Chapter 21: Problem 27

What are main reasons for protecting "infant industries"? Why is it difficult to stop protecting them?

Short Answer

Expert verified

The main reasons for protecting infant industries are to encourage economic diversification, promote domestic innovation, and create employment opportunities. However, it is difficult to stop protecting them due to political pressures, sunk costs and path dependency, and the entrenchment of uncompetitive practices.

Step by step solution

Define infant industries

Infant industries are newly established industries that have not yet matured enough to compete effectively with well-established and more experienced competitors from other countries. These industries often require government support in the form of protective measures like tariffs, import quotas, and subsidies in order to grow and develop.

Reason 1: Encourage economic diversification

One of the main reasons for protecting infant industries is to foster economic diversification. By nurturing new industries, a country can diversify its economy, reducing its dependence on a single sector or a limited range of products. This can also help stabilize the national economy, making it more resilient to external shocks, such as commodity price fluctuations or economic crises.

Reason 2: Promote domestic innovation

Protecting infant industries can also encourage domestic innovation and technological development. Government support can help these industries invest in research and development, allowing them to create and adapt new technologies. This can ultimately lead to increased productivity and competitiveness on the global market.

Reason 3: Create employment opportunities

Another reason for protecting infant industries is to create employment opportunities. By fostering the growth of new industries, governments can help generate jobs in sectors that may have previously been underdeveloped, helping to reduce unemployment and improve overall living standards.

Difficulty 1: Political pressures

It can be difficult to remove protection for infant industries due to political pressures. As these industries grow and create jobs, they also build political support and influence, making it challenging for governments to eliminate protective measures without facing backlash from interest groups and constituents.

Difficulty 2: Sunk costs and path dependency

Governments might find it hard to stop protecting infant industries due to sunk costs and path dependency. Substantial investments may have already been made in developing these industries, and ceasing protection could lead to significant financial losses. Furthermore, once an industry has been established and supported, it can be difficult to change course and reallocate resources to other sectors.

Difficulty 3: Entrenchment of uncompetitive practices

Over time, the protection of infant industries can result in the entrenchment of uncompetitive practices that hinder innovation, efficiency, and market competition. In this situation, withdrawing support from these industries could lead to significant disruptions and economic challenges, further complicating the decision to stop protecting them.

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