What Is the Infant-Industry Theory?
Let me tell you about the infant-industry theory. It states that new industries in developing countries need protection from competitive pressures until they mature and build economies of scale that can stand up to their rivals. This argument is frequently used to support protectionism, and it was first put forward by Alexander Hamilton and Friedrich List.
Key Takeaways
- The infant-industry theory holds that new industries in developing countries require protection from competitive pressures until they mature.
- This theory, developed in the early 19th century by Alexander Hamilton and Friedrich List, often serves as a basis for protectionist trade policies.
- Governments in developing nations might implement import duties, tariffs, quotas, and exchange rate controls to allow the infant industry time to develop and stabilize.
Understanding the Infant-Industry Theory
You should understand that the infant-industry theory assumes emerging domestic industries need shielding from international competition until they become mature and stable. In economics, an infant industry is one that's new and in its early development stages, not yet ready to compete with established competitors.
This theory, first outlined in the early 19th century by Alexander Hamilton and Friedrich List, justifies protectionist policies. The core idea is that young industries in underdeveloped nations require protection from more established ones, typically from abroad.
In response, governments can impose import duties, tariffs, quotas, and exchange rate controls to stop international competitors from undercutting the prices of the infant industry, giving it the time it needs to develop and stabilize.
Special Considerations
Consider this: According to a paper in the Journal of International Economics titled 'When and how should infant industries be protected?', the theory was later refined by economist and philosopher John Stuart Mill, who argued that infant industries should only be protected if they can eventually become viable without it. Charles Francis Bastable added that the total net benefits from the protected industry must outweigh the total costs of protection.
Infant-industry proponents claim that industries in developing economies must be protected to prevent international competitors from harming or destroying the domestic ones. These industries lack the economies of scale that older foreign competitors have, so they need protection until they can build similar scale.
The theory maintains that once the emerging industry is stable enough for international competition, protective measures like tariffs should be removed. However, in practice, this doesn't always happen because those protections can be tough to eliminate.
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