Infant Industries [ Biz/ed Virtual Developing Country ]

The Virtual Developing Country is a case study of Zambia. This trip is the Rural Life and Agriculture Tour and this page looks at the development of infant industries and whether they should be supported by governments.

Theories

Infant Industry

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Mtumbe's farm and the floriculture industry in Zambia is a good example of an infant industry. Mtumbe is competing in a market where producers from Europe hold considerable economies of scale. His output is sent to the flower markets in the Netherlands where they are sold along side roses from many large-scale producers. He is a very high cost producer.

Long-run average cost curve

Whereas Mtumbe is able to produce at a level shown at Q1 on the long run average cost curve there are still substantial costs reductions that he could make by expanding. By increasing his capacity to 4 hectares of roses he is able to lower his costs. Consider the costs savings he might be able to make if his scale increased by several hundred percent. He still has a way to go before the optimum scale of output is reached at Q2.

Rose growers in the Netherlands produce on a much larger scale and are able to enjoy a number of economies of scale thus producing at a very competitive cost. In addition they do not have to spend the large sums of money getting their output to the market place that he does. His roses must be sent by air to Amsterdam. His comparative advantage lies in the Zambian climate and in particular its sun and warmth. Dutch roses are grown in greenhouses and must be heated and lit. Nevertheless, it is a very competitive market as well as being one where there is also potential for growth.

Some economists would argue that in the case of infant industries there is a need for government support whilst the firms in that industry are growing to a level where they are able to take advantage of economies of scale and compete on an even playing field with the larger producers. Clearly in the case of cut flowers Zambia does not import roses from overseas. It has no domestic market and thus protectionist measures such as import tariffs would be inappropriate. This support could take the place of export subsidies where farms such as Mtumbe receive payments from the government to lower their costs and hence make them more competitive. Once they have expanded and taken advantage of the possible internal economies of scale then the subsidies can be removed and are exposed to the full blast of competition.

Free market economists disagree with this type of intervention as they believe that subsidies distort the operation of the free market. The comparative advantage only exists artificially behind the trade barrier. In addition once in place the firms might become dependent upon it.

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Related Glossary Items:
Long run average cost curve
Economies of scale
Comparative advantage