Friday, 16 March 2012

Export restrictions and supporting national champions

By Xavier Cirera

Although not my main area of research, this is the second time that I have written about export restrictions. The reason is that this week saw one of the fastest trade policy reversals in history. In the space of a week, India introduced and reversed an export ban on cotton. The ban was intended to allow the domestic textile industry access to cotton at lower prices. After angry reactions from farmers and the main cotton importer, China, the ban was reversed.

The ban was bad news and, more importantly, was bad policy. First, because it would have been ineffective in addressing the constraints of the textile sector. Trade policy instruments are often ineffective in addressing industrial policy issues. Second, because of the negative distributional effects from the reduction of cotton farmers’ incomes. People tend to forget that as trade liberalisation has large effects on income distribution so do trade restrictions. Third, because a ban increases volatility in international markets (indeed prices increased 5% after the ban and returned to previous levels after the reversal). This affects, for example, the livelihoods of many subsistence farmers in Africa.

This makes me think about our earlier post on supporting national champions by Carlos Fortin. I agree in principle with Schumpeter’s view of industrial growth. Too often industrial policy has been neglected by mainstream economists and policy makers, and very little attention is given to supporting these ‘national champions’. However, the problem is one of policy design and implementation. How do you decide what is a national champion and what are the main instruments to support these sectors? These important questions are far from being solved, and the problem is that too often government policy focuses in practice on the sectors with more successful lobbying and using the wrong instruments; as the example above suggests.

Addressing this problem of targeting and instruments should undoubtedly be at the centre of industrial policy. This will make industrial policy more focused and effective, and would also benefit society by removing the large number of existing distortions in other sectors.