Every rich country protected its young industries once. Why is it wrong for India to do the same?

Sceptics of trade liberalisation point out that Britain and America both taxed imports heavily while their industries found their feet. Among the later industrialisers, Korea sheltered shipbuilders and carmakers on its way from poverty to prosperity. What, then, is wrong if India does the same? The argument is a serious one: a firm may be hopeless in its first year and formidable in its twentieth, because making things is how a company learns to make them well. If that is so, a few years of shelter buys a permanent industry, and the tariff pays for itself.

Korea is the case usually meant, so it is worth being precise about what Korea did. Through the 1960s, Korea ran policies that favoured no industry in particular and pushed all of them outward. It devalued its currency sharply, which made Korean exports cheaper abroad, taxed export profits at half the normal rate, cut tariffs, joined the world trading system in 1967, and ran a trade deficit throughout. Firms aimed themselves at foreign customers, and foreign customers decided which ones survived. On that footing, Korea grew at 9.5% a year for a decade.

Only then did the government start picking winners. From 1973 it channelled roughly 60% of bank credit and three-quarters of manufacturing investment into steel, ships, chemicals, and heavy machinery. Growth over the following decade averaged 7.2%, more than two percentage points below what the neutral policies had delivered. Korea’s light manufacturers, starved of credit to feed the favoured sectors, lost ground in rich-country markets while Taiwan’s kept gaining, and the favoured industries never made up the difference. Hong Kong, Singapore, and Taiwan, which intervened less, grew faster still. The case usually offered as proof that picking winners works is a case where the country grew fastest before it started picking, and slower afterwards.

India managed neither half of Korea’s record. Its licensing regime handed each firm as much protection as it needed to turn a profit, and required it to make more and more of the product at home, with no date on which any of the protection would lift. Protection calibrated to guarantee a profit is the precise opposite of a test. Nothing ever obliged an infant industry to grow up, so none did. The same argument arrives today wearing a second costume, as a plea to shield small manufacturers from cheap imports.

So is it wrong for India to do what the others did? The others did not do what the story says they did. A decade of pushing firms to export carried Korea forward, the tariffs came with a deadline attached, and the years of picking winners cost Korea in lost growth. India has never yet managed the deadline, never applied the test, and an industry that is never required to grow up does not.