Mercantilism And Infant Industries

Running head: MERCANTILISM AND INFANT INDUSTRIES 1

Mercantilism and Infant industries

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MERCANTILISM AND INFANT INDUSTRIES 2

Abstract

The paper will examine the theories of mercantilism and infant industries. The paper will

first look at the historical background of the two theories. It will further explain how the two

theories are related or connected by comparing them and relating to the economic landscape of

some countries. The paper will further analyze the two theories by looking at how it has

contributed to the growth of developing countries. This will be done by examining the economic

landscapes of some countries such as Brazil. The computer industry of Brazil, for example, has

been helped by a protectionist rule over the years which has helped it expand internationally. The

paper will finally look at how mercantilism and infant industry argument can contribute to the

development of developing countries economy.

MERCANTILISM AND INFANT INDUSTRIES 3

Mercantilism and Infant industries

Mercantilism theory

Mercantilism is an economic theory that was practiced in Europe during 16th and 18th

century (Frank, Bernanke & Kaufman, 2007). Mercantilism promoted governmental regulations

of a country’s economy. This process was carried out to augment the power of the state at the

expense of the national powers that they were rivaling at the time. Mercantilism was the

counterpart of political absolutism. The term was given currency by Adam Smith in his Wealth

of Nations (1776). Adam Smith was a Scottish economist.

Mercantilism had various interlocking principles that helped it protect the mother nation

through its process of augmenting power. According to the theory, a strong nation should have a

large population because the large population is the one that will supply the market labor,

soldiers and market for its products (Heckscher, 1955). The theory also postulates that all human

wants are to be minimized especially those related to luxury goods such as silver and gold. Such

wants to drain off the precious foreign exchange. Parsimony, thrift, and saving were regarded as

virtues in the economy (DeWitt, 2002). According to the theory, it is by this means that the

capital could be created for the economy. Precious metals were deemed to be indispensable to

the wealth of a nation in the mercantilism system. The system also believed that trade balances

should be favorable. By favorable, it meant that there should exist excess exports and fewer

imports. Mercantilism provided a favorable climate for the early development of capitalism.

Infant Industry

Infant industry in economics is a new industry that is at its early stages and it is

experiencing relative difficulty or incapable of competing with the established countries or

MERCANTILISM AND INFANT INDUSTRIES 4

companies abroad (Roland, 2013). Most governments are urged to support the development of

infant industries by protecting them at an early stage. The industries can be protected through

some methods such as through tariffs or subsidies. When it comes to subsidies, it may be

indirect. This is when import duties are imposed on a certain product. It may also involve

prohibition against the import of finished or raw materials.

The United Kingdom was the first nation to impose such an approach (Ormrod, 2003). In

the early development of its raw wool industry, the country ensured that competition was not

allowed in the country. This was done by restricting import of raw wool into the market

especially when such a product was of superior quality than the locally produced wool. This idea

largely lacks in the United States literature but it has been in existence for quite some time.

Alexander Hamilton was the first individual to introduce t in the united states but it was not until

1791 that the approach was imposed (DeWitt, 2002).

Relationship between the two theories

Infant industry argument is an economic justification for trade protectionism. One of the

core argument for infant industry is that it protects small industries because it does not have the

economies of scale like the developed industries. All through history, big industries have been

bullying small industries by taking the majority of the market share and using small techniques

to kill the nascent industries (Frank, Bernanke & Kaufman, 2007). This is common especially for

competitors from countries abroad. These small companies thus need to be protected until a stage

where it can survive on its own without getting bullied by foreign companies that have higher

economies of scale. One example of steps taken to protect infant countries was undertaken by the

United States from 1816 to 1945 (DeWitt, 2002). Tariffs in this country were among the highest

globally. Most rich countries in the world currently used some form of subsidies and tariff

MERCANTILISM AND INFANT INDUSTRIES 5

protection to develop its industries. Newer economies in this current dynamic market are highly

vulnerable. This vulnerability arises due to the ease at which trade has been made between

different countries across the globe. Such, infant industry argument is brought into the picture to

help those small industries thrive in an inherently competitive economic market.

About the above-discussed infant industry argument, mercantilism presents the same

argument to some context. Evidence of mercantilism first appeared in Pisa, Genoa, and Venice.

During the Elizabethan era, mercantilism was first practiced on a large scale (Ormrod, 2003).

Mercantilism like infant industry relies on maximizing net exports as the best route to national

wealth. Infant industry argument wants the best for the nascent industries in the economy.

Mercantilism in its objective of ensuring the country has protected the domestic companies. For

example, during the raw wool boom in the United Kingdom, the country banned raw wool

import. That wool that was of high quality than the domestic ones were even strictly restricted

from being imported into Britain (Ormrod, 2003). As much as this was a way of making the

country wealthier, it is also a form of infant industry mechanism. In the process of restricting

imports, the country managed to encourage the infant industries that produced raw wool.

Infant industry argument was also witnessed recently in Brazil were the country shielded

its computer industry by protecting it against international companies (Roland, 2013). The

computer industry grew tremendously over the years becoming one of the leading industries in

the world. As much as this was an infant industry technique. It is also a form of mercantilism to

some context. The country was ensuring that its computer industry is growing at the expense of

other computer industry in other countries. As such, it can be seen that Infant industry argument

and mercantilism are connected in some ways, and their undertaking is related to some extent.

MERCANTILISM AND INFANT INDUSTRIES 6

Contribution to economic growth of developing countries

Mercantilism and infant industry arguments have contributed immensely to the economic

growth of developing countries. A good example is the computer industry in Brazil. Through a

protectionist stance against a foreign company, Brazil economy grew over the years (Roland,

2013). International companies with its economies of scale could not bully the infant companies

in the country thereby letting it thrive. As these companies thrived, employed opportunities

opened up and the living standard of the people working in these companies improved. Infant

industry argument came into play so that the country economy progressed at the expense of

foreign companies (Heckscher, 1955).

Mercantilism can also contribute to economic growth in developing countries by ensuring

that exports exceed imports (Frank, Bernanke & Kaufman, 2007). One of the factors that add the

debt of a country is excessive imports. The country will keep borrowing to buy these foreign

goods thereby increasing its debts. By ensuring that the country can produce its materials on a

large scale to a point where it can export, the country can improve its balance of trade. With

more exports than imports, the country’s economy will improve over time. The infant companies

will also have the chance to produce its goods, not only to the domestic market but also to

international markets.

Conclusion

In conclusion, mercantilism and infant industry has enabled developing countries to

compete with the developed nations. The United States used this kind of technique to establish

itself in the international market (DeWitt, 2002). Through a combination of infant industry and

mercantilism, its exports grew over the years. This has made the United States have one of the

MERCANTILISM AND INFANT INDUSTRIES 7

biggest economies of the world. All developing countries should instill this kind of techniques to

boost its small industries. Without such measures, the multinational corporation will continue to

grow at the expense of local infant countries. Unemployment will continue to persist in the

country which through a multiplier will result in a poor economy. As much as mercantilism and

infant industry has its shortcomings, instilling the two techniques is better than letting the

domestic market get bullied by companies from abroad with economies of scale.

MERCANTILISM AND INFANT INDUSTRIES 8

References

DeWitt, J. (2002). Early globalization and the economic development of the United States and

Brazil. Westport CT: Praeger Publishers.

Frank, R. H., Bernanke, B., & Kaufman, R. T. (2007). Principles of economics. Boston:

McGraw-Hill/Irwin.

Ormrod, D. (2003). The rise of commercial empires: England and the Netherlands in the age of

mercantilism, 1650-1770. Cambridge, U.K: Cambridge University Press.

Roland, G. (2013). Development economics. London: Prentice hall.

Heckscher, E. F. (1955). Mercantilism. London: Allen & Unwin.

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