Dr. PBJ: Protectionism or protecting the unprotected?

I refer to your ‘Letter to the Editor’ on 31 May 2012. It is surprising that an economist of Dr. P B Jayasundera’s calibre and experience would need to be told that protectionism is not the right tool for increasing local production and exports.

However, when I saw the name of the author of the article it was not unexpected that the content of the letter consists mostly of classical economic concepts currently taught in Economic 101 classes.

The Secretary to the Treasury (ST) has stated that certain agricultural and dairy imports need to be discouraged to promote local production. Based on this statement, R.M.B. Senanayake goes on to deliver a basic lecture on the concepts of free trade and comparative advantage referring to the well-known names, such as Ricardo and Adam Smith. He falls short of referring to more modern day neo-classical economists such as Friedman, Hayek.

It is important to pose the question then why ST referred only to agricultural products like milk foods and sugar, while not mentioning any industrial goods. This is simply because trade in agricultural produce is highly subsidised, directly or indirectly by governments to make their farmers competitive in the international market.

Countries such as Sri Lanka cannot compete without levelling the playing field through subsidies or tariffs. Giving Sri Lanka’s fiscal constraints, additional subsidies are not a viable option, hence the recourse to tariffs.

In a very imperfect world trade regime, particularly in agricultural products, the arguments made by economists such as Senanayake do not take into account the realities of the distorted international trading system.

 The elaborate theories formulated by classical economists assumed perfect competition which is not found in today’s world. It is, therefore, unrealistic and destructive for a small country like Sri Lanka to conduct its trade policy, particularly for agricultural goods on the basis of a world of perfect competition.

It is, however, noteworthy that the trade in manufactures has been liberalised to a greater extent through successive GATT/WTO Rounds. The concept of comparative advantage operates more effectively in the industrial sector. This explains why Dr. Jayasundera has focused only on agricultural products which continue to be subject to high level of subsidisation.

In an ideal world, where countries such as Sri Lanka have access to detailed information on world-wide subsidisation of each and every import item, we would be in a position to convince the WTO that there is a case for countervailing duties to be imposed. To my knowledge developing countries do not possess required data, complicated modelling skills and other resources to undertake such investigative studies.

Furthermore, the argument for levelling the playing field through tariffs also applies in the case of rice and vegetable imports.

If one were to adhere to Senanayake’s argumentation, local farmers would not be able to compete with Indian farmers who are highly subsidised by both Federal and State governments.

Senanayake has also not taken into account the long term dynamics related to food security. One billion people are expected to acquire middle-class consumption patterns over the next years as the large emerging markets continue their accelerated growth. This will bring about a change in food habits with higher levels of consumption of dairy and meat products.

In addition, the increasing tendency to utilise certain cereals for producing fuel is also expected to add to the demand pressure. These will have a knock on effect on the price of cereals.

The upshot is that food prices are likely to be elevated in the medium to long term. As a result, there is a case for building domestic capacity in food protection from the perspective of a dynamic comparative advantage based on future food prices.

I should also point out that it is not only technocrats like Dr. PBJ who are responsible for decision making when it comes to reforms, particularly those with difficult political economy implications.

Finally, it is important to emphasise to our socialists as well as capitalists that we should not over indulge in narrow and outdated ideologies and theories.

Let me remind readers of what Deng Xiaoping, the chief architect of China’s reform and opening up said at the Third Plenary Session of the 11th Central Committee of the Chinese Communist Party (CPC) in 1978: “If a party, a country or a nation does everything by sticking to dogmas, follows an ossified way of thinking, and is prevailed over by superstition, then it can never move forward, its hope of life will die, and either the party or the country will be doomed.”



Luxman Siriwardena