Nurturing vs protecting
I recently bought bicycles for my two granddaughters. I paid an extra P100 each to have them fitted with training wheels, but I’m not sure if that was a good idea. I learned to ride a bicycle without depending on those appendages to prop me up. I learned the hard way, enduring many falls and scratches until I could go on my own without someone holding my seat to keep me upright. I’m convinced that one learns to balance a bicycle much faster that way, rather than develop a continuing dependence on those training wheels, making it harder to wean oneself from them.
In a similar vein, I’ve heard of how an uncle supposedly taught his children to swim by throwing them directly into the deep water. They learned to swim the hard way, to be sure, but they certainly learned fast, and were probably the better for it.
Last week, I wrote on ‘’rifle’’ and ‘’shotgun’’ approaches in sectoral economic policies, and argued that a rifle-focused policy of nurturing is superior to one of shotgun-style protection that may help a targeted few, but with much collateral damage elsewhere. Exemplifying the shotgun approach has been the ‘’infant industry’’ protection traditionally given to targeted industries via high import tariffs or quantitative restrictions on imports of competing products. I call it a shotgun solution because it hit everyone with higher prices. It helped domestic producers, but in the process also hurt all the bystanders, i.e., the general consumers.
I liken such protection to bicycle training wheels, or a child swimmerÆs arm floaters, which only prolonged, for the protected industries, the process of learning to stand on their own and stand up to open competition. Many never outgrew them, as they focused on the protected but limited domestic market, ever dependent on ‘’training wheels’’ that made it all right to have lower efficiency and higher costs. Lacking competitiveness as such, they were unable to tap the wide opportunities for growth in the international markets. Consequently, our economy’s growth was stunted, while our more open neighbors zoomed past us with far greater exports than we ever managed as an economy. The shotgun approach thus hit us two ways: It led to lower overall welfare by unnecessarily penalizing the wide mass of Filipino consumers with higher prices, and it held us back as economic laggard in the region for decades.
With hindsight, it’s easy to understand why our leaders took the shotgun route back then. The rifle approach of nurturing (rather than ‘’protecting’’) target industries would have entailed measures to improve infrastructure (to reduce energy, transport and communication costs); provide technology support through effective research and development and extension services (to raise productivity, hence reduce unit costs); expand access to financing (to provide the capacity to invest in productivity-enhancing inputs such as hybrid seeds); and strengthen capacities through improved education and training–and more. All these would have entailed substantial budgetary resources which, with a weak economy and weak tax administration, were in short supply. In contrast, the shotgun approach of trade protection not only cost government nothing (even as it proved costly to society, as seen above) but actually brought money to the government, from the tariffs collected on competing import products. For a shortsighted policymaker, the choice was a no-brainer. This is why economic policymaking cannot be entrusted to financial minds alone.
We’ve seen many more rifles and shotguns in our midst. A current issue concerns the approach to funding Metro Manila’s mass rail transit system, now notorious for frequent failures and breakdowns. Keeping fares at highly subsidized rates, or well below a level that would recover costs, is tantamount to having all taxpayers support its operation and upkeep, whether or not they even use the facility at all. In effect, even taxpayers in faraway Mindanao or Ilocos are forced to pay for the MRT, even if they will never ride it in their lifetime. It’s a shotgun that hits everybody, MRT rider or non-rider alike. Raising fares to recover costs is seen by many to be the preferable ‘’rifle’’ approach, which properly puts the cost burden on the direct users or beneficiaries–arguably the fairer way to address the issue.
Farther back was the era when government controlled the pricing of petroleum products, purportedly to ‘’stabilize’’ prices in an environment of price volatility. An Oil Price Stabilization Fund (OPSF) was set up from which the oil companies were paid when world petroleum prices were above domestically mandated prices, and paid into when the reverse was true. As would be expected, the government tended to keep prices below world prices more of the time, leading to huge accumulated OPSF deficits that dominated the overall public sector deficits of the time. In the end, all taxpayers, oil consumers or not, were forced to pay–when it made better sense to have heavier oil consumers (like owners of gas-guzzling luxury cars) bear the heavier burden of the cost of petroleum. The OPSF ‘’shotgun’’ was eventually abandoned to give way to the rifle approach of oil price deregulation, making oil consumers pay for their consumption commensurately. I shudder when I hear calls for oil re-regulation–as if we hadn’t learned our lesson from the 1980s-1990s.
My conclusions remain the same: A rifle is better than a shotgun when it comes to economic policy, and nurturing target sectors in an open, level and competitive environment is better than hitting consumers with the loose shotgun of trade protection.
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