Sunday, March 22, 2009

The Financial Crisis, Protectionism and Bullshit

Katinka Barysch's recent article in Open Democracy on the current financial crisis and the G20 neatly summarises the conventional view of how to retrieve the situation. She could have managed an even neater summary by simply writing "more of the same - but with a little closer regulation". That, effectively, is the spartan recipe that Gordon Brown and many, if not all, economic soothsayers are trying to thrust down the gullet of a bewildered public both in the West and elsewhere. What has to be avoided they tell us - in dutiful obedience to received opinion - is a new round of protectionism, like the "disastrous" one of the 1930s. Nicolas Sarkozy has come in for special criticism for reportedly "tying" financial support for French car-makers to the employment of French workers.
In the new world order of global capitalism, governments can't be allowed to use national funds to protect national economies. International treaties on free trade and globalization oblige them to ignore the problems and, indeed, the wishes, of their own electorates if these conflict with the prevailing orthodoxy. Unfortunately, it is hard to see how this constraint is anything other than fundamentally undemocratic.
Such is the dilemma that Sarkozy is confronting in France where a highly politicized citizenry expects the President to be first in line to protect them in times of economic difficulty. Assertions that they will be better off losing their jobs now so that " in the long run" they can earn a little more later cut no ice with the French. Nor should they with any other electorate. Do we have to keep reminding ourselves of Keynes's warning about what the long run means?

Anti-protectionist rhetoric is misleading in many respects - too many for the compass of a short note such as this. I will briefly touch on just two that seem to me of particular importance.
First, if the free-traders are to be believed, we have been living - at least up to the onset of the crisis - in a world of largely free and unfettered commercial exchange. Nothing, however, could be further from the truth. All western countries routinely provide a variety of overt and covert types of support for nationally-based industries, examples of which are export marketing assistance, investment incentives, tax holidays, infrastructural projects related to plant location, special utility rates, farm subsidies, manipulation of exchange rates and so on. In the United States, a great deal of assistance to US corporations is provided at state and municipal levels, and through regional agencies such as the Tennessee Valley Authority Economic Development Division, and it passes below the visible horizon of foreign onlookers. In fact, the range of protectionist devices is limited only by the ingenuity of the economists and bureaucrats who are paid to invent them. While most political leaders in the West pay lip service to free trade, many governments beaver away behind the scenes to evade its implications - as the French President appears to be doing; and so too the President of the United States. Where the working population is in trouble is if they find themselves governed by leaders who really believe in the free trade nostrum - like Gordon Brown and Peter Mandelson.

Here we come to our second point. The vast sums being ploughed into economic recovery by western governments is to be paid for by - you guessed it - western taxpayers. So what an obsessive adherence to open commercial borders may mean is that a good proportion of the £billions and rising that Gordon Brown and co. are putting into circulation could be going straight into productive activities in some other part of the world, leaving the UK's unemployed scarcely better off than if the sums had not been spent at all; worse off, in fact, when the increased indebtedness is taken into account. The question that Obama and Sarkozy are trying to tackle, but that no UK politician or commentator appears to acknowledge is this: why should national taxpayers foot the bill for an economic stimulus package that is not aimed primarily and fundamentally at employment creation in their own country? Put more simply, why should I pay for someone in Slovenia to make cars? Or someone in China to make t-shirts? Are the Slovenian cars and the Chinese t-shirts truly cheaper? In an era of full employment, they might be; but in conditions of unemployment, their prices rise exponentially. They rise first because I am financing the production, and second because I am financing my own unemployment. In this light, free trade, in the version foisted on the world by the West, is fundamentally unstable. It works most efficiently for countries with full employment; but. as unemployment increases, its efficiency decreases. For developing countries with high unemployment it is plainly nonsensical. And it is not the way any of the developed countries achieved their privileged status, as Cambridge University 's Ha-Joon Chang convincingly demonstrates. See also his recent interview with Democracy Now.

As I write this, the UK car industry is reportedly fighting for survival. Trade theory has it that industries that falter should be left to die, while their workers should retrain for some other - unspecified - activity in which the country enjoys an equally unspecified comparative advantage. In reality, it is not lack of competitiveness that is hitting the UK car industry, but the severity of the recession. It is also hitting the industry in many other countries. Car manufacturing plants that survive will not be the most competitive but the ones receiving enough state aid to nurse them back to health.
In the current conditions of crisis, competition is not taking place between semi-comatose companies, but between politicians. The smartest (Obama and Sarkozy among them) will ensure one way or another that their key industries live to fight another day; those who are wedded to extremes of free trade ideology can be assured of one thing: they will lose the next election.