TCS Daily

Wheels of Fortune?

By Tim Worstall - October 12, 2004 12:00 AM

It is rare to find a single story that illustrates, in exquisite detail, all of the varied pro- and counter- arguments for free trade as opposed to managed or protected trade. I am therefore grateful to Peter Foster who filed this piece in the Daily Telegraph from New Delhi. In a nutshell, the Indian Railways Minister, a Mr Prasad, has refused permission to import railroad wheels into India, preferring to establish a factory in his home state of Bihar to make India self-sufficient in their production.

You may wonder what I mean about counter-arguments to free trade for as we have seen recently here, economists from Milton Friedman (of course!) to Paul Krugman are adamant that free -- not fair, managed or protected -- trade is what works. As Helen Szamuely pointed out in these pages, even Oxfam is on board with their "Trade not Aid" campaign, it being left to the slightly confused people at Christian Aid to oppose the idea of voluntary exchange. Here at the fair TCS the commitment to free markets includes the subject of free trade, and when media agreement reaches as far as The Guardian you might think that debate is over.

However, you would be sadly wrong. There is still a substantial current of thought that for developing nations there is still value in protecting young industries, in helping certain favored or desired sectors to establish themselves free from the competition or the ravages of global capitalism. Import barriers, quotas, tariffs, permissions, all are variously advanced as ways to help. Indeed, they do help and therein lies the rub. For an industry can indeed establish itself with such help, may well not be able to do so without it. This is why I like our little Indian story above so much for it provides us with the rebuttal.

I will admit a little surprise that India does not already make its own railroad wheels. While they have become more complex in recent years, the basic technology is a century and more old. Cast some steel, hit it with hammers sufficiently and there you have it, something to help you move people and goods from Delhi to Madras. Surely India could and should host such a simple manufacturing process? At this point screaming matches break out. Partisans from either side trot out their favored case: South Korea industrialized with state direction of low interest loans and behind tariff barriers. Yet Hong Kong did it in the most purely free market environment on earth. Ah, but, Singapore is also ethnic Chinese and they had and have a great deal of state intervention in the economy. Latin America largely failed with their import substitution attempts from the 1950's to the 1980's. Well, yes, they did but they don't seem to have done much better since either. This goes on until someone points out that the Tennessee Valley Authority was responsible for bringing electricity and irrigation to huge areas of the US then someone states that the free market did the same for some other area of the US. If anyone points out that Lenin and Stalin at least were able to promote the Electrification of the Soviet Union (it's not just a terrible opera folks) then we reach the economist's version of Godwin's Law. Praising two mass murderers for their ability to bring electrons to the land they starved, while the rest of Europe seemed to manage it using the free market has that sort of effect, closing down the possibility of further rational conversation.

The truth is that infant industry protection does in fact work, it does allow the creation of work and factories that otherwise would not exist. We will in a decade or so be able to celebrate the establishment of the Indian railroad wheel industry and rejoice at the fact that the sub-continent is self-sufficient in such manufactures. The more important question is not whether it does work in this manner, but what is the cost of it working?

Let's leave aside any of the snide remarks possible about a Minister having the power to license or not an import, that's an unfortunate hangover from the more absurd mid-last century economic planning ideas known as the License Raj. Similarly, not too much attention should be paid to the amazing fact that the new factory will be built in said Minister's home state. We may not be able to use either pork-barrel or parish-pump politics to describe that sort of behavior in a predominantly Hindu country but whatever the appropriate description we are not surprised at such actions when politicians are present. The real cost is here:

"Analysts predict that it will be many years before India can produce enough wheels to meet demand. The shortage has left 20,000 carriages awaiting wheels, and a similar number of old ones requiring replacements."

What do you think will make the people of India richer? An indigenous railroad wheel manufacturing industry? Or a train system with 20,000 extra carriages on it and a further similar number running on new not old wheels? Please note that the industry will arrive after a decade of not having the new and repaired carriages. It isn't really that tough a question is it? Simply another nail in the coffin for the idea that tariff barriers (whether you call them quotas, tariffs, permissions or licenses makes little difference) will make a country rich.

The sad thing is that this is not in fact a new idea. We've known it since at least "The Wealth of Nations" back in 1776. I guess it just takes a few centuries for ideas to sink in.

The author is a TCS contributor. Find more of his writing here.


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