Explain the rationale for and problems with making the infant-industry argument work as intended.
Answer: The infant-industry argument holds that a government should guarantee an emerging industry a large share of the domestic market until it becomes efficient enough to compete against imports. Developing countries still use this argument to support their protectionist policies. The infant-industry argument is based on the logic that although the initial output costs for an industry in a given country may be so high as to make it noncompetitive in world markets; over time the costs will decrease to a level sufficient to achieve efficient production. The cost reductions may occur for two reasons: As companies gain economies of scale and employees become more efficient through experience, total unit costs drop to competitive levels.
Although it is reasonable to expect costs to decrease over time, they may not go down enough, which poses two problems for protecting an industry. First, governments have difficulty identifying those industries that have a high probability of success. If infant-industry protection goes to an industry that does not reduce costs enough to make it competitive against imports, chances are its owners, workers, and suppliers will constitute a formidable pressure group that may prevent the importation of a cheaper competitive product. Second, even if policymakers can ascertain which industries are likely to succeed, it does not necessarily mean that companies in those industries should receive governmental assistance. Entrepreneurs may incur the costs and reap the benefits instead. For the infant-industry argument to be fully viable, future benefits should exceed early costs.