Quotas are bad policy

I’ve had more than my quota of quotas. Economists have long been critical of these devices, which arise in many different contexts. Import quotas are a non-tariff barrier to trade: countries, or customs unions such as the EU, may only allow in a certain number of foreign-produced cars or textiles or foodstuffs. The motive here is said to be protection of domestic producers of goods, perhaps masquerading behind some sort of ‘infant industry’ argument.

Such quotas rarely do much good. They protect particular producers but they penalise consumers. They probably discourage innovation and necessary change. Once instituted, they are very difficult to remove. They don’t even have the advantage of bringing in government revenue, as tariffs do. In countries where the rule of law is weak, they are often the basis for corruption as well-placed government insiders get access to scarce imports and can exploit shortages.

Then there are quotas which result from cartels, like OPEC. Here there may be talk of conserving resources for the future, but the reality is increasing profits in the short run by creating an artificial shortage. Consumers lose out here too.

Quotas are an integral part of the EU’s fishing policy: catches are rationed ostensibly to prevent over-fishing (a negative externality), though there are other ways to do this, such as bidding for property rights, rather than by arbitrary assignment of maximum catches.

Labour markets offer huge scope for quotas too, of course. Immigration is a case in point: governments claim to know that the labour market requires certain types of immigrant rather than others – a claim for which there is little objective basis.

In India a certain proportion of jobs is reserved for scheduled castes. In Malaysia there are quotas for bumiputra, reserving jobs for people of Malay extraction (as opposed to those of Chinese and Indian origins). The argument here is that historically disadvantaged groups should be given a leg up. Well, perhaps – but often these interventions may benefit better-off members of groups which perform badly on average, at the expense of poorer people from groups with a higher average income. This has been the reason why affirmative action in the USA in favour of African-Americans has been increasingly challenged by whites and Asians.

Nearer home, we have had religious quotas for membership of the Northern Ireland police force, and a similar policy has been advocated for ethnic minorities in the Met. The justification here is that community peace – another ‘externality’ – is best served by attempting to manipulate representation of different groups in policing communities. Yet experience in the USA and elsewhere suggest that cronyism and low performance can result. Moreover, the changing demographic composition of cities over time presents ongoing problems of representation.

A different justification is offered for quotas for women’s representation on company boards (and possible extension to ethnic groups): this is primarily on grounds of fairness or equity. To those who might query the prioritising of equality of outcome rather than equality of opportunity, a further justification is often offered. This is that ‘diversity’ improves organisational performance in various ways. The evidence for this is, however, rather weak. And it begs questions about what dimensions of diversity should be emphasised. Our company boards have few teenagers or religious leaders or comedians represented: should we be concerned?

Yet another argument is that we need quotas in sporting or cultural fields. The Premier League needs more home-grown footballers. France needs a lot of French-produced movies (although most Gallic cinemagoers seem to prefer Hollywood blockbusters, albeit dubbed into Franglais). I wouldn’t deny that this view has a certain appeal, but it clearly offers not-necessarily-deserved protection to particular interest groups.

The nadir of this type of reasoning came for me last week with a news item from Canada. The Canadian Radio-television and Telecommunications Commission enforces rules that require 35 per cent of television content to be domestically produced. Unfortunately three Adult Movie channels have failed to comply, so that a notice has been issued requiring the channels to up their game. The Canadian porn industry is no doubt rubbing its hands, and possibly other parts of its anatomy, with glee at this potential bonanza.

The point I am making is that advocates of quotas must believe that capitalism suffers from a wide range of market failures, which can best be addressed through dictating arbitrary numerical targets. The purpose of the economist has to be to raise impertinent questions about the likely effects of messing around with market outcomes, the real as opposed to intended beneficiaries, and the case for alternative means of achieving such goals as genuinely require some intervention. It’s a never-ending task.

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

1 thought on “Quotas are bad policy”

  1. Posted 08/04/2014 at 10:12 | Permalink

    Increasing gender diversity on corporate boards causes declines in financial performance. The evidence for this is very strong. Our briefing paper on the matter http://c4mb.wordpress.com/improving-gender-diversity-on-boards-leads-to-a-decline-in-corporate-performance-the-evidence/. We’ve presented the evidence to House of Commons and House of Lords inquiries, yet this insane direction of travel continues. The FTSE100 are appointing women (almost all of them NEDs) to their boards in the face of legislated gender quotas if the companies haven’t voluntarily’ achieved 25 female representation by then. We know from a recent DBIS report that the ultimate target is 50% M/F boards, and the FTSE350 is next in the firing line. I look forward to Comrade Cable discovering something to replace capitalism with, by the time the inevitable collapse of the business sector happens.

    Mike Buchanan
    Campaign for Merit in Business

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