Inefficient Industries Research Articles

Employment and Environmental Protection

One of the most pressing problems in an economy intransition is that of unemployment. Hitherto the`costs' of this unemployment have either focused onthe value of the lost production, or on the costs tothe government of supporting the unemployed. From asocial viewpoint this is inappropriate. In this paper,we discuss the costs of unemployment in terms of theirimpacts on human welfare, particularly the healtheffects. On the positive side, as inefficient industries areshut down and as production responds to marketpressures, wasteful government subsidies are reduced,as is the level of environmental pollution. Clearly,therefore, there is a trade-off between theenvironmental and economic benefits on the one handand the welfare costs of unemployment on the other.In this paper, a simple model is developed to analyzethis trade-off. A single firm has a short-runproduction function in which output is dependent onthe level of employment. The present position ischaracterized by `inefficiency' in that the firm ismaking a loss and overproduction is taking place.Environmental damage is a function of the level ofoutput. The efficient production point is known, asare the efficiency prices.The problem to be solved is to minimize the costs ofmoving to the efficient point. The papercharacterizes the efficient dynamic path and givessome illustrations of such a path for the coal sectorin Russia, for given values of the efficiency losses,the environmental costs of using coal and the costs ofunemployment.

Can Japan disengage? Winners and losers in Japan's political economy, and the ties that bind them

The Japanese economy has long been divided between world-class manufacturers, on the one hand, and uncompetitive small enterprises, inefficient service industries, and staunchly protected farmers, on the other Recent economic troubles have made the system's inefficiencies less tolerable, exacerbating the conflict of interest between the two. In political terms, however, the two Japans have not parted ways. Japan's post-war system bound the competitive and protected sectors to each other through political bargains and economic relationships. And despite enormous pressures for reform, this legacy continues to slow the pace and shape the content of Japan's economic liberalization today. Those groups with the greatest stake in liberalization, such as consumers and exporters, have not always defined their policy preferences in terms of their economic interests narrowly conceived, and have not always demanded liberalization even when they favored it. And when they have advocated it, they have not achieved clear-cut victories but only complex compromises, with considerable compensation for the potential losers from liberalization.

Technical efficiency analysis of Fiji's sugar industry: An application of the stochastic frontier production function approach

Small developing countries have for long acquired significant benefits through preferential trading arrangements. However, these benefits have led to a proliferation of inefficient industries in the recipient countries. With the recent changes in the GAIT, these inefficient industries may close and thus lead to major economic and social problems in the recipient countries. This paper utilizes the frontier production function approach to examine the efficiency status of Fiji's sugar industry. The analysis reveals that a significant level of inefficiency exists at the farm level of Fiji's sugar industry. Some of the factors that were found to effect the level of efficiency are farming status, land class and ethnicity. These factors are then used to derive policy implications.

Trade and Financial Market Reforms in ASEAN: Putting the Cart before the Horse?

Indonesia, Malaysia, the Philippines and Thailand in general opened up their capital markets at a faster pace and before liberalization of trade. McKinnon (1991) and others have cautioned against such a sequencing of reforms as it may encourage the financing of investments in inefficient industries. Trade policy reforms adopted thus far have gone only part way towards creating an open and competitive system of trade. Government-sponsored efforts to promote heavy and technology-intensive industries have often relied on protection, monopoly, or hidden subsidies. These industries are unlikely to be able to successfully compete in an open competitive environment. Regional and global initiatives that advance the cause of real sector liberalization will force these industries to undergo restructuring or even to close down. Resistance to such changes is inevitable. Hence, there is a high likelihood that pressures will be placed on governments to adopt alternative forms of protec tion as trade liberalization takes place in the form of AFTA-CEPT and on a unilateral MFN basis. Global and regional economic institutions limit the degree to which discriminatory and non-transparent policies can be adopted. Yet such institutions provide only weak discipline over numerous trade practices, so there remain numerous unexploited protection ist measures available even as tariffs come down. Extending these arrangements to limit

NATURAL RESOURCE ENDOWMENT, THE STATE AND DEVELOPMENT STRATEGY

This paper speculates that a linear causal chain runs from the natural resource endowment to the landholding system, the type of political state, the choice of development strategy and economic performance. It suggests that resource-deficient countries tend to have peasant-dominated landholding systems which foster autonomous political states and growth-promoting economic linkages. Such countries out-perform resource-rich ones which have more varied landholding patterns which emphasise conflicts over rents and foster factional political states and weaker economic linkages. The preoccupation with rents in resource-rich countries impedes beneficial land reform and creates inefficient industry in a counter-productive effort to create non-farm jobs. Resource-deficient countries cannot afford such inefficient transfers and pursue a development strategy which uses scarce resources more effectively. © 1997 by John Wiley & Sons, Ltd.

International trade policies, industrialization, and economic development

During the 1950s and 1960s, most developing nations, particularly the larger ones, strongly opted for a policy of import substitution industrialization (ISI). This was based on heavy protection and generally led to very inefficient industries. Since the early 1970s, an increasing number of developing countries deregulated their economies and liberalized trade, and this stimulated efficiency and growth. Some developing nations also tried strategic trade policies and to endogenize growth (as postulated by endogenous growth theory), but with only limited success. It seems impossible and inconsistent under the new international trade rules, however, for other developing countries to duplicate the East Asia “miracle,” which was based on strong government support for domestic industry while stimulating competition and efficiency among domestic firms. The successful completion of the Uruguay Round is expected to greatly benefit developing countries through continued deregulation and increased access to developed...

Reexamining Russia: Institutions and Incentives

Reexamining RussiaInstitutions and Incentives Peter C. Ordeshook (bio) Can Russia become a stable liberal democracy? Are there ways to end the conflicts that seem a permanent feature of Russian politics? Will the new constitution adopted in December 1993 bring order to relations between the executive and legislative branches and to the making and enforcement of law? Does the bloody strife in Chechnya, where Soviet flags once again fly from tanks and armored personnel carriers, presage a repeat of Russia’s historical experience with political reform, with democrats once again driven into authoritarianism’s iron embrace? At present, pessimistic answers to these questions seem better grounded than optimistic ones. Democratic reformers, stunned by their poor showing in the December 1993 parliamentary elections, seem unable to coalesce, while nationalists and fascists marshal their forces to seize power through Russia’s infant democratic institutions. Political maneuvering proceeds in a manner barely contained by law; even some of those once counted among democracy’s staunchest defenders have resorted to undemocratic tactics when it suited their purpose. No longer are people concerned with lofty democratic ideals: instead they focus on mere survival, with those able to do so grabbing all the wealth they can. The anarchy of day-to-day business dealings is tempered only by the mafiya, whose contract-enforcement capability, though based on criminal violence, goes unchallenged by the state. With plummeting production fueling demands for subsidies to inefficient industry, comparisons with Weimar Germany are not entirely far-fetched. [End Page 46] Indeed, the marvel of the December 1993 elections is not that democratic reformers did so badly while Vladimir Zhirinovsky did so well, but that the fascists, ultranationalists, and hard-core antireformists somehow failed to secure outright control of the new legislature. 1 Is Russia trapped in some terrible equilibrium that can only be escaped by a passage through more dangerous turmoil or a retreat from liberal democracy? Even the possibility should be enough to impel democrats in Russia and abroad to start looking for another way out. Although most of those concerned with ex-Soviet states pay lip service to the proposition that economic reform and political reform are tightly interdependent and must proceed together or not at all, the two are in fact often dealt with as though different principles guide each. This is a grave mistake, for the same basic principle must guide both. The economic reformer formulates strategy in terms of laws regarding private property, banking, and contracts, as well as government policies regarding tariffs, taxes, privatization, borrowing, and subsidies. Economic reformers of every stripe understand that changes in law and policy must be guided by a common principle—namely, that socially desirable outcomes cannot be wished into existence, but depend on the ways in which governmental actions and the structure of economic institutions channel individual self-interest. Decrees and exhortations cannot make people work, save, invest, or invent. Instead, they need incentives (Adam Smith’s “invisible hand”) to do these things in natural and self-sustaining ways. Intelligently designed public policies and economic institutions are needed if reform is to give people an immediate self-interest in working, saving, investing, and inventing. The Significance of Self-Interest Although the methods for best applying the principle of self-interest in economics may be imperfectly understood, they seem pellucidly clear when compared to knowledge of political reform. Like the transition to markets, the transition to democracy depends on the design and handling of institutions—in this instance, rules of legislative representation, electoral laws, and constitutional allocations of power—that give people an immediate self-interest in pursuing certain types of actions and outcomes. For a democracy to be stable, moreover, its institutions must be crafted to give those who might destroy them an incentive not to do so. The Framers of the United States Constitution had a keen sense of the political (to say nothing of the economic) significance of self-interest that contemporary Russian leaders would do well to emulate. James Madison displayed this famously in Federalist 51 when he wrote that “the great security against a gradual concentration of the several powers in the same department, consists in giving to those who administer each [End Page...

Adjustment for stabilisation or growth? Ghana and the Gambia

Ghana and The Gambia are part of the group of African states that have been following programmes of structural adjustment (SAPs) throughout most of the 1980s and into the 1990s. They are also amongst the states that the Bretton Woods institutions (BWIs) have periodically cited as success stories for adjustment. The aims of adjustment policies are well known to analysts of African political economy. Their theoretical foundations lie within a brand of neo‐classical economics that emphasises the advantages of nonintervention in the free market and, conversely, the risks attendant on state attempts to regulate or intervene in the market. It follows that this line of thought anathematises the attempts of various African states to promote indigenous industrial development. State spending on such aims is deemed inflationary and wasteful inasmuch as it is believed to promote inefficient industries that can only survive on the basis of state subsidisation and protection against foreign competition. State concentration on the industrial sector can also be seen as providing a disincentive to those sectors of the economy that are actually productive, notably the rural sector, since it is the producers in the latter sectors that have to foot the bill for state intervention. Structural adjustment is designed to counteract these tendencies through a variety of policy measures, including imposition of limits on fiscal and public spending policies in order to limit inflationary and wasteful state expenditure; deregulation and privatisation which are also designed to reduce state spending; liberalisation of the tariff regime in order to ensure that the productive sectors are opened up to market competition and therefore have to use resources efficiently; and devaluation which is necessary to counteract the tendency towards overvaluation of the currency that results from the pursuit of inflationary policies. An examination of the economic policies of many African states (including Ghana and The Gambia) suggests they have fallen into these very traps. The BWIs have therefore insisted that such states must undergo structural adjustment so that they will utilise their resources more efficiently — in accordance with the free market, that is. Only through taking this course can the foundations for growth be laid argue the BWIs. The following case studies examine how the conditions for growth actually have been attained in Ghana and The Gambia, paying particular attention to the issue of how far adjustment policies are conducive to industrial growth.

What do stochastic frontier cost functions tell us about inefficiency?

Recent studies using the stochastic frontier approach have suggested high levels of inefficiency in nursing home and hospital facilities. This paper makes two observations. First, one could falsely estimate high levels of inefficiency if a statistical assumption — zero skewness of the random component of the cost residual — is violated. Second, an inefficient industry may be difficult to distinguish either statistically or visually from an industry free of inefficiency. If available, panel data yields more robust estimates of cost differences among nursing homes or hospitals.

Export Opportunities in a Crumbling Economy: The Soviet Union in 1990

Economic liberalization is underway in many countries that had previously been relatively closed to outside commercial relations. This includes former East Bloc nations and LDCs that had long attempted to protect their inefficient industries from foreign competition. Perhaps the most spectacular example of this trend is the former Soviet Union. This article reports a study of the changes that occurred in the former Soviet Union's trade relations with non-communist countries in the critical period during which trade ‘openness’ was being established. The results provide insights that may be useful to exporters in their assessment of market opportunities in countries undergoing the difficult transition to a market economy.

New business entrepreneurship in the Japanese economy

This article presents the results of a study focused on the role of new business entrepreneurship in the Japanese economy. Particular attention is paid to the activities of various government agencies in relation to new business entrepreneurship and to the barriers to this activity in Japan. New business entrepreneurship was defined as the formation and rapid growth of a business enterprise through unique approaches to the firm's activities. In contrast to the American stereotype of Japan as an economy of a few large, interconnected firms, it is, in fact, characterized by small- and medium-sized enterprises. Over 99% of all Japanese enterprises are categorized as small or medium and over 80% of all employed Japanese are employed by such firms. However, very few of these firms are entrepreneurial in nature. The vast majority are small firms that are either subcontractors to a single larger firm or small retail, wholesale, or restaurant establishments. The start-up rate for all types of businesses in Japan has been declining for the past 10 to 15 years. More importantly, the rate of start-up s for independent firms, as opposed to firms started by a larger firm to serve primarily as a subcontractor, declined even more sharply. This indicates a significant weakness in Japan's otherwise strong economy. The low and declining rate of new business entrepreneurship in Japan is a function of structural, governmental, and cultural barriers. Structural barriers include an acute, long-term labor shortage, high financial start-up costs due in large part to high land prices, and a shortage of venture capital funding. Government barriers include “red tape,” financial and other support for small firms that is withdrawn as they enter rapid growth, and the persistent protection of inefficient industry structures. Cultural barriers involve Japan's strong group/collective orientation, the traditional career path in Japan, bounds on creativity, and the fact that entrepreneurship is not assigned a high social value. While the government provides an extensive, well-developed network of services for small- and medium-sized firms, these programs are not designed to facilitate rapid growth into the large firm phase. The Japanese experiences and programs offer useful insights for policy and tactics by other governments.

A Reappraisal of the Origins of Import-Substituting Industrialisation 1930–1950

The current enthusiasm for trade liberalisation in Latin America, and indeed for a broad-ranging return to the market, has as its backdrop the widespread disillusion with the protectionist model of the 1950s and 1960s. Import substituting industrialisation (ISI) is seen as having used tariff barriers and controls to generate an extremely inefficient industry, suffering under a weight of state bureaucracy, with often inappropriate direct state participation. Its excessive import needs, for all its import-substituting origin, are directly related to the generation of the debt crisis.1The high and poorly-structured tariffs brought tariff-hopping foreign investment on inappropriate terms. Repressed domestic interest rates allowed such firms to borrow locally at negative real rates and crowd out locals who then borrowed abroad. This inefficiency, plus the overvalued exchange rates implicit in heavy protection, made exports of manufactures unthinkable, and thus condemned the incipient industry to severe limitations of market size as well as condemning the economies to growing balance of payments non-viability. This in turn severely affected industrial progress by limiting growth and exposing firms to stop-go policies.In turn, ISI policies themselves are seen as having originated with the turning point of the 1929 depression, when the export-led growth mechanism essentially broke down and at least the more sizeable Latin American economies turned fatally inwards. The trajectory from 1930 to the ‘fully-fledged’ ISI model of the 1950s and 1960s is typically left vague.This article will attempt to show that recent research now allows us a much fuller and more nuanced view of the evolution from the export economy model of the early century through to the later ISI model.2

Structural Adjustment in Japan: Terminating "Old King Coal"

Much continues to be written about Japan's economic successes in areas such as electronics and automobiles. Yet, despite the continuation of its large international economic surpluses, more attention needs to be paid to the uncompetitive and inefficient sectors of the Japanese economy. Indeed, the popular view is that many markets in Japan are not functioning properly, e.g., mining, distribution, and construction sectors. For evidence, the literature points to the significantly large price differentials that exist between domestic and world prices for both traded and non-traded goods. Various approaches have been adopted to explain the existence of price differentials and price insensitivity in Japan. Much of the recent theorizing has moved away from cultural analyses, which stress patriotism and deference to authority, to noncultural ones that focus on public policy, institu tions, market ideology toward national security, and corporate organization. Whatever the approach, the conclusion of this literature is that many markets in Japan do not respond to price as they do in other capitalist societies, and there are significant consumer-welfare losses. This article explores the political economy of structural adjustment and policy termination through a case study of the coal industry. In 1968 a decision was made to phase out gradually Japan's inefficient coal industry in response to the increased costs of domestic coal. 1 Yet two decades later,

Determinants of the tariff structure of the Israeli industrial sector 1965–1977

This paper examines the determinants of the tariff structure of the Israeli manufacturing sector in the mid-1960s and late 1970s, a period marked by considerable trade liberalization. The empirical results point to the ‘made-to-measure’ nature of the tariff structure, i.e., relatively inefficient industries were granted higher rates of protection. The relative inefficiency measure which was derived from the CES production function kept a high explanatory power, along a wide range of substitution elasticities. The empirical results also show that in the early 1960s, tariffs favoured low-wage, labor-intensive industries; while in the late 1970s, industries with high levels of concentration lobbied successfully for higher levels of protection.

Welfare implications of sugar pricing in Pakistan

The sugar industry in Pakistan has been highly protected since the mid- 1970s. The nature of support prices has ensured a high private return to investment in sugarcane — despite the high cost of production resulting from low and stagnant yield levels and low sucrose content. Estimates of welfare gains and losses cast doubt on the social profitability of this protection. Government policy should encourage increased output through higher yield levels and sugar recovery, and consumers should stop subsidizing an in-efficient industry.

Political Versus Technical Risk Deduction and The Failure of U.S. Synthetic Fuel Development Efforts

The history of synfuels suggests that sustaining long-term research and development is difficult for a political and bureaucratic system that demands a ready-arsenal of technological quick-fixes. The authors point out that synfuels has become a perennial panacea that never seems to quite pan out. There is a persistent unwillingness to invest in long-term research, while more modest demonstration programs could perfect viable options. After reviewing three major supply interruptions, the authors conclude that if there is likely to be additional short-term supply-related shocks as well as the certainty of mid-term depletion of our liquid and gaseous fuels, then the US must be prepared for the development of a very inefficient synthetic fuels industry. It is important, then, to consider how to reduce technical risk before the demonstration stage. 23 references.

The optimal rate of decline of an inefficient industry

This paper considers the problem of the optimal time path of contraction of an industry which has been hit by foreign competition, and shows that in general, along the optimal path, a production subsidy is warranted. The optimal subsidy trades off the benefit of unemployment in speeding up the approach to the new long-run equilibrium against the cost of lost output in the ‘inefficient’ industry. The dynamic shadow price of labour in this industry is also derived and shown to be always positive, though below the industry wage rate.

The Effects of Tax Holiday on Investment Decisions: An Empirical Analysis

To promote rapid industrialization, developing countries have employed a variety of fiscal incentives to attract resources into the manufacturing sector. Perhaps the one incentive most frequently used has been that of protective tariffs. However, many developing countries, including Pakistan, have encou¬raged the creation of new manufacturing units through tax exemption, often referred to as tax holiday. Although the basic idea is the same in each country, all or part of a firm's corporate income is exempted from taxes for a specified period of time—each tax exemption scheme is tailored to meet a particular country's resources and development objective. During the period from _1959_to. 1972 a tax holiday scheme was used in Pakistan to accomplish two basic objectives: (i) to increase the overall level of investment in the industrial sector, and (ii) to encourage industry to locate in the less developed regions of the country. The principal objective of this study is to determine whether the tax holiday scheme has been successful in achieving its objetives. For the first objective it is necessary to find out whether the exemption scheme actually stimulated new investments that would not have otherwise taken place or whether firms that would have been established without the tax incentive received a windfall. Increasing the level of investment by creating high cost and economically inefficient industries, offers no real advan¬tage to a developing country. The effectiveness of any tax exemption scheme must, in part, be judged on the basis of the basic economic merit of the indust¬ries stimulated by the exemption scheme. For the second objective, the success of the scheme can be measured by the extent of the diversion of industry to less developed regions as a result of tax exemption.

Full Employment, Trade Expansion, and Adjustment Assistance: Reply

inefficient import-competing industries to more efficient lines of production. In cases where resources are relatively immobile, injury may occur. Under an escape clause contained in recent extensions of the Reciprocal Trade Agreements Act, industries could apply for relief and, if successful, be granted increased protection. This escape clause, in modified form, was continued in the Trade Expansion Act of 1962.1 However, Congress provided an alternative to increased protection in the form of adjustment assistance. This provision is designed to help injured parties move to other lines of production or adjust to increased foreign competition. In essence, the escape clause attempts to reconcile the conflict between increased imports (and a more efficient allocation of world resources) and full employment. The conflict arises when increased imports cause injury to domestic import-competing producers resulting in curtailment of domestic production and unemployment or under-

Need for Tariff Equality

Tariffs are a means, not an end, and the goal is neither the protection of inefficient industry, the enhancement of profits, nor the enrichment of one section of the population at the expense of any other, Herbert H. Lank, president of Du Pont of Canada, Ltd., told the Royal Commission on Canada's Economic Prospects recently. Canadian tariff policy, he said, should be shaped to promote the balanced expansion of the country as a whole. It should be a broad, flexible policy, not one designed merely to protect primary industry. To this end, Canadian tariffs on American secondary products should be raised to the same level as American tariffs on Canadian secondary products. Is this an intelligent approach to the tariff problem? he was asked. Perhaps not, but it is the only realistic approach there is, he replied. Canada's chemical industry is growing at a rate of 7% annually, and it has been predicted that by ...