Rise of Economic Nationalism

“Globalization presumes sustained economic growth. Otherwise, the process loses its economic benefits and political support.”

Paul Samuelson

Context

Guess what Corona virus pandemic did that even Soviet union could not? It has shown the world decaying of the capitalist system. Spread of the virus has lead to various forms of lock downs across the globe. This caused multiple problems in economic globalisation to erupt, which made each country look to the protection of its “own” economy. Now this funda of “own” economy and local over global is what we will focus upon. So stay tuned.

Is it the end of Globalization?

One of the devastating impacts of Covid-19 will be that nations are going to look even more inwards. Rather than look beyond its borders, nations will focus on their narrowly-defined national interests.

• Reflecting on the debate on globalization, one may wonder whether the world was entering a new, uncharted territory or if Covid-19 was simply accelerating a push-back against globalization that has been taking place for some time with the rise of economic nationalism across countries.
• Here’s a hint: Globalization has undeniably been in retreat for some years now and the coronavirus pandemic is likely to exacerbate this process.

Dawn of Economic Nationalism

What is Economic Nationalism?

• Economic nationalism, also called economic patriotism and economic populism, is an ideology that favours state interventionism over other market mechanisms.
• It connotes not only controls of external relations, but also to mobilize internal resources.
• It tends to see international trade as zero-sum, where the goal is to derive relative gains (as opposed to mutual gains).

What happens in a nationalist economy?

• Economic nationalism tends to emphasize industrialization (and often aids industries with state support), due to beliefs that industry has positive spillover effects on the rest of the economy, enhances the self-sufficiency and political autonomy of the country, and is a crucial aspect in building military power.
• It imbibes policies such as domestic control of the economy, labour, and capital formation, even if this requires the imposition of tariffs and other restrictions on the movement of labour, goods and capital.

Its evolution – A walk into the past

• References to economic nationalism appeared initially in the years following World War I when the international economy was subjected to high stress arising out of the economic and political dislocation inherited from the war.
• A similar explanation of the term followed after the Second World War.
• In this period, economic protectionism was seen as an alternative to revive damaged economies after the world war.
• The role and status of the ‘state’ emerged to be essentially important in managing economic affairs. The Soviet Union presented a model where state planning was central.
• Under this model where the state has been the prime facilitator of, means of production and distribution, the public, as well as the private sector, growing at the same rate.
• This model consolidated the idea of economic nationalism against that of western inherited capitalism.

Facets of Economic Nationalism: “ME FIRST”

Proof that economic Nationalism existed way before the COVID era.

1) American Protectionism

• America First: USA remains the main proponent of economic nationalism, under the “America First” doctrine of the Trump administration.
• US-China Tussle: Trade war had been launched through the imposition of tariffs and China’s plan for economic and technological development had been declared an existential threat to US national security.
• It has been accompanied by a series of bans on Chinese telecom companies and the launching of a global campaign by the US to have its allies exclude the Chinese company, Huawei, from the development of 5G networks.

2) Chinese Expansionism

• China’s strategy is, of course, no different than the one pursued by the US.
• Backed by its great economic and military might, China seeks to achieve the same objectives using its economic prowess and its pole position in the global manufacturing chain to achieve the said objectives.
• The ambitious ‘Belt and Road Initiative’ is the testimony of its economic nationalism.

3) EU contractionist tendencies

• Brexit: Classic example of economic nationalism.
• Europe, too is taking a turn towards economic nationalism.
• Many EU countries have been vocal as saying “in the long term we cannot depend on Asia, on China for goods that are strategic for us, whether in the aerospace or medical sectors or in other supply chains.”

4) India’s ‘self-reliance’ Mantra of being ‘Vocal about Local’

• When PM romped to a massive and decisive victory in 2014, neo liberal globalists believed that India would unflinchingly embrace globalisation and undertake economic reforms.
• Indeed, at global forums, India often batted for economic globalisation, slammed rising trade protectionism.
• The late Arun Jaitley, in his 2018 budget, admitted to this when he made a “calibrated departure” from the decades-long policy of cutting tariff rates.
• But there has been a bit of economic nationalism here as well.
• The resolve to augment domestic manufacturing in India – ‘Make in India’ campaign is a case for local over global.
• Earlier, India chickened out at the last minute from joining the 16 members RCEP agreement to protect local industry.
• Likewise, the central government has decided that it will not buy goods or services valued less than 200 crore rupees from global companies.
• The recent amendment of the FDI rules by India so as to discourage Chinese investment in India – something that may not be consistent with India’s WTO obligations – also smacks of protectionism.

Why there is a rise in the popularity of Economic Nationalism?

• Not all countries benefited equally from the economic liberalism of the 1990s. It had its winners and losers.
• National economic recoveries, i.e., nationalistic interests, have proved out to be paramount in the worldwide pandemic.
• Economic nationalism to some extent can provide the framework within which economic development is possibly providing a way for savings to accumulate and investment to grow.
• Goods when made locally help to protect local entrepreneurs, reduce imports and one can attract foreign investment.

Issues with Economic Nationalism

• Becoming too nationalistic at the expense of one’s trading partners can be counterproductive.
• It is an approach that creates conflict. Being more nationalistic tends to be a zero-sum game in an increasingly interdependent world economy, where countries depend on other countries for their economic and political and national security well being.
• When companies cooperate, they can become more competitive.
• When they are more competitive, they hire more workers, pay higher salaries, and otherwise contribute to economic growth.
• ‘Vocal about local’ epitomizes this trade protectionism and pushes a flawed and oversimplified economic logic that domestic manufacturing can be resurrected by actively encouraging (even forcing) customers to buy products ‘made in India’.
• However, the policy measures adopted to achieve this goal are unsound as they mark a relapse to protectionism.
• India’s economic experience of the first four decades after independence amply demonstrates that a protectionist and a highly controlled economic model do not yield a competitive and proficient manufacturing sector.

Analysis from India’s perspective

The government evidently wants to strengthen local businesses and make them globally competitive so that India can become the next manufacturing hub, like China. The prime minister has perhaps taken the disruption caused by the pandemic as an opportunity to push India towards developing its manufacturing prowess and emulate China’s export-driven rise.

Economic Nationalism – chequered past in India

• Era of license-permit raj, umbrella of protectionism and import substitution lead to lack of competition and inefficiency in domestic businesses.
• The economy suffered a distortion that led to eventual bankruptcy and brought India to the brink of defaulting on international debt obligations in 1991.

Is India ready to go down that path again?

• If localisation is an increasingly popular global policy response to the lessons taught by the pandemic, it is not clear how India may suddenly become the next manufacturing powerhouse.
• India doesn’t already dominate global supply chains, lacks the manufacturing prowess of China and is faced with a world where countries are busy ring-fencing risks and pulling up the drawbridge.
• The danger is that in its push towards becoming more self-reliant and promotes domestic manufacturing; India may end up taking an even more unequivocally protectionist turn.

Some problems to solve before we head to the nationalist road

Problem I- India’s inherent- Investment problem

• Today, globalisation is seen from the lens of the recipients of foreign investments.
• The receivers of foreign inflows are at the centre of things, the nuclei around which capital revolves.
• The power of FDI destinations will grow in the near future, as MNCs try to combat the twin pressures of protectionism and localisation.
• To achieve its ambitions, nations will simultaneously try to woo foreign investment despite the growing nationalism.
• In fact, economic xenophobia will become the means to do so in perverted and inverse globalisation.
• As was the case with Make in India—and now Make in Thailand and Make in Vietnam—nations will want MNCs to invest capital and introduce technology in faraway destinations.

Problem II- Structural Reforms And Labour Lessons needed

• To cast a ‘nationalistic’ obligation on them to boost domestic industry instead of undertaking reforms that would improve the domestic industry’s competitiveness is fallacious.
• Moreover, to expect the world to buy goods ‘made in India’ when we close our markets to foreign goods would be like living in a fool’s paradise!
• The coming decade will be dominated by automation, robotics, AI, 3D printing and smart techniques that will aid economic nationalism, protectionism and localisation.
• This marks the end of the ‘Age of Industrial Revolution’, and ushers in Industry 5.0.
• Post-crisis, nations will seek opportunities to reform and change labour as well as laws that govern it. Some, like India, will hope to please businesses at the expense of labour.
• Recently several states increased the work hours in factories and made it easier to sack workers and more difficult to form trade unions.

Way Forward

• India should work to strike a balance between making itself an integral part of the global supply chain (like China) while promoting local industries and empowering small businesses so that they can compete with the world’s best.
• The focus must be making India a very competitive nation so that our local companies, products and services are purchased by the domestic consumers as well as enthusiastically by consumers around the world.
• One aspect of being resilient is that our local companies are as competitive as possible.
• India’s competitiveness will be unshackled not by clamping down on imports and asking consumers to go local, buy local and promote local.
• Rather, small businesses and local producers will become more efficient and even globally recognised in a competitive environment aided by a government that makes doing business easier.
• Until that transformation happens the argument that we can suddenly become world-beaters by turning self-sufficient is not convincing.

For the World to do better,

• The rhetoric of global power cannot suddenly change to the globe of power.
• Squeezing the global economy through individual version of protectionism is lethal at the moment.
• The world may not spend time deliberating the merits and demerits of globalization after the pandemic is contained. But, it should work together for a common and larger objective and approach for all.
• Only structural reforms, not the dismantling of present architecture  can do best to resolve these issues.
• India and other developing countries should  work together to reform the present WTO structure for everyone’s  benefit and particularly for the ones which are disadvantaged.
• The need of the hour is to explore the relationship between comparative advantage and optimal trade policy where all countries are relatively benefited.

Conclusion

Nationalist moves are crucial because they will allow nations to reduce dependence on exports and foreign markets, curtail imports or foreign suppliers and enhance economic nationalism through local consumption of domestic goods and services.

But obviously we do not want trade wars. Covid has also taught us the necessity of international collaboration and co-operation. Unlike US and China, India cannot afford to pursue such obscure economic approaches. We may end up making a terrible mistake if we consider international trade to be a zero-sum game.

Instead of turning its back on globalisation, India should play a leadership role in strengthening the international economic architecture, which populists in the West want to demolish, premised on a win-win relationship that produces mutual prosperity and global peace.