Nations Can Try Promotion – Not Protectionism

COPENHAGEN: The word “globalization” is part of everyday vocabulary, with general  agreement that it involves international integration of economies through the flows of trade, capital, technology and people. For some, globalization is equated with imperialism, where one single hegemonic power – once Britain, now the US and maybe China in the future – exercises undue influence on the workings of other economies. Most, however, equate globalization with unfettered markets and, by extension, the retreat of the state from economic and social affairs, with boosters claiming both the necessity and virtue of markets in coordinating economic and social life.

Even with intensified globalization, states promote markets. State intervention persists in a myriad of ways in both rich and poor countries. Witness President Barack Obama’s bailout of the US auto and banking sectors during the Great Recession, China’s subsidy program for its solar-panel industry or continued protection of Japan’s rice production through tariffs of over 700 percent.

Of course, our daily lives are intertwined today with the ups and downs of the world economy – in itself an argument for state intervention to minimize the vulnerabilities and instabilities that arise from globalization such as rising food prices due to adverse weather and growing demands from large, expanding economies of China and India. Poorer people, who spend a large share of their income on food, are hard hit. Governments cannot afford to sit idly by if they want to avert political crisis let alone a humanitarian one. They must intervene to stabilize food prices.

States are responsible for their citizens’ economic wellbeing and regulate markets to reduce instability associated with inflation, unemployment or falling productivity. With jobs and incomes at stake, governments can protect domestic business against unfair competition.

Most of these actions are driven by economic nationalism, although not all interventions are economic. For example, the French government’s promotion of its cultural industries, particularly films, against the commercial onslaught of Hollywood may have other goals. But the economic calculus is not altogether absent; geographic protection of champagne is another example.

National security arguments also prompt intervention, such as scrutiny by the US government of Chinese telecommunications firms, like Huawei and ZTE, to sell in the American market. Upset about the elimination of any French jobs, the French government threatened to nationalize ArcelorMittal units in France, owned by an Indian steel magnate, after he proposed closing two inactive blast furnaces.

Not all states intervene, though, too often indifferent, even callous to the plight of their citizens. In fact, most states fail to govern their economies well in the face of challenges and opportunities emanating from the world economy. Only a few states have the capacity to intervene effectively. Today these include ambitious developing states such as Brazil, Russia, China and India, known as BRIC, and East Asian economies. These countries have a history of state-led development with global and regional political and economic ambitions in the midst of other powerful states.

The concept of economic nationalism is used for selective engagement with the world economy. Rather than the orthodox notion of economic nationalism, defensive in nature and nation-centered, I offer a more dynamic understanding – economic nationalism in motion. This version, first proposed in the Review of International Political Economy, 2009, suggests that the practice is influenced by pragmatic considerations rather than ideology – akin to Deng Xiaoping’s proverbial cat that catches mice irrespective of its color – especially under fluid circumstances of economic growth, emerging competitive industries and, most importantly, as national capitalists mature. Earlier economic nationalism meant protection; today it’s promotion, though the basic motive for both is ensuring national economic interests. This ability to navigate changing circumstances and priorities pragmatically contributes to the dynamic movement of the practice of economic nationalism.

Behind economic nationalism in motion is a particular kind of state-business nexus where the two operate in a public-private partnership. The key difference with this form is that the state explicitly promotes national capital at home and abroad for national economic gain, although prestige can also play a role, when a public-relations agenda drives hosting a major sports events or acquiring state- of-the-art technologies for pet projects without thorough cost-benefit analysis.

Fostering national economic development and competitiveness, promoting national companies and brands, is part of the economic-nationalism-in-motion portfolio. Market-driven globalization is not incompatible with state intervention. States must identify the conditions under which such economic nationalism can be undertaken and the instruments at their disposal to negotiate the forces of economic globalization.

There are many examples of economic nationalism in motion. Take China, for example, Despite being a dirigiste, closed, command economic system, it’s become the second largest economy with the highest share of exports. China’s rise is often attributed to greater international integration, but behind that participation is a pragmatic and strategic form of selective state intervention – from a defensive to an offensive posture, from trial and error to bolder policies.

Other illustrations of economic nationalism in motion include China’s strategic decision to become a member of the World Trade Organization; development of special economic zones after Deng’s 1992 tour of the coastal south; the technology-for-market strategy regulating multinational corporation investment in China; support for globally recognized Chinese brands; and even mobilization of the public against Japanese businesses in China and boycott of Japanese products over the disputed Senkaku/Diaoyu islands. Of course, not all actions of economic nationalism result in favorable outcomes. Virulent anti-foreigner sentiments to protect domestic employment could have long-term repercussions on inter-state relations and go against the need to secure additional workers. The island dispute and Japan’s reluctance to accept large-scale immigration notwithstanding, the largest immigrant group in Japan today are Chinese.

Thus, economic nationalism is not a matter of simple protectionism, erroneously attributed to Friedrich List. Rather, as he had envisaged, it’s about promotion – consistent with China’s fostering of national capital and economy by way of strategic investments in African resources, India’s infrastructure support for its IT industry, the Japanese government’s cooperation with Mitsubishi to develop a new regional jet aircraft, and India’s government leveraging the Indian diaspora to support the India-US nuclear treaty.

Economic nationalism is a contested practice. Countries may find it hostile; citizens may perceive it as illegitimate. Who benefits from such nationalism? Where does promotion end and crony capitalism begin? If businesses gain from economic nationalism, what about the people left behind, given that globalization reduces policy space for states, especially social policy? For example, the pressure to reduce budget deficits, lower interest rates, and attract profit-oriented domestic and foreign direct investments often leads to cutbacks in public education, social security and health programs. Economic growth takes precedence over social policy, and under globalization, the notion that what’s good for General Motors is good for America becomes tenuous.

Government belt-tightening is typical to achieve what’s regarded as sound macroeconomic environment. Yet one cannot escape the rising inequality in high-growth economies of China and India, relatively egalitarian societies of Japan and South Korea, and liberal democracies such as the US and UK. Economic nationalism may be one way to deal with global economic forces for national benefit, yet the emergent social problems accompanying globalization must also be addressed. Governments must seriously reexamine tendencies for economic nationalism and aim to develop a new form, one anchored in social policy to promote a nation’s education, health and human dignity in the process of globalization.