Globalisation VS Economic Nationalism

What is Economic Nationalism?

Economic nationalism refers to a set of policies which argue the domestic control of land, labor and capital. Economic nationalists believe that a closed economy does greater good to the people of a country than integrating the national economy to the world economy. They question the advantages of a liberal trade policy and free market economics.

Globalization, on the other hand, prescribes a completely opposite behavior. It involves integrating national economies to the world economy and free movement of capital, labor, and other factors of production. Globalization saw its peak in the late 20th century and the early years of the 21st century.

It was all good; the times were of growth and prosperity. And then came 2008; it was the year of the worst financial crisis after The Great Depression of the 1930s. It all started with a housing bubble in the United States; it spread like an epidemic in the entire world. And from then on, economies, particularly the emerging ones, have become skeptical about the advantages of economic integration.It cannot be denied that the extent of globalization was the most obvious during this Financial Crisis of 2008. It spread like wildfire; the weaker ones got more severe burns. In the words of the English statesman Lord Palmerston, “Nations have no permanent friends or allies, they only have permanent interests.” Many countries therefore look forward to focusing on domestic economic activities rather than engaging in a global economic system.

From here on, I would like to limit the scope of the article to India only. In 1991, India opened up its economy, more so reluctantly, to international trade. The government did away with a protectionist policy and excessive controls on industries. Till now, the whole country was riding shotguns for its domestic producers, who, as policymakers argue, were too weak to face competition from the international market. But the country was on the brink of defaulting; it was in major crisis. In order to qualify for a loan from the World Bank and IMF, the country decided to put down its shields and allow free movement of capital and labor.

From then, the country has come a long way. A 100% FDI is now permitted in agriculture, mining, petroleum & natural gas, defense, telecom services, retail (single brand), asset restructuring companies, airports, helicopter services, courier services, construction, industrial parks, trading, e-commerce, NBFC’s and pharmaceuticals. It is the 11th most favored destination for a multi-national company to set up their headquarters, as per a McKinsey Global Institute Report.

 

But lately, the government of India has restricted foreign capital inflows in theform of equity and loans due to a staggering economy with a falling currency. The job creation at Indian companies is hitting new lows, the GDP growth rate which was a satisfying 9% in 2009-10, was a disappointing 4.4% in Q1, 2013-2014. The fattening Current Account Deficit, rising imports, speculation, the Federal Bank withdrawing the stimulus in the United States along with low growth and policy inaction led the Indian Rupee’s downhill rally.

Normally whenever you get a fever, a good doctor will prescribe a medicine that will fight the bacteria and cure the symptoms; why would somebody go to a doctor who blames the thermometer instead? My point here is that the Indian economy was suffering and the depreciating rupee was just a symptom. The global markets said that it was okay to pay 63 rupees for a dollar, and here in India we were fighting against the call of the international markets. As a result, gold imports were slashed, the FDI cap in commodity exchanges was reduced to 23%, and speculation was barred. It reduced the automatic limit on corporate investments overseas to equal to the net worth from four times the net worth and lowered the limit under the liberalized remittance scheme for individuals to $75,000 from $2, 00,000 to conserve foreign exchange. The RBI also restricted the individuals from using the liberalized remittance scheme to acquire immovable property overseas.

And the rupee continued to crash. It hit a lifetime low of 68 for a dollar in August 2013. And then came a saviour. The Reserve Bank of India got its new boss, Raghuram Rajan who has also been the Chief Economic Adviser to India's Ministry of Finance in the previous year and the Chief Economist at the International Monetary Fund from 2003 to 2007. With a supply side economist coming to take the lead, the markets reacted positively on his first day as the RBI’s new boss. The sensex soared 412 points to a three week high and the rupee went up to 65.5 against the dollar, as Rajan announced plans to revise and strengthen the monetary policy framework and liberalise the markets as well as curbs on investment and position-taking. He also said that steps would be taken to strengthen financial infrastructure and attract capital inflows and stressed the need for faster, broad based, inclusive growth.

As most free market enthusiasts argue, curbing demand and not taking the supply side measures does not solve our problems. In the short term, the currency may go in the green zone, but when the larger picture is seen, it appears very clear that the signals that an economy is sending in the world when it imposes capital controls are not very positive. The economy is no more favored as an investment destination by foreign institutional investors. Exiting FII’s translates to higher CAD and a weaker currency.

The economic nationalists argue that the benefits of globalization are unequal: the developed countries that have more control over the supply chains and logistics get more benefit than the developing countries. The rich become fatter and the poor become poorer. This was acceptable when the growth rates were high. In times of low growth rates, no country wants to be at the losing end. The effect of an economic decision in one country is not limited to just that country. So it’s not just your economic policies, it’s what Obama does in USA and Angela does in Germany.

In the current scenario, it is difficult to make a choice: be happy with what you have, or make use of the best available in the world. Surely, globalization has come with its pros and cons. Each stage of production is undertaken in the most efficient manner. Free markets mean globalization of capital and larger capital flows in countries have sometimes led to inflationary pressures which force the government to increase the interest rates which again hinders growth. Also globalization implies that the supply chains are international which makes them more vulnerable to changes in currency values and cost structures.


Considering everything, I would say that having closed economies is not a solution to our problems. In fact, it might not be morally correct. If A wants to buy a good that has been made in Africa, which is because he feels it has more utility than a good produced in his own country. Now if A’s country bans any such import, this denies A any choice. Also it makes the producers of his country complacent; when they don’t face any competition, they might not work hard at all to serve A and the likes. Free trade makes everyone rich. It gives consumers cheaper goods, workers better wages and businessmen greater profits. Protectionism has had worse effects on domestic workers than the coming of MNC’s in the countries. Creative destruction, by the way of allowing free competition in the economy, ensures that it is the customer who has the power. Only efficient businesses survive, and the inefficient ones have no way else but to improve themselves. Why blame others for our own inefficiencies? How long does a father keep guarding his sons?