Global Economy: ‘Economic nationalism’…

A RISING APPARITION

From the desk of MD

MANAGING the current economic turmoil, and complexity of the global crisis, has called for nuance and practical solutions rather than stridency and principle. For example, we often hear and read of governments intending to prop up the credit markets by offering guarantees or by creating “bad banks”, a concept that was written upon, on this site, in recent days. Whilst governments will most certainly adopt an element of both, it needs to consider what package of a fiscal stimulus would be most effective. That will likely vary from one country to the next. In addition, as we witness in Britain, the government has acted, too, by nationalising a number of banks. The Royal Bank of Scotland (RBS), for instance, is now almost 70% state owned. What is more, though, countries around the world should not become too partisan, or entrenched with certain views on how best a resolve might be found; no proposed solution to the crisis facing the world should be rejected or categorically embraced.

But, the re-emergence of a spectre from the darkest period of modern history argues, vociferously, for a different and strident response. Economic nationalism – the basis which attempts to preserve jobs and capital wealth at home – is not just turning the economic crisis into a political issue but is threatening the world with a deep and troubling depression. If it is not eliminated with due speed the consequences and implications will be dire.

When trade is vibrant and healthy it encourages specialisation which, inevitably, brings prosperity. Global capital markets, despite a constant hammering from commentators around the world, do allocate money more efficiently than local ones. Economic co-operation encourages confidence and, specifically, when there is international co-operation in seeking mutual outcomes that will always likely lead to enhanced security.

In America, Congress is arguing over a clause in the $800 billion stimulus package concerning the use of US materials in public works. Some argue there are extreme elements associated with such rhetoric. Tim Geithner, the new Treasury Secretary, directly accused China of “manipulating its currency” which prompted a backlash from Beijing. Around the world, car manufacturers have lobbied for financial support and assistance, and some have been allocated vast sums. A host of other industries, in countries both rich and poor, want direct help and intervention from their governments.

…Economic nationalism – the basis which attempts to preserve jobs and capital wealth at home – is not just turning the economic crisis into a political issue but is threatening the world with a deep and troubling depression.

What is also true is that the grip of nationalism is the tightest in banking. In both France and the UK, politicians are pouring taxpayer’s money into ailing and troubled banks and are demanding, in return, that the cash be used in lending at home for small business, in particular, who are finding the economic conditions impossible to remain afloat. Thousands of small firms’ are filing for bankruptcy each week. Economic stability requires the governments and their banks to work in tandem and towards similar objectives, otherwise economic stagnation and deterioration will become much worse. Since, in practice, banks are reducing overall lending, that equates to repatriating cash. According to the Economist, regulators are also thinking nationally. It cites Switzerland as now favouring domestic loans by ignoring them in one measure of its capital holding; foreign loans counting in full. Creating financial leverage, then, in some instances, is becoming “creative” which, if becoming more widespread, could distort things even more.

Broadly speaking, governments protect goods and capital, largely, in order to protect jobs. Protectionism might be the divisive barrier in overcoming in an attempt to bring the global economy back to some reputable position. Many workers around the world are demanding help from their governments with increasing levels of panic and anxiety. The Lindsey oil refinery, a recent example in Britain, for instance, and in France where vast swathes of workers stayed away on wild card strike action, marching and protesting for jobs and wages to be preserved nationally. In Greece, too, police used tear gas in dispersing farmers protesting against the level of subsidies they are in receipt of.

Three favoured arguments may be given in defence of economic nationalism: it is commercially justified, can be justified politically and that it won’t get very far. Firstly, some damaged banks may feel safer retreating to their home markets, where they will understand the risks better and benefit from scale. However, largely, that is a trend which governments should seek to counter, not to encourage. On the second point, whilst it is reasonable for politicians to wish to spend taxpayers’ money at home, that only becomes viable so long as the costs of doing so are not disproportionately high. Quite clearly, though, the costs associated with the current economic downturn are extravagant and beyond almost anyone’s comprehension.

For the third argument, that protectionism will not get very far, is dangerously complacent: lawmakers, for instance, in 1930 exacerbated the Depression by raising US tariffs. Most reasonable minded people opposed high charges at the time, and failed to stop them being introduced. Over 1,000 economists petitioned against their bill. Whilst now-a-days global supply chains are more intricately complex than in the 1930s, the point that economic nationalism is very much on the march suggests that even commercial logic will soon be trampled underfoot.

The common links of bondage that bind countries economies together are under constant strain. World trade is expected to shrink during 2009, the first time that would have happened since the early 1980s. Net private-sector capital movements to the emerging markets are likely to fall to around $165 billion; a significant reduction when we consider that in 2007 such liquidity reached $929 billion. Even if there were no policies to undermine it, globalisation is suffering its biggest reversal in the modern era.

As public support for free markets are at a record low, our politicians know that they must be seen to be doing something. Yet, policies construed to put things right at home can inadvertently erode the global system. An attempt by Ireland, for example, late last year, in propping up its banks with guaranteed deposits to account holders sucked money away from Britain. US plans to monitor domestic bank lending, month by month, will encourage lending at home than overseas. As countries stridently attempt to save themselves they endanger each other in the process of doing so.

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THE biggest question to be answered is what America will do. During certain phases of this crisis it has shown the way with correct leadership such as agreeing to supply dollars to those countries in most need of them. It was also seen to be guaranteeing the contracts of European banks when it rescued a large financial insurer. But, the sloganeering of “Buy American” within the stimulus bill appears all too nationalistic. That would hardly boost US employment, in the short run, because the international retaliation would destroy more jobs at exporting firms. Even if the champion of free markets was going it alone that would send a disastrous signal to the rest of the world because the political consequences would far outweigh the economic ones.

President Obama says that he doesn’t like the phrase “Buy American”. Whilst that’s good for countries outside of the United States, it’s probably not enough just coming from the lips of the President. Whilst it is rightfully acknowledged that some of the original provisions have been softened in the Senate’s version of the stimulus package, Mr. Obama must go further. Dutifully, he could champion a set of principles:

Co-ordination: a principle of co-ordination would greatly help in rescue packages, like the one that greatly helped the rich world’s banks last year. Individual countries stimulus plans should be built upon common principles, even if they differ in the details. Co-ordination is good for economics, as well as for politics. Combined plans which often spring from effective co-ordination are far more economically potent than isolated national plans.

Forbearance: Individual nation stimulus plans should embrace open and free markets, even if that will benefit some overseas nations. In these circumstances, financial regulators should leave aside, meantime, the re-regulation of cross-border banking until later, at an international level, rather drawing up rules now that would clearly have long-term consequences.

Multilateralism: The World Bank, the IMF and the development banks should help to meet the shortfall in capital that the emerging markets have suffered. But, to facilitate this, they need the correct structure and resources to do so. The World Trade Organisation (WTO) could help to shore up the trading system if its members pledged to complete the Doha round of trade talks and make good on their pledges made at last year’s G20 gathering in putting aside the hovering threats of trade sanctions.

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WHEN economic conflict seems more prevalent than ever, what can persuade countries in giving up their trade weapons? Effective U.S. leadership is the only choice. The international economic system depends upon a guarantor, fully prepared to support and back it during crises. During the nineteenth century Britain performed that role; nobody did between the war years, and the consequences were disastrous. Partly because of those mistakes, the United States bravely sponsored a new economic world order after WW II.

And now, once again, the task of saving the world economy falls to America. If America isn’t ready the rest of the world are in deep trouble.

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© Mark Dowe 2009: all rights protected

mark.dowe@googlemail.com