Excessive protection of industries by customs duties

The inordinate protection given industry by customs duties in a given country acts as a deterrent to, and decisively affects, the domestic market for industrialization. Whilst such protection was undoubtedly considered essential to the development of industry in the early stages of industrialization, its persistence as a policy has created such a barrier of tariffs and restrictions that industries become isolated from world markets and thereby are deprived of the advantages offered by healthy competition from abroad. Because of the exclusive concern with the domestic market, together with the limited size of such a market, restrictive and monopolistic practices develop which weaken incentives to technical progress and the corresponding increase in productivity.

Some developing countries have been able to use moderate protection to expand manufacturing output steadily and efficiently, but many countries have wasted both capital and labour resources in the course of industrial development. Experience indicates that although protection was introduced in these countries to assist infant industries, in the belief that the dynamic benefits would exceed the short term costs, escalating levels of protection for manufacturing led to the neglect of, and biases against, agriculture and other non-manufacturing activities, and permitted a high degree of inefficiency with concomitantly low social returns on the human and capital resources invested in manufacturing itself. Excessive protection for manufacturing also tended to handicap overall economic growth by raising the costs of inputs into agriculture and other primary production and service industries instead of making such inputs widely and cheaply available. It has usually accentuated regional imbalances by the undue attraction of resources into large cities. It has led to the restriction of potential domestic markets, undue limitations on the scale of production, and further cost burdens to the economy. Where excessive protection led to balance of payments problems, it became a brake on development rather than an instrument for its acceleration. Balance of payments problems have not been solved with the progress of industrialization as the proponents of infant industry protection expected. Indeed, where protection has been excessive these problems have been exacerbated.

In the past, import restrictions did not cause serious social hardships when most manufactured goods were imported, because imports of such luxury goods as automobiles could be restricted in times of balance of payments stringency, and liberalized when export income permitted. With industrial progress, however, balance of payments difficulties have necessitated the restriction of imports of industrial inputs rather than of final goods and this has led to unemployment. 'Stop and go' policies have thus become very costly. Excessively protected infant industries often failed to grow up, though some have become competitive exporters. Where foreign investors were attracted by high levels of protection that enabled them to make monopoly profits, high volumes of remittances added to balance of payments problems.