The Return of Economic Nationalism?

Conventional wisdom says globalization is grinding to a halt. Supposedly, the recession means free trade is down, the worldwide gambit is over, and open markets lost: Protectionism is up, isolation is on the onset, interventionist states won, and we’re spiraling into a 1930s-style “save-yourself” vortex. In the past few weeks, two articles in the most popular globalization-advocacy journal—The Economist—have specifically bemoaned the coming tide of “global disintegration” and the specter of worldwide “economic nationalism.”

First off, everybody needs to cool it: Globalization is not going anywhere anytime soon. Second, nationalism never departed. The claim that countries have been growing over the past 25 years because of pure market deregulation across the board is false. The idea of the “unfettered market” is nothing but a wild myth.

Since World War II—even during the supposed libertarian love-fest and free-market free-for-all of the 1980s—states have invested in their people as well as forsaken integration and cooperation when prudent. Market intervention has always been part of the globalization process. But, too often, the market is viewed as a multilateral institution and the state as a pesky force of isolationism. Despite this false perception, we should continue to see global cooperation and so-called “nationalistic” government action in tandem for the foreseeable future. They’re not mutually exclusive.

Over the past two decades, much of the world profited from peace, low inflation, and the bringing of billions of people (mostly the emerging middle classes in India, China, and Brazil) into the economic fold. Much of the world also suffered: Globalization has not always encouraged confidence and enhanced security for everyone. “Free trade” too often means tariffs on the primary exports of developing countries. “Development assistance” too often means developing economies must submit to rules that prohibit or hinder investment in their own infrastructure and people—the kind of investment responsible for the United States’s own miraculous growth in the 19th century. The national interests of developed countries have shaped the playing field from the start.

All countries are guilty of self interest, no doubt. Emerging markets have responded to an uneven playing field with their own brand of “economic nationalism.” Indeed, Harvard economics professor Ken Rogoff notes that India’s comparatively “stringent restrictions on international capital flows” saved it from the brunt of the recession. The point is that state intervention and national interests have been complicated through globalization, not erased.

Economic nationalism and state intervention can be good or bad, smart or dumb, and in the coming years we need to be pragmatic and distinguish. Globalization proponents—especially those who support the phenomenon on the condition that it’s better managed—have nothing to fear from economic nationalism and state intervention per se. The economic interconnectedness of the world is not disappearing, and we will need to address most problems collectively. But this time we need to be more careful not to put all of our eggs in one basket. Many forms of economic nationalism can help with that.

Good forms of state intervention include stricter regulation for banks, especially on the part of the developed world. Banks have to be stopped from taking irresponsible risks overseas, especially when things are good and risk looks tasty. Leverage must be capped. Some firms must be nationalized. Another good form, especially for developing countries, is job creation through investment in local infrastructure. Ineffective forms of nationalism include tariffs on the primary exports of developing countries, arbitrary trade disruption out of fear, and stricter immigration laws at a time when immigrants are hurting most.

Although it’s true that many kinds of protectionism would at this point be detrimental, others might not be. Global trade is down substantially, and closing economies is not the answer for anyone, but some protectionist measures are necessary to sell international cooperation to people in developed countries (see the “Buy American” clause, which is no Smoot-Hawley tariff).

State regulation, protection, and intervention do not necessarily mean economic isolation from the rest of the world. But, when faced with a choice, we should certainly favor regulation over protectionism. If strong global regulation doesn’t happen, then the most sensible thing for many countries will be to shelter themselves from the rest of the world.

And yet, although we need stronger international regulatory institutions, especially for finance, the onus for creating those is on national governments of the developed world (more nationalism). Right now, international institutions are paradoxically both indispensable and ineffective. They can’t set up the new architecture. Strong states must lead the way by regulating at home, albeit hopefully with multilateral principles in mind.

The crisis has so far led to unprecedented international cooperation. Three weeks from now, the G-20 will meet to brainstorm some solutions to the recession. There, the powers must decide how to balance the market and the state intervention in many different cases. They will undoubtedly recognize that “economic nationalism” has always been under the surface of globalization, implement the good aspects of state intervention and protection, and steer clear of the others.


Raúl A. Carrillo ’10, a Crimson editorial writer, is a social studies concentrator in Lowell House. His column appears on alternate Fridays.