouch- tude of added costs is indicated by the ratio of
able. Agriculture remains Japans most pro- wholesale to retail sales; the higher the ratio,
tected sector. the more frms are involved in the distribution
Agricultural protectionism lowers the living process. Japans wholesale-retail ratio has bean
standards for 85 percent of the Japanese people 3.9 to 1, whereas Americas has teen 1.7 to 1.
who earn their full-time livelihood off the Chain stores have served only about 8 percent
farm. Farm privileges transfer tax burdens of the Japanese market, versus about 50 p+-
from farmers to all other workers and slow the cent of the U.S. market. Despite protectionism,
flow of available workers to industry. They many small retailers have concluded that their
lit the supply of land for industrial develop backward operations would continue to
ment and contribute to higher land costs. decline, and they have sought franchises with
Agiicultural pro- Despite enormous protection, the Japanese chains such as 7-Eleven stores.
farm population dropped from 30 million in The Japanese government combined trade
tectionism lowers 1965 to under 20 million in recent years. restrictions, special access to foreign curren-
cy, and subsidies in attempts to help privi-
the living standards leged sectors of the economy. In all cases
Retail Regulations such efforts simply supported inefficiency and
for 85 percent of rarely prevented decline in these sectors.
Japanese consumers suffer from restrictions Examples include the following:
theJapanese peo- on the countrys distribution system and from S&Z. The Japanese government has prc-
retail outlets that drive up prices. Unforhmate- mated the steel industry since World War II.
ple who earn their ly, protectionist policies mean that Americans Exchange control bureaucrats gave producers
and other foreigners cannot freely establish privileged access to foreign currency with
full-time livelihood competing outlets offering lower prices. which they could buy needed machinery. The
Small stores, experiencing competitive government provided priority supplies of coal
off the farm. pressure from large retailers during the late and low-cost investment capital. Those poli-
1960s. were protected by the Large Scale cies led to an overcapacity of high-cost steel
Retail Store Law in 1973. That law established manufacturing by the 1970s. Investment
licensing requirements for any proposed store returns plunged. Soaring oil prices and inter-
with more than 1,500 meters of floor space in est rates triggered horrendous losses. In the
most localities, and 3,000 square meters in 198Os, companies like Nippon Steel, Kobe
large cities. The effect was to slow significant- Steel, Sumitomo Metal, and Kawasaki Steel
ly the spread of large stores. Retail companies shut down blast furnaces and cut payrolls by
began expanding mid-size stores, and in 1978, some 47,000 workers. Higher financing costs
the law was revised: Stores with as little as brought additional turmoil in the 1990s.
500 square meters needed official permission Coal. After World War II, the Japanese
before they could open. The law required government began subsidizing the coal min-
retail companies to notify &&Is in writing ing industry with low-cost loans and priority
seven months before a proposed store open- access to foreign exchange and electrical
ing. That measure gave neighboring mom- power. Yet Japanese coal output has dropped
and-pop store owners ample opportunity to more than 50 percent during the past two
besiege of%zials to squelch most competiton. decades. Employment plunged over the past
During the 198Os, the government further 20 years from 260,ooO to about 26,000. The
restricted large retailers, and applications for industry is still declining.
new stores dragged on for years. Those nation- Rail. The long-nationalized Japanese
al restrictions were compounded by local National Railway was notoriously overstaffed
resnictions on large stores, as well as regula- and inefficient, with several times more
tions making it diff&lt to build warehouses employees per revenue mile than railroads in
suitable for large stores. The Japanese dishibu- other industrialized countries. According to
tion system has thus remained inefficient. Keio University economist Hiroshi Kate,
Whereas half of U.S. wholesalen reported President of the Japan Economic Policy Asso-
more than $1 million in annual revenues, very ciation, overstaflimg amounted to about 93,ooO

64
workers, a third of the total payroll. Yet Japan Until 1980, Japan had exchange controls,
National Railways share of passenger and which meant no one could take cn&ncy into or
freight traffic declined. In contrast, most of out of the counhy without oI3cial permission.
vans private railways were quite profitable. Japanese laws prevented commercial banks
~.le situation at Japan National Railway began from selling securities and securities firms from
impidving only after it was broken up and pri- taking deposits. Japanese regulators delayed the
vat&d as six separate companies in 1987. introduction of valuable risk-management tech-
Shipbuilding. To help it compete in world niques, such as interest rate futures contracts
markets, the Japanese government provided and options. Investment management was lim
the shipbuilding industry with tax breaks, ited to trust banks and insuance companies. A
low-interest and deferred loans, plus financ- government-enforced cartel of several dozen
ing through the Export-Import Bank and the companies controlled life insurance. Officials
Japan Developrrrnt Bank. Th+z result is highcosf determined the kind of securities in which
excess, capacity. During the past decade, major insurers could invest. Securities brokerage
shipbn.ilders like Mitsubishi Heavy Industries, commissions were fixed. The result was high
Ishika~jimi-Harima Heavy Industries, Hitashi brokerage commissions, poor investment
Zosen, Kurt&ma Dockyard, Kawasaki Heavy returns, and fewer consumer fmancial services
Indus@ies, and Sumitomo Heavy Industries compared with the United States.
closed shipyards and cut their payrolls by Japans financial system did not prepare
more thag 45,000 people. More than a dozen Japanese financial companies for the doubling
companies failed. Japan has less shipbuilding of interest rates in 1989 and 1990. Nor did the
capacity now than in 1970. The Japanese lost regulatory wall prevent the Japanese stock mar-
a big share of the ship market to South Korea. ket from falling about 50 percent in 1990. Ihe
Aluminum During the late 1960s and early Japanese equity market remained volatile and
197Os, the Ministry of International Trade and thin. Japanese money managers made their
Industxy (MITI) decided that aluminum was a share of costly mistakes venturing into U.S. real
key,industly and showered six producers estate. Required by law to pay policyholders
with special breaks. But the subsequent escala- only out of current income, and root capital gains,
w of oil prices turned those visionary plans Japanese life insurance companies loaded their
.o horrendous losses. One producer ceased portfolios with securities that yielded high cur-
operations, seven smelters were shuttered, and rent returns and depreciated sharply. Japanese
overall capacity contracted 60 percent, with the insurance companies lost billions in such
remaining smelters operating at less than half straightforward instruments as U.S. Treasury
capacity. bonds. Most of Japans giant commercial banks
Petrochemicals. Japanese officials nurtured had their credit ratings downgraded.
the petrochemical industry with subsidies, Those are just some of the faihuea of Jap
import restrictions, low-cost land, extra for- anese protectionism. Others include health ser-
eign exchange allotments, and favorable tax vices, food processing, sugar refining, co&-
treatment for licensing foreign technologies. tionery, tobacco, and lumber.
Naturally, that encouraged companies to enter By providing subsidies and promoting im-
the business. The result was costly overcapacity, port restrictions, the Japanese government
triggering profound price declines. Petxchemical delayed the transition from declining industries
companies were further squeezed by MITIs pal- to new industries. Precious people, goods, and
icy of pmt&ing Japanese petroleum producers, capital remained tied up in declining industries
especially with import restrictions on naphtha, a longer than they would have been in a wide
principal feedstock for petrochemicals. MITI open market. Consequently, fewer new jobs
tried to help petrochemical companies by fur- were created. Japan boomed during the 1980%
ther protecting their markets and organizing a but the United States c1&4 far mcxe jobs-l 8
cartel in the 1980% but the scheme did not million altogether.
work. Japanese companies most dramatically
Finance. Japans financial markets have expanded their market shares in the United
been among the most heavily regulated in the States, Europe, and Asia during the 1980s.
industrialized world. In many ways, that coun- when trade and investment liberalization
Ws regulations in that arena parallel those of gathered momentum. Tariffs were cut to levels
: united States, although Am-eric~ policy- lower than in the United States. Dozens Of qU*
makers, in recent years, have moved further tas were scaled back or eliminated. Japanese
toward reform. companies gained easier access to capital, with

65
more flexible terms and often lower costs. Symposium of Indian Economic Confer-
Certification and standards procedures were ence 1967. Bombay: PopuIarprakashan 1969.
simplified. Japan has come far, but the process Agxwal, A.N. Indian Economy. Delhi: Vii
is painfully slow. Publishing House, 1975.
Frankel, Francine R. India? Political Econonq
1947.1977. Princeton: Princeton University
Conclusion Press, 1978.
Lucas, Robert E.B., and Papanek, G.F., eds.
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The way to prevent supplier problems from Developmenr. New York: Asia Publishing
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their needs abroad. Free trade means that Bombay: Popular Prakashan, 1969.
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what customers need, customers can still pro-
tect their vital interests. How can they be
legitimately denied? Europe

De Benedetti, Carlo. How to Make Europe


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