Economic Patriotism

Protectionism in government-enforced industrial policy is rooted in domestic allegiances, yet can ultimately hurt local economies, writes Patricia Wruuk of Deutsche Bank Research. Economists agree that the free market is the best way to allocate goods and profits to a population, though some favor a more regulated industrial policy than others to ensure domestic sustainability and avoid the cross-border corporate mergers steadily on the rise in the EU. Wruuk notes that governments rarely have the business acumen to discern which domestic companies and products are worth funding. Worse yet, many government officials struggle in retracting support of a failed company or product in fear of marring political careers with uncertainty. Wruuk details the industrial policies of Germany, France and UK, and discusses how their approaches to domestic regulation of foreign trade and investment have benefited or hampered economic progress. She recommends that governments pursue basic framework conditions for domestic innovation by funding education, infrastructure, or research and development projects that ordinarily would go unsubsidized by the market itself. Extra support for firms may only distort competition and make it that much harder for any company to adjust to a global market and toughened competitors. – YaleGlobal

New game in industrial policy?

Patricia Wruuck

Wednesday, June 21, 2006

Globalisation triggers protectionist reactions. In the current discussion about economic patriotism industrial policy and protectionist arguments are commingled. Economic patriotism arises also as a reaction to growing economic interdependence. National industrial policy cannot be viewed in isolation any more but has to be seen in a global context.

Theory argues against activistic industrial policy. Theory only justifies government intervention in industry if the market malfunctions. Even strategic trade policy and endogenous growth theory, neither of which assumes perfect markets, only justify intervention in exceptional cases. Information continues to be the key problem for active industrial policy. The state presumes that it can identify and pursue trends better than the market players. Information deficits generally result in the benefits of intervention being smaller than the cost.

Different focuses in industrial policy within Europe. The UK broadly takes a liberal attitude to takeovers by foreign investors and is profiting from this openness. France has stronger interventionist traditions and continues to protect prestigious companies. Networks between the political and business elite play a special role. All the same, on international comparison the country is very open to investment. Germany places priority on free market policy (Ordnungspolitik) over industrial policy; the creation of national champions is not pushed, which is also due in part to the structure of German industry in terms of company size.

No empirical evidence that intervention is successful. A direct comparison of different industrial policy strategies is difficult for methodological reasons. However, there is sound evidence of a correlation between competition and growth; therefore protectionist strategies are not promising in the long run.

National champions as a threat to the single European market. Protectionist tendencies interfere with the proper functioning of the single European market. Since national breaches of the rules harm competition within the EU, all member states have to shoulder the costs of economic patriotism. Openness continues to be key to long-term economic success.

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http://www.yaleglobal.yale.edu/pdfs/economicPatriotism.pdf