An Empirical Test of the Infant Industry Argument

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American Economic Association

An Empirical Test of the Infant Industry ArgumentAuthor(s): Anne O. Krueger and Baran TuncerReviewed work(s):Source: The American Economic Review, Vol. 72, No. 5 (Dec., 1982), pp. 1142-1152Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/1812029 .

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VOL. 72 NO. 5 KRUEGER AND TUNCER: INFANTINDUSTRYARGUMENT 1143C. The industry,fdeveloped,would beeconomic nough opermit reasonablerateof return n the nitial osses; and thereforeD. The industry equires a temporaryperiod of protectionor assistance during

which tscostswillfall nough o permit ttosurvive international ompetitionwithoutassistance.The firstproposition s essentially hatcosts ofa newactivitymay nitially e high.Reasons put forth s to why theymightbe high nclude learningby doing and thepossibilityhatthere re "linkages"betweenindustries et forthby Albert Hirschman(1958). If the atter, hen n the earlystagesof development,heabsence of complemen-tary ctivities r small size of the ndustrialsector of an economymight constitutereasonwhy ll industrial ctivities ould ni-tially e high ost.The reasonswhytheremight e learningby doing are numerous.Workersmight e-quire a periodoftraining. heremight e aninitial hake-down eriod as the activity e-came operational.Management tselfmightgain in experience.These possibilitieshavebeenneatly ncapsulated yKennethArrow(1962) in thenotionthatoutputper unitofinputmight ncrease as cumulative utputwithin given ineofactivitythe plant?thefirm? he ndustry? he entire ndustrial ec-tor?) ncreased.4 egardless f whichreasonis putforth,n essential eature fthe nfantindustry otion is thata new activitywillinitially e high ost,butthatunitcosts willdecline ver ime.The secondpropositions that,while ostswill decline,theywill do so in a way thatindividuals nitially tartingheactivitywillnot reap the fullrewards.Otherwise, herewould be no case forprotection:f start-upcostsarehighbut theactivitys economic,twouldpay an individual ntrepreneuro in-cur those osts n order oreap aterbenefits.For there o be a case for ntervention,heremust be positiveexternalitiesromthe de-velopment fan infant ctivity hich ccrueto individuals therthanthoseundertaking

the activity nitially. hus, the presence ofexternalitiess necessary n order to showthat private activitywill not generate theoptimaldevelopment f nfant ndustriesn amarket-orientedconomy.Whether he ex-ternalitiesreat the ndividual ndustryevel,or rather t the evel of the entire ndustrialsector s an open question,discussedfurtherin Section II. Clearly, whatever nfant n-dustry ssistance s provided hould be pro-vided to the ndustry, roupof ndustries, rsectorgeneratinghe externalitiest a rela-tivelyuniform ate.Differentevelsof pro-tection o differentctivitieswould be war-ranted only if the sector containing themore-protectedctivitywere expected o ex-perience greatercost reductionsthan theless-protectedector.5The third roposition sserts hat he ossesassociatedwith n initial eriodofhigh ostsmustbe recoveredwith nterest) t a laterdate, although not by the individual en-trepreneur tarting p the activity. n es-sence,the costs of production f those ben-efiting y the development f the activitymustfall enough to repaythe initial ossesand toprovide reasonable ateof return nthose osses since resources ouldotherwisehave been allocatedto unprotected ctivitieswith ncrementalnternational alue-added).The fourth ropositions reallya logicalconsequenceof the first hree.All analystshave been willingto concede that if thefirst three propositionswere valid, someformof assistance and intervention ith alaissez-faire utcome)to theexternality-gen-erating ctivitys warranted.However,pro-tectionwould neverbe first est contrastedwith a production ubsidy), nd mightnoteven achieve ts ntended urposes, s arguedbyBaldwin.For thepresent, he important spect ofthe nfantndustryase seems ummarizablein theproposition hat, n orderfor t to beempirically alid,a necessary but not suffi-cient)conditions that osts n (temporarily)

4See Baldwin s toothermechanisms y which xter-nalitieshavebeen said to affect rofitabilityf start-upofnewactivities.

5st might e contended hat more-protectedectorwould generategreater xternalities ccruingto otheractivities. he unresolved uestion n that case is whyprotection hould be temporary.f it were not tem-porary,nfantndustry onsiderations o not apply.


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1144 THE AMERICAN ECONOMIC REVIEW DECEMBER 1982assisted or protectedndustries hould havefallen over time more rapidly than costsin nonprotected r less-protectedndustries.This interpretationoincideswith the casewhere t is assumedthatprices n the restofthe world regiven, nd do notchangeovertime due to differentialates of technicalchange ntherest f theworld.6ftherewerealso technical hange in the correspondingindustries broad, the infant ndustry asewould need to be reformulatedo statethatintervention ouldbe warranted nly funitcostswereexpected o decline morerapidlyin the infant ndustry han in the matureindustry broad (with the same qualifica-tions as above regarding xternalitiesndrecovery f the nitial nvestment ith nter-est). For the purposesof this paper, it isassumedthatworldprices re given, o thata decline n costs n one industryt a morerapid rate than n another onstitutesmoreof an infantndustryase.

II. ASimple mpiricalestThere are two ways that one industry'scostsperunitofoutput or value-added) anchangerelative o another's: ither ts share-

weighted nputsperunit of outputmustfallmore or rise less) than the other's,or therelative riceof the factor t uses relativelyintensivelynproductionmustfall.This can readily e seen as follows. efinethe total ost, C, ofthe th ndustrys(1) =w iiwhere W. is the reward o the th factor fproduction nd Vji s the quantity f thethfactor mployedn the thindustry.

Clearly, hechange n i s costs s(2) dC dWjVji dVjiWj,

I J

and the change n cost perunit of output s(3) d Cj dE _ j i Cj

dVj_iWjVjiC dXi CiVji C. Xi XI Xi

Denotingthe shareof the th factorn totalcosts nindustry bya?ij equation 3) can berewritten:(4)

[C,/x,] dWj dVji dXCj/Xiij W+Eij Z-XThus, the proportionatehange n costsperunitofoutput n the th industry epresentsthe share-weightedumof changes n inputpricesplus the share-weightedumoffactorinputs ess the rateofchangeof output.LetCirepresentheproportionateateofchangein costs per unit of output. Contrastingchanges ncostsbetween he th and thek thindustry ields dW.(5) C eCk E(aij akj) djw.

+ 2E ij dji _dx jdVk dXk]- | k Xk

The first ermon the rightrepresents hechange nrelative osts due to changing ela-tive nputprices.Clearly, hatrelativenputpricesmaychange n theprocess f growthsnot groundsfor nfantndustry rotection.761tmightbe anticipated hat the worldpriceof aparticular ommodity ould rise overtime forreasonsother than technical hange), nd therefore presentlyuneconomicindustrymight become economic. Thiswould notconstitute case for nfant ndustry rotec-tion,however, ecause: (i) it is not clear thatbecausethe price in the futurewill rise, activitynow is eco-nomic; and (ii) there s no reasonfor nterventionincethoseundertakinghe activity owwillbenefit rom hehigher uture rice.

7As a practical matter, hanges in relative factorpricesdo notseemto be a major sourceof relative ostchanges. Turkeyhad a very arge change in relative


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VOL. 72 NO. 5 KRUEGER AND TUNCER: INFANTINDUSTRYARGUMENT 1145If there s to be a dynamic ost reduction,tmustbe reflectedn a differenceetween hetwobracketed erms n theright-handide.We are thus led to the straightforwardproposition hat f there re dynamic actorswarranting ntervention, hey will be re-flectedn a differencen the two right-handterms f equation 5). Define,now,8

dA, dX dVj,(6) A, AijSubstituting6) into 5), and dropping hefirst erm as irrelevant or infant ndustrypurposes,

(7) C,-c =dAk dA-A A>In order or nfant ndustryonsiderationsohave warranted nterventionn favorof in-dustry, costs per unit of outputmusthavefallenmore in i than in k. Equation (7)shows that a necessary onditionforthistooccur is that nputs per unit of output de-crease more rapidly n industry than inindustryk. As formulated, his unit costreduction ould come about because oftech-nical change, heovercoming f indivisibili-ties, herealization f scale economies, rforgenuinenfantndustry easons.This, then, s the empirical test. Shouldindustry have been protected on infant

industry roundsand its costs have fallenrelative o k, it willbe udged that hereweresome dynamic actorsn industry thatmayhave warranted nterventionalthough hereis no presumption hatsoever hat nterven-tionwas optimal).Passingthetest s a neces-sary conditionfor thereto have been aninfant ndustry.t is not sufficiento provethat infant industryprotectionwas war-rantedbecause: (i) the ndustrymighthavedevelopedanyway; ii) the rewardsmayallhave gone to the entrepreneursn the in-dustry; iii) the reduction n costs mighthave come about for reasonsother han ex-ternalities; r because (iv) thereductionncosts was not sufficiento providean ade-quaterateof returnn earlierosses. tmightnot have beenoptimalbecausean alternativeinterventionnstrument r a lower level ofprotectionmighthave achieved the same orbetter esultswith ower osts.If, however, osts n industrydid not fallrelative o industry , clearly rotectionwasnot warranted.9t is in this sense that acontrast frates f growthfoutput erunitof input between more-and less-protectedindustries onstitutes testfor heempiricalvalidity f the nfant ndustryrgument.

Beforeproceeding o theempirical esults,twoquestions emain.A first uestion s thetime periodoverwhich nfantndustryon-siderationsmightwarrant ntervention. hesecondpertains o therange factivitiesverwhich hetest hould be carried ut.The first s thesimpler uestion, ince allthat s required s a period sufficientlyongso that, fcost reductionswerenotincurred,it could reasonably be concluded that thecosts of protectionwould not in all likeli-hood be recovered. ince the Turkishdatapertainto a period of thirteen ears (andlonger),we note simply hatwith real rateof returnf10percent,10hepresent alueof

factorprices due to governmentnterventionn thelabor market, nd yetthechanges n costs thatthesecouldhave induced eemrelativelymall.See Table A2for the calculations. t has also been suggested hatcommercial oliciesthemselvesmightnducechanges nrelative actor rices and that this s a dynamicfactorthat should be considered. However, if commercialpolicies caused changesin relativefactorprices, theywouldclearly ncrease osts n protectedndustriesndthus tendto weakenwhatever ynamic ase therewasfor ntervention.8The dA/A is nothing therthan theconventionalformulafortotal factor-productivityrowth,which stherateofgrowth foutput ess the hare-weightedateof growth f inputs per unit of output.For presentpurposes,however, heassumptions ecessary o ustifyuse of dA A as a measure are far weaker thanthosenecessaryor totalfactor-productivityrowthnterpre-tation.

9This does not prove that heremight ot have beenan infantndustryase. It is conceivable hat ncentivesother than those createdby the formsof protectionactuallyused mighthave inducedentrepreneurso en-gage in cost-reducingctivities. ee our 1981paperforan analysis f theeffects f the traderegime n incen-tives nTurkey.l Mostobserverswouldputtherealrateof returnnTurkey t a number ubstantially igher han this.


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1146 THE AMERICAN ECONOMIC REVIEW DECEMBER 1982cost savings en years'hence s less than40percent f theanticipated mount. t seemsdoubtfulwhether rotection or a periodofmorethan ten years,withno beginning fareductionn costs,could conceivably omeunder heheading f ustifiednfantndustryprotection.The secondquestion s themore difficult.It will be recalledthatthe infant ndustryargumentresumes oth ynamic actorsndexternalities. he test described above isstraightforwardn evaluatingfor the pres-ence of dynamicfactors, ut does not indi-cate to whichunits it mightapply. Sinceprotection s grantedat differentates todifferentndustries,t seemsnaturalto sup-pose thatthe relevant and k to contrastwould be differentndustriesubjectto dif-ferentevelsofprotection. avingdone so, ahigher A/A wouldbe requiredfor more-protectedndustryhanfor a less-protectedone to satisfy he nfantndustryest.Mostproponents f theinfant ndustryrgumentseemto adopt thisnotionthatthe benefitsare external o the firm ut internal o theindustry. his would appear to implythatratesof growth f outputper unit of inputshouldbe higherforthe industry han fornew firmsor new investmentsf existingfirms).t is also possible,however, hatex-ternalitiespread across new entrants, nddo not affectmoretraditional irmswithinindustries.n that event,one would expectoutput erunit f nput ogrowmorerapidlyin newly stablished irms r activities haninpreexistingnes.Bothof thesepossiblerelationshipsmplythatthe relevant nit forexternalitieso berecaptureds somewhere ithin given, ro-tected, ndustry.While this seemsthemostplausible nfantndustrynterpretationandthe one used here),some might rgue thatthe benefitsof new industries re spreadacross the entire ndustrial ector, nd arenot centered in the protected industriesthemselves. ne mightbe skepticalof theargument,n thegrounds hat t is hard toseewhydifferentevelsoftemporaryrotec-tion should be accorded to differentn-dustriesunless theirown costs would falldifferentially.ut if the relevant ourceofexternalitiess the entire ndustrial ector,the industrial ectoras a whole should be

observed to have experienced relativelyhigh rate of growth f outputper unit ofinput n contrast o therestof theeconomy(in contrast o maturendustrial conomies).Comparison of output per unit of inputacross countries s inherently ifficult,utnonetheless an providea partialcheckontheplausibilityf thispossibility.

III. ResultsAs alreadymentioned, urkeyhas pro-videdprotection,n infantndustryrounds,to a varietyfnew ndustries.rotection asbeen largely utomaticbecause theauthori-tieshavegenerally rohibitedmports fanygood once domestic productionbegan.11Ratesofeffectiverotection avebeenfairlyhigh, ndestimatesmust e basedupondirectprice comparisonsratherthan upon tariffschedules.The best available estimates regiven nTable 1 below.The detailsof data sources nd proceduresforestimatingutputper unit of inputaregiven in the Appendix. Here, only threepointsneed to be noted.First, here re twosetsof estimates vailable: one from sam-ple of 92 firms nd the otherfortwo-digit

manufacturingndustriesn the private ec-tor of the Turkisheconomy.Secondly,themain thrust f import ubstitutionctivity(on infantndustry rounds) n Turkeywasduringthe earlyand mid-1960's.The two-digit ndustryatacovertheperiod1963-76,whiledata for ndividual irmsoverat leastthat periodwhen thefirmswere already nexistencebut shorterperiods in some in-stanceswhen thefirms tarted peration nthe late 1960's. Finally,since muchof theimport-substitutionrocess consists of re-placingimportednputswithdomesticma-terials,estimateswere generatedfor threeseparate nputs: abor,capital,and materialinputs.2Table 1 givesthemainfindings. he Ap-pendixgives ources nd procedures nd the

" One would anticipate hat, n the absenceof ex-pected monopolypower from ntering given ine ofactivity irst,he utomatic rotectionmechanism ouldprovide n incentive orthemoreeconomic mongtheimport-competingndustriesobe developedfirst.12No data were available withwhich to estimatechanges n skills f the aborforce.


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VOL. 72 NO. 5 KRUEGER AND TUNCER: INFANT INDUSTRYARGUMENT 1147TABLE 1-EFFECTIVE RATES OF PROTECTION AND RATES OF GROWTH OF OUTPUT PER UNIT OF INPUT

Rate of Growth fOutput/InputIndustrv ERP, ERP2 DRC FirmSample IndustryFood Products 13 n.a. 18 .25 .16Fur and LeatherProducts 14 -24 -15 n.a. -1.17Wood and Cork Products 16 58 -13 -3.34 -.55Furniture nd Fixtures 16 n.a. n.a. n.a. -.56NonmetallicMineralProducts 23 -27 1 1.61 .72Textiles 42 -23 12 .72 .84Apparel ndFootwear 42 47 n.a. 5.24 4.10Metal Products 57 140 682 -.05 1.61Chemicals 60 200 21 -.04 .46ElectricalMachinery 63 113 36 5.76 1.41Paper and Products 72 105 97 n.a. 1.55RubberProducts 77 N-IVA 279 n.a. 4.27Basic Metals 80 113 14 2.21 -.93NonelectricMachinery 142 132 36 n.a. .62Petroleum efining n.a. 236 n.a. n.a. -8.80Transport quipment 209 134 131 n.a. .94AllManufacturing 1.91 1.84Source: ERP,: Ozfirat stimates iven n Krueger, able IX-2; ERP2: Baysan estimates ivenn his Table 1, p. 126.DRC: Krueger, able VIII-1.Notes: 1) Beverages nd Tobacco are not reported ere due to lack of a measure f effective rotection;oth aretraditional. stimated atesof growth f outputper unit of input re 4.31 percent nnuallyforBeverages nd 5.97percentforTobacco. 2) All rates of growth re continuousnatural rates. N-IVA denotes negative nternationalvalue-added.

underlying ata on rates of growth f out-puts and inputs fromwhichthese estimateswerederived.The first hreecolumnsof Table 1 givethreedifferentstimates f sectoral protec-tion ll pertainingo the ate 1960's.The firstare based on sectoral verages omputedbythe State PlanningOrganizationfor 1968.Sectors re listed n orderofincreasing ro-tection ased on these stimates. he secondare based on input-outputariff ata ad-justedfor he stimateddditionalprotectionaccordedby import uotas and prohibitions.The third are domesticresource-cost sti-mates taken from sampleof firms.Whilethe ast are most loselybased on pricecom-parisons, hey uffer rom hedrawback hatlevelsofprotectionary o muchwithin achsector hatsampling rror s probablyfairlylarge.'3Thisvariabilitytems artly rom hefact that an import-licensingegime nher-ently rovides aryingevelsofprotectiono

the same ndustryt differentoints n time.Even more importants the considerationthatthere re import-substitutionndustrieswithin" traditional" ectors such as syn-thetictextiles), nd " traditional" ctivitieswithin mport-substitutionectors such ascopperprocessingwithin asic metals).Thus,the variabilityeflectshe underlying ealitythat levels of protection ifferwidelyevenwithin articularndustries."4Despitethe wide variability,he three etsof estimates ogether rovidea fairly oodindication f the height f protectionn themid-to late 1960's, nd its differentialcrossindustries. ssentially,he first even are allregarded as traditional industrieswithinTurkey;the last nine are regardedas theimport-substitutionectors.15The latter re

13See Krueger,where the variance n theestimatedsectoralmeanswas also calculated.

14Whiledata in nominal erms re availablefor hree-and four-digitndustries, o appropriate rice deflatorsor detailed estimates f effective rotection ates areavailable.'5The import ubstitutionndustries enerally xpe-riencedmorerapid growth f output. ee Table Al.


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1148 THE AMERICAN ECONOMIC REVIEW DECEMBER 1982those that were encouraged in the early1960's,and werethe focus of Turkey's m-port-substitutionolices on infant ndustrygrounds. he positive atesof protection orthe traditional ectors probably did littlemore thanoffset urrency vervaluation nthe ate 1960's;theTurkishira was devaluedby66 percentn 1970.The last two columns in Table 1 giveestimated atesof growth f outputperunitof input. The firmsample column givesestimated atesfor the sampleof firms.Ascan be seen,therewere some industries orwhichno firm ata were available. In someinstances such as petroleum efining) hiswas because the activity s undertaken ri-marily y one largefirm; n other nstances,there were simplyno firms n the sampledata. Rates forthe ndustry over theyears1963-76,theperiodforwhich tate nstituteof Statistics ata are available.As can be seen, there s no systematictendencyfor more-protected irms or in-dustries o have had higher rowthf outputper unit of inputthan less-protected irmsand industries.wo industries-apparelandfootwear nd rubberproducts-appear tohave experienced elatively apid growth foutput per unit of input. Apparel andfootwear s a traditionalndustryn Turkey,and its mediumrate of effective rotectionreflects urrencyvervaluationnd thenega-tiveprotection o textiles, ather hanposi-tive nominalprotection irected oward p-parel and footwear.Rubber products s asectorwith a sizable traditional omponentand import-substitutionctivities onsistingprimarilyf tire roduction. his atter ctiv-itywas extremely igh ost, s reflectedothin Tercan Baysan's estimate that interna-tional value added was negativeand in averyhighDRC estimate.No firms roducingrubberproductswere n the sample, o onlya sectoral ate s available.There s likewise o apparent endency orthe new activities, s reflected y the firmdata, to have experienced atesofgrowth foutput erunit f nput ystematicallyigheror lower than the industry o which theybelonged. Thus, the externality rgumentdoes not seem borne out by the data: ifanything,amplefirmsxperienced slightly

higher ate of growth f outputper unitofinput han heir orrespondingndustries,utsurely hedifferenceswellwithin hemarginof error f thecalculations.Finally, heres thequestion s to whetherexternalities ould have been realizedelse-where n themanufacturingector.Here, theonlyway of udging s to evaluatethe esti-matedrate of growth f output per unitofinput n themanufacturingector s a whole.That, in turn,nvolves comparison f therate realized in Turkeywith that in othercountries. ecausedata are not entirelyom-parable,and because the estimates re resid-uals and therefore ubject to fairlywidemargins f error, uch comparisons re nec-essarily xtremelyazardous.Estimates ypi-cally rangefrom -4 percent or developedand other developingcountries."6 espiteproblemsof comparability,t hardly eemsplausible that differencesn measurementaccountfor he owerfigurenTurkey.To see ust how low the estimated atesofgrowth foutputperunitofinput are,con-sider the following. uppose a firmnitiallyexperienced 50 percent ost disadvantage(i.e., required 0 percent ffectiverotection).Outputperunitof nputwould have to grow4 percentnnuallymorerapidly han notherindustriesn orderfor tto be able to survivewithoutprotection en yearshence."7This,however,would provide no return n theinitial oss. It is thus n underestimatef thedifferentialn growth f output per unit ofinput thatwould be necessaryto warrantprotectionf the nfantndustry.For the Turkish ase, when all manufac-turingwas experiencingncreased utputper

16Edward Chen (1977) estimated ates of manufac-turing otal factorproductivity rowth f 2.29, 3.47,3.50, and 3.75 percentfor Hong Kong, South Korea,Taiwan and Singapore, respectively, or the 1960's.Estimated atesfordeveloped ountriesnclude3.5 per-cent for Norway V. Ringstad,1971), 3.66 for Japan(Mieko Nishimizu nd CharlesHulten, 1978), 3.75 forItaly VittorioConti and RenatoFilosa, 1979), and 2.9percent or heUnited States JohnKendrick, 976). nsome of these cases, qualityadjustmentshave beenmade to estimatednputs.Using unadjusted ata wouldraise those estimates,making hecontrastwith Turkeyeven sharper.7This number s foundby solving ,= Io (I - r)' forrwhen ,=.667, I0o= and tequals 10.


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VOL. 72 NO. 5 KRUEGER A ND TUNCER: INFA NT IND USTR YARGUMENT 1149unit of input at a rate of 1.8 annually, hiswould imply hat ndustries xperiencing 0percent rotectionhould ncrease utput erunit of input t a rate of at least 5.8 percentannually. More concretely, onsider rubberproducts, he "best" Turkish ase. If the owestimate f the ERP for rubberproducts saccepted, heoutputperunitofinputwouldhave to grow at 7.34 percent annually inorderfor heir osts to fall enoughforthemto become competitiven ten years.At theirexisting ate ofgrowth foutputperunitofinput, t would require wenty-threeearsforthem to become competitive."8 ven thatcalculation akesthe ow estimate fthe rateof protection, llows for no return n theinvestment ver the twenty-three-yearnter-val, and is for he two-digitndustry ith hehighest stimated ate of growth f outputper unit of input. Obviously,for "infant"industries uch as paper where outputsperunitof input grewat less than theaveragerate of all manufacturing,here an neverbea "catchup" as longas existing elative atesare maintained.

IV. ConclusionsThis paper has attempted wo things:todevelopan empirical estforthevalidity fthe nfantndustryrgument;nd to use thatteston Turkishdata. The test s simple ndstraightforward:nput per unit of outputmust fall more rapidly n more protectedindustriesf there s to be any rationaleforinfant ndustry rotection. n the Turkishcase, therewas no such tendency ver theperiodcovered.The factthatprotected urkishndustriesdid notexperience apid ncreases n output

per unit of input s sufficiento provethatprotectionwas not warranted. t does not,however,prove that there were no infantindustries.t might e thatthe traderegimeitself rovided hewrong ncentives.t is atleast possible that,under an alternativen-

centive structure,utput per unit of inputmighthave grownmore rapidly n some,orpossibly ven all, Turkishndustries.'9Whatcan be concluded is that, at least in theTurkish case, protectiondid not elicit thesortof growthnoutputperunitof nputonwhich nfant ndustry roponents ase theirclaimfor rotection.

APPENDIXThe major thrust f import substitutioninto new ndustries ccurredn theearly ndmid-1960's. For the period 1963-76, thereare industry-levelata availablewith whichto estimate nputs nd outputs.A Census ofManufacturersnd Annual Survey of In-dustries rovides etaileddata on number femployees,wage bill,value ofpurchased n-puts,value of output, nvestmentmade byfirms,nd number ffirms orprivate ctivi-tieswithin ach industrial ectoremployingten or more employees.These data, com-bined withestimates f capital stock pro-vided by the State Planning Organizationand appropriate ricedeflators20orm dataset from which it is possible to infer thebehavior f inputs nd outputsfortwo-digit

manufacturingndustriesn the private ec-torin Turkey.2" ince much of the import-substitutionrocess onsists freplacingm-ported nputswithdomesticmaterials, hreeinputs were separately estimated: labor,capital, nd materialnputs.A secondset of data is at thefirm, atherthan industry,evel. It covers those firmswhichreceived oans fromthe Turkish n-dustrialDevelopmentBank. For them, atawere vailable on a variety f their ttributes(size, date of inception, recisecompositionof output, tc.) and also for annual invest-

'8This calculation s based on theassumption hatoutputperunitof nput nrubber roducts ontinues ogrow t 4.27 percent nnuallywhile n theentiremanu-facturingector t continues to growat 1.84 percentannually.

19Seeour earlierpaper for an attempt o trace thelinksbetween hegrowth f output er unit f nput ndthe ebbs and flows f the traderegime.20Wholesaleprice ndiceswereavailable foroutputsof each two-digitndustry.hese data werethen sed, nconjunctionwith the Turkish nput-output ables, toobtain weightednput ricefor ach sector's urchases.The same price deflatorswere used for two-digitn-dustries nd forthefirm ata described elow.21 In our earlier aper thebehavior f theprivate ndpublic sectors s analyzed and contrasted, nd a fullerdescription f thedata is given.


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1150 THE AMERICAN ECONOMIC RE VIEW DECEMBER 1982TABLE Al-UNDERLYING GROWTH RATES OF OUTPUT AND INPUT FOR PRIVATE

SECTOR INDUSTRIES AND SAMPLE FipMsIndustries' 963-76 GrowthRate of: SampleFirmGrowthRate of:Labor Capital Real Output Labor Capital Real Output

Food Products 4.6 14.2 7.7 7.5 13.3 9.5Beverages 18.0 14.2 22.5 - -Tobacco -3.3 -.3 5.7 - -Textiles 4.6 13.3 11.0 6.2 14.1 10.2Apparel nd Footwear 23.3 13.3 28.3 1.9 8.0 6.8Wood and Cork Products 10.0 14.2 12.6 9.1 27.9 15.8Furniture nd Fixtures 4.7 14.2 6.6 - -Paper and Products 16.7 26.0 23.7 - -Chemicals 8.4 15.4 15.1 4.2 12.4 12.0RubberProducts 5.1 13.3 16.8 - -Fur and Leather roducts 7.8 17.0 8.6Petroleum nd Coal Products 28.1 60.5 33.7 - -NonmetallicMinerals 8.0 16.7 15.3 5.0 7.4 7.4Basic Metals 18.1 25.3 21.5 7.6 14.9 15.8MetalProducts 7.8 13.1 11.8 9.0 17.1 13.3NonelectricalMachinery 15.2 17.6 17.9 - -ElectricalMachinery 12.5 20.1 19.8Transport quipment 22.7 30.5 30.1Note: All rates fgrowth re continuous atural ates, omputed y running logarithmicegression f each variableon time.

ments, annual labor force and wage bill,annual purchases f raw materials nd inter-mediategoods and inventoryhanges, ales,profits, epreciation,nd so on. Altogether,there re 91 firms orwhichdata were vail-able on a reliablebasis for period of morethan fiveyears.22Most new investmentsfthese firmswereundertaken n responsetoincentives rovidedby the trade regime, l-though some were in more traditional n-dustries. ince therewas creditrationingnTurkey, here s some presumption hatbor-rowers from the Industrial DevelopmentBank were firms f above-average uality,accordingto the criteria sed by the Bankfor ts ending.On the basis of thesedata, it was possibleto computean estimated apital stock foreach firmusing perpetual nventory ech-niques. Doing so was judged better thanusing balance sheet estimates which werealso available) since the lattermade no al-

lowancefor rice evel hangesntheir apitalstock n the context f a relatively ighrateof inflation.Depreciationrates were esti-matedfrom merican ngineeringata foundin W. R. Park,23nd then caled to equal theStatePlanningOrganization's stimate f theaverage rate for all manufacturing.nvest-mentdeflators vailablefrom he State Plan-ning Organizationwere first mployedtoconvertnominal investmentnto constant-price estimates f additions o capital stock.Investmentn a given year was treatedasbecoming ffectiveapital onlyat thebegin-ning of the following ear.24 eriod t-l'scapital stock was depreciated,nd then real

22Interviews ere held with more than a quarter fthe firms, hichprovided check on the reliability fthe data, and also provided dditional nformation ncharacteristicsf firms nd theirmanagement.

231t is an interestinguestionwhether ne shoulda priori xpect depreciation atesto be loweror higherin Turkeythan in the United States. On one hand,cheaper abor shouldencouragemoremaintenancendthusa longereconomic ife.On theotherhand,poorand irregularmaterialsquality, rregular upplies ofelectric ower, nd workerswith ess experiencen thecare of equipmentmight endto theoppositeresult.24For omeolderfirms, atawerenotavailablefrominception. n those ases, nitialbalancesheetdata wereconverted o an estimate freal capitalstockbased onknowledge f thefirm's istorynd starting ate.


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VOL. 72 NO. 5 KR UEGER AND TUNCER: INFA NT IND USTRYARGUMENT 1151investmentn t-1 was added to obtaincapital stock nperiodt.In addition, ata from he firms ould bedirectlyused for the number of workers.Purchased inputs, adjusted for inventorychanges,were deflated o yield an estimateofmaterialnputs.Finally,for ome firmsphysical ndicator of homogeneousoutput(forexample, ons of cement)was availableand used to indicateoutput. For others, tproved preferable o take deflated ales ad-justed for nventory hange as themeasureofoutput.Thus, forboth firms nd industries, atawere available on materials nputs, utputs,labor inputs, nd capital stock nputs, longwith the sharesof the respective actors nthevalue ofoutput.For purposes festimat-ing changes n inputper unit ofoutput, heaverageshare over the life of thefirm ndforthe entire 1963-76 period fortwo-digitindustries)f abor,material,nd capital wasused. Thisprocedurewas judged superior oemploying Divisia index because of thevolatility fshares rom ear o year.25Table Al provides he stimates f rates fgrowth f labor and capital nputs nd out-puts.All rates are computedfor theperiod1963-76 at the industry evel. For firms,rates were computed over the period forwhichdata wereavailable,and a minimumof fiveyears. n some instances, irmdataspan a period of twentyyears,but somenewer mport ubstitutionctivities id notstart ntil he ate 1960's;data on thesefirmsare also included nthe stimates.Table A2 gives data on thewage share neach two-digit ndustry nd computesthemaximalrate ofchange n relative osts thatcould have been associated with the verysteep ncrease n realwagesthatoccurrednTurkey during the period. The real wageincreasewas the result of labor legislationand did notreflect nderlyingabormarketconditions:urbanunemployment as risingrapidly uringmostoftheperiod.

TABLE A2-COMPUTATION OF POSSIBLE CHANGESIN RELATIVE COSTS DUE TO CHANGES

IN RELATIVE FACTOR PRICESWageShareof Rate ofIndustry Value-Added Cost Change

Food Products .264 -0.4Beverages .101 -2.0Tobacco .183 -1.3Textiles .368 0.3Apparel nd Footwear .521 1.7Wood and CorkProducts .485 1.4Furniturend Fixtures .381 1.5Paperand Products .372 .4Chemicals .319 -.1RubberProducts .274 -.5Furand Leather roducts .484 1.4Petroleum nd Coal .016 -2.8NonmetallicMinerals .326 -0.0Basic Metals .201 - 1.2Metal Products .384 0.5NonelectricMachinery .320 -0.1ElectricalMachinery .332 0.0Transport quipment .562 3.7AllManufacturing .245 0.0Notes: Real wages are estimatedto have risen at acontinuous ate of 6 percent rom1963to 1976,basedon average weekly earningscovered under social in-surance.The median share of labor was 33 percent.Relative ost changeswere omputed e weightingheserates of change by each industry'sctual 1968) shares.For themedian ndustry's oststo have remained on-stant, capital costs would have had to decline at acontinuous ateof2.95 percent.

25Initial stimates, ased on Divisia indices,yieldedoccasionallybizarreresults.For example,for firms rindustries ufferingosses, thecapital share was nega-tive, nd firms ithheavy nvestment ere alculated ohave increased utputper unitof nput!

REFERENCESArrow, enneth .,"The Economic Implica-tions of Learning by Doing," Review ofEconomic tudies,June1962, 29, 155-73.Baldwin,Robert ., "The Case Against In-fant-IndustryariffProtection,"Journal

of PoliticalEconomy,May/June1969, 77,295-305.Baysan, Tercan, Economic ImplicationsofTurkey's ntrynto theCommonMarket,"unpublished octoraldissertation,niver-sity fMinnesota, 974.Chen,EdwardK. Y., "Factor Inputs, To-tal Factor Productivity nd EconomicGrowth: The Asian Case," DevelopingEconomies, une3, 1977,15, 121-43.Conti,Vittoriond Filosa,Renato, A Disag-gregateAnalysis f Accumulation,roduc-


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1152 THE A MERICAN ECONOMIC REVIEW DECEMBER 1982tivity,nd Labor Costs n the Manufactur-ing Industry" in Economic Papers, 2,Rome: Bank of Italy Research Depart-ment,June1979.

Hirschman, lbert ., The Strategy f Eco-nomic Development,New Haven: YaleUniversity ress, 1958.Kendrick,ohnW.,"ProductivityrendsandProspects," n U.S. EconomicGrowthrom1976 to 1986, Washington: Joint Eco-nomicCommittee f Congress,October 1,1976.Krueger, nne 0., Foreign Trade Regimesand EconomicDevelopment: urkey,NewYork: ColumbiaUniversity ress,1974.andTuncer, aran, Growth of FactorProductivityn TurkishManufacturingn-dustries," npublished aper, 1981.Nishimizu, iekoandHulten, harlesR. "TheSources of Japanese Economic Growth:

1955-71,"Reviewof Economics nd Statis-tics,August 1978, 60, 351-61.Park,W. R., Cost Engineeringnalysis,NewYork: JohnWiley nd Sons, 1973.Ringstad, .,Estimating roductionunctionsand TechnicalChanges fromMicrodata,Norway: Statistiskentralbyra,971.Samuelson,aulA.,Foundations fEconomicAnalysis,Cambridge:Harvard UniversityPress,1958.TurkishRepublic, tate Institute f Statistics,Census of Manufacturingndustries,An-kara, 1963; 1970.

_ 9 , Annual Survey f Manufac-turingndustries, nkara,variousyearsto1976., State Planning rganization,urkiyeImalat Sanayiinde Dermaye ve Isgucu(Capital and Labor in TurkishManufac-turingndustry), nkara,December1977.

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