4066 Ann Harrison and Andrés Rodríguez-Clare

Rodrik (2007) has criticized the use of cross-industry studies to test for the success
of IP on the grounds that if IP is designed to deal with market failures that impede sec-
tor growth, then one should not be surprised to find a negative correlation between
protection and growth. He assumes that gi ¼ (1"yi)A, where gi is the growth rate of
industry i, yi is an index of market failures, and A is a parameter that captures produc-
tivity growth that is common across industries. In this framework, industries with
stronger market failures would exhibit slower productivity growth. If there are political
or fiscal costs associated with the promotion of an industry then in equilibrium one
would find industries with a higher yi exhibiting stronger promotion and lower
growth. Rodrik’s point is that lower growth could be perfectly consistent with a suc-
cessful IP, just as it is consistent with a politically motivated policy of promoting sunset
sectors. Rodrik’s argument may be correct for certain types of IP, but not for IP asso-
ciated with the infant-industry argument (as defined in Section 2), since this would generate
a positive correlation between protection and productivity growth. Even if Rodrik were
correct in the short run, we would expect that in the longer term successful examples
of infant-industry protection would lead eventually lead to growth.
In any case, there is a more fundamental problem with existing tests of infant-indus-
try protection. There is no evidence to suggest that intervention for IP reasons in trade
even exists. If intervention were motivated by IP reasons, we would expect the pattern
of protection to be skewed toward activities where positive externalities or market fail-
ures are largest. Instead, existing evidence suggests that protection is motivated by opti-
mal tariff considerations (Broda, Limao, & Weinstein, 2006), for revenue generation,
or to protect special interests (Gawande, Krishna, & Olarreaga, 2005; Goldberg &
Maggi, 1999). Tariff protection is frequently granted to less successful firms or declin-
ing industries. Beason and Weinstein (1996) study the pattern of industrial targeting in
Japan and specifically ask whether the government targeted industries with increasing
returns or emerging sectors such as electrical machinery. They find the opposite result:
protection and other forms of targeting such as capital subsidies were highest for declin-
ing industries and industries without increasing returns. Most tariff protection was heavily
concentrated in processed food and textiles, while most subsidized loans and tax relief
went into mining. Beason and Weinstein conclude that “industrial policy considerations
were dominated by the desire to aid declining sectors or protect the interests of large
unproductive industries.” Lee (1996) reaches similar conclusions for South Korea.
Harrison and Hanson (1999) find that in Mexico in the 1980s the pattern of trade
protection was skewed toward food processing and garments, presumably for political
economy reasons since these were sectors where Mexico already had a comparative
advantage. More recently, Mobarak and Purbasari (2006) use a database on firms
granted import licenses for raw materials and commodities in Indonesia to show that
politically connected firms are more likely to be granted protection. However, firms
that export are significantly less likely to be granted support. This suggests that firms