The rise of economic nationalism

Politically sweet music but ominous for long-term global prosperity

Identifying outsourcing as the villain

President Barack Obama, in his State of the Union Address delivered last Tuesday, made a hard-hitting attack on American companies that have shipped American jobs abroad by going pell-mell for outsourcing manufacturing jobs from countries like India and China in the last two decades.

He said that six months prior to his election to office in 2008, USA had lost four million jobs; within six months of his election but before his remedial policies could take effect, another four million jobs had been lost.

During the last 22 months, his country was able to create only three million jobs, meaning that there is still a shortfall of some five million jobs if USA is to restore its position to pre 2008 level. If it is to solve its economic woes permanently, it has to find jobs for some record 13 million people who are seeking jobs as at present.

Move to reclaim USA

Surely, his house is on fire and he should be angry because he has to make a re-election bid in November this year. Both poverty and unemployment levels in USA have risen to unprecedented levels: poverty above 15% of population and unemployment above 8% of the labour force by the end of 2010 and 2011 respectively.

Despite numerous stimulus packages, the US economy has not recovered from the worst recession with which it had been hit since 2007. Globally, there is growing fear that economic power is shifting from USA to emerging countries like India and China, a serious dent in American pride.

So, his prescription announced in the State of the Union Address is to reclaim the lost American power and value. To do so, he says that he will support American companies if they bring back jobs to American soils and will give further support if they sell American products in new global markets.

In other words, he has vowed to create an economy that produces in America but sells outside. Faced with this domestic economic turmoil, this was his plea to American companies and citizens, a kind of a new Political Social Responsibility or PSR akin to the Corporate Social Responsibility or CSR designed for private companies worldwide decades earlier.

Is economic nationalism the answer?

This is in fact re-emergence of the old mercantilism under which it was advocated that a country should export but not import. In today’s terminology, it is called ‘economic nationalism’ where a country should produce and consume locally produced goods but could sell to others if it has surplus.

Obama is not alone in preaching economic nationalism. Many leaders in other parts of the world, faced by chronic economic crises, have chosen to talk about variants of economic nationalism. Leaders in Germany and Japan which have experienced surging exports but low economic growth due to the economic ailment now known as ‘Bazaar Effect’ or becoming trading nations instead of being manufacturers, are under pressure to reverse the production process that have created jobs and incomes elsewhere.

In developing countries, imports, especially food imports, are considered as creating jobs and incomes abroad and there is pressure for curbing imports and settling for an import substitution policies at home.

Sri Lanka: produce foods locally and fill the trade gap

Sri Lanka has advocated economic nationalism for a different reason.

According to official statistics, Sri Lanka does not suffer from these types of economic ailments. Unlike Barack Obama or other leaders in developed or developing countries, its leaders can take comfort in a number of achievements which they claim that the country has made in the last few years: high growth rates, low poverty and unemployment numbers, tamed inflation and fast growing exports.

Yet it has a major issue in its external sector with imports rising much faster than exports, thereby generating a record trade deficit of $ 10 billion in 2011 and pressure for its currency to depreciate against other currencies.

The authorities have attempted to keep the exchange rate stable by supplying foreign exchange from its reserves to the market, but have lost a significant portion of reserves in the process. As at end of November, 2011, its official reserves have fallen to $ 6 billion from $ 8 billion five months ago.

Since November, according to market reports, another round of reserve loss has taken place driving the country’s foreign reserves now to a critically low level. Since the situation is going to worsen in 2012 with an equally high or even a larger trade deficit, the worried Sri Lankan authorities have tried to fix the problem by taking unconventional measures sans a proper adjustment of the exchange rate.

Voicing some aspects of these measures,   Sri Lanka’s top policy maker and reputed economist, Dr. P.B. Jayasundera, Treasury Secretary and Secretary to the Ministry of Economic Development, is reported to have said in a recent media conference that Sri Lanka should step up its food production drive to  curb food imports and thereby help Sri Lanka rupee to strengthen in the foreign exchange markets, a measure that would help Sri Lanka to narrow its ballooning trade deficit (available at http://www.ft.lk/2012/01/26/govt-to-grow-out-of-import-trap/#more-68411).

Not all foods can be produced in Sri Lanka

The objective of this measure, according to the reputed economist, is to save foreign exchange which the country now spends on food imports, namely, wheat flour, milk products, fresh and dried fish and certain varieties of fruits. Since wheat cannot be grown in Sri Lanka, the strategy may be to cause a shift in the consumption pattern by weaning the wheat consumers away from wheat products and encouraging them to consume rice based products. At present, a Sri Lankan consumes on average about 110 kilograms of rice and about 38 kilograms of wheat flour based foods per annum. To cause this shift, it may also be necessary to invoke nationalist feelings among the Sri Lankans: why eat imported wheat flour when one can eat truly Sri Lanka produced rice? But it would certainly increase the demand for rice putting pressure for its price to rise in the market. Hence, to prevent its price from rising and thereby raising the cost of living of people, it is necessary to increase the production of rice while keeping the production costs unchanged.

This measure therefore involves the bringing back the old import substitution policy as a mainstream economic policy of the country and therefore can be categorised as a different form of economic nationalism. This is because it propels the wisdom that if Sri Lanka can grow foods, it should not import such foods from abroad and fatten foreign farmers. In other words, it is in the national interest of Sri Lanka to fatten the local farmers.

Some do not agree with economic nationalism

When Obama was fiercely attacking American companies for moving out and seeking low cost inputs, namely, labour, experts who were assembled at the World Economic Forum, popularly known as WEF, in Davos in Switzerland were debating how best the world could promote free trade, free enterprise and free competition.

Even the British Prime Minister David Cameron is reported to have sent a message to WEF urging European Union to think positively about the emergence of China and India as world economic powers. He has said that instead of treating as a threat, emerging nations like India can be of great help to Europe. He has advocated that Europe should go for bilateral trade agreements with countries like India and Singapore by the end of 2012.

High unemployment: the breeder of economic nationalism

When a country has high unemployment, there are always agitations by its citizens against any policy or practice that kills jobs at home but creates them in other countries and thereby raise the incomes of people in those countries. Hence, any policy announcement that aims at putting a stop to such practices is sweet music to people of any country.

Smart politicians in both developed and developing countries who understand the importance of moving with people by endorsing their popular views to win elections project themselves as pro-nationalist and anti-free trade champions. Obama or any other leader who exploits people’s sentiments in this manner cannot be faulted because their objective is to remain in power. If they lose power, then they cannot implement whatever the sound policies they think are suitable for their countries. In this sense, David Cameron is taking a huge risk by advocating for free trade agreements with economically hostile countries because those agreements are simply ‘give and take exercises’.

Apple’s alleged crime

The extent to which people in a country treat the loss of jobs in the home country as a crime and those who caused such losses as criminals was demonstrated when some Americans commented on the blogs that conveyed the demise of Steve Jobs, the hero of immense innovative spirits of Apple fame in modern era.

People outside USA hailed and appreciated the innovations which he endowed to the world. But some in USA did not see him in the same light and, while appreciating his innovations, found fault with him for shipping American jobs to China. This is in fact American way of looking at Steve Jobs’ employing some 700,000 workers and 30,000 engineers in Apple’s manufacturing units in China as reported by Walter Isaacson in recently released Jobs’ biography.

National minded Americans too prefer cheap goods

According to the biographer, Steve Jobs had justified his action when he had met Barack Obama in 2008. He is reported to have told Obama that he had to shift his production units to China because he could not recruit 30,000 engineers in USA to head those floor workers and could not hire 700,000 floor workers in USA at the salaries paid to Chinese workers.

The result was the production, for example, of the iPad designed by Apple in USA in Fox Conn Manufacturing Facility in China at a fraction of the cost at which it would have been produced back at home. So, iPad was made available at a competitive price and within one month, those nationalistic minded Americans bought two million units with no consideration whatsoever about the American jobs which Steve Jobs was alleged to have killed at home.

So, consumers were mindful of getting the best for themselves by buying iPad cheap. None of them showed signs of willingness to buy them at a higher price had it been produced by high cost fellow citizens in USA.

So, the plea of Obama when he asks American companies to produce back at home has two connotations: American companies should hire local labour at higher wages and American citizens should buy those high priced products because it leads to the re-claiming of that great nation now being lost to Indians and the Chinese. This is the political version of CSR designed for private companies: A Political Social Responsibility that promises the building up of a great nation by enforcing economic nationalism on its citizens.

Steve Jobs’ advice to Obama: produce skills locally or perish

Steve Jobs’ biographer also says that Jobs, whose ethic was to tell the truth to face however much it is unpalatable to his listener, has also warned Obama that he would be a one-term President if he does not take action to reform US education and produce the needed skills among the Americans; Jobs has even suggested that US should have a liberal migration policy and offer citizenship to those bright students from abroad, especially those from China and India, so that they could be hired by American companies.

After four years of Jobs’ suggestion, Obama has in his State of the Union Address has agreed to go only halfway this year: he has suggested giving citizenship to the children of numerous illegal immigrants because they had been born and bred in USA. But the beneficiaries under this scheme are the children of illegal immigrants from Latin America and they fall short of the category bright students from India and China whom Steve Jobs meant when he made the suggestion to Obama.

The ominous rise of economic nationalism

Economists wonder whether ‘economic nationalism’ could rescue USA. The global production integration is a process that has started and cannot be halted at this stage without grave consequences to a national economy. When mercantilism was at its height and ruining European economies, Adam Smith fought it valiantly in the late 18th century. Fortunately, Great Britain was wise enough to go along with Smithian prescription though it was not politically palatable at that time. Other European nations which did not do so had to suffer economically.

Today, there are many Adam Smiths throughout the globe advocating free trade, free competition and global integration of economies together as has been shown by the experts who had been assembled for WEF now taking place in Davos. The ground conditions in USA are not yet fertile for that country to create a massive number of manufacturing jobs there.

As MIT economist Daron Acemoglu has said in an interview with the journal The Region of the Federal Reserve Bank of Minneapolis in September, 2011, American workers should train themselves to handle new jobs that are emerging in new fields like services, innovation and designing if its chronic unemployment problem is to be solved. It is retraining and skills development and not economic nationalism that would rescue the USA.  It will therefore be a well-played political game for Obama to advocate economic nationalism, but it is ominous for creating long-term economic prosperity.

The same is true for any other developing country which too plans to practice economic nationalism, whether to solve chronic balance of payments problems or not, by divorcing itself from the new global production process.

(W.A. Wijewardena can be reached at waw1949@gmail.com.)