In one of last month issues of the Economist, they opened up quite an interesting topic on how the consequences of the financial crisis have affected globalization. As we all know an immediate reaction to the sudden credit stop in 2008 was a strong decline of international trade (see graph below). As jobs in the real economy were being lost, and as many companies went under, a paradoxical solution of many quack economists and the panicking public was a plea for protectionism of domestic jobs and industries. Even though this wasn't the main debate point at the time, there were indeed strong advocates of this necessity to protect domestic industries via higher tariffs and quotas, among other things. To save domestic industries from foreign competition in these tough times - a campaign well accepted by many interest groups seeking protection.
|Data taken from WTO|
However, despite protectionism being anticipated as a likely outcome (as it happened during the Great Depression), it seems that the world has gone in a slightly different direction. What we have now as a consequence is some form of "gated globalization" - not a reverse of globalization, but a more carefully managed interventionist style. Perhaps the difference in responses to the recent Recession and the lessons learned from the 1930s prevented the forces of protectionism to reinvent themselves (and the fact that today we have the WTO which prevents hard-line protectionism), but many interventionist patterns remained. Calling for more intervention and more regulation is an expected consequence when people lose their trust and confidence in the system, despite the fact that it was the artificial demand caused by misplaced regulation and a series of other factors that led to systemic instabilities (particularly in Europe). The people have a hard time realizing the true causes and think an omnipotent government can fix the system. So far it has failed in this attempt, but it's still not giving up, particularly in the developing countries.
Probably the biggest outrage of the general population in the Western world is aimed at the bankers (widely perceived as the main culprits of the crisis). And even though the bankers did play a big role, they cannot be the only ones to blame (as mentioned earlier). Regardless of the facts, people need to find an enemy and the bankers seem like the perfect one. The consequence are stricter regulations on banking standards, and consequently a drop in capital flows (they've fallen to a third of their level in 2007), and a well anticipated drop in bank lending - which is of course constraining the recovery of the real sector. Newly imposed capital controls and bank ring-fencing are constraining investments, as confidence is still low due to high policy uncertainty.
|Source: The Economist|
In addition to capital controls, much worse measures are being implemented worldwide, despite the WTO's efforts to curb them:
"New impediments—subsidies to domestic firms, for instance, local content requirements, bogus health-and-safety requirements—have gained popularity. According to Global Trade Alert, a monitoring service, at least 400 new protectionist measures have been put in place each year since 2009, and the trend is on the increase.
Big emerging markets like Brazil, Russia, India and China have displayed a more interventionist approach to globalisation that relies on industrial policy and government-directed lending to give domestic sellers a leg-up. Industrial policy enjoys more respectability than tariffs and quotas, but it raises costs for consumers and puts more efficient foreign firms at a disadvantage. The Peterson Institute reckons local-content requirements cost the world $93 billion in lost trade in 2010."
The typical protectionist response of those who don't understand the basic laws of international trade. Just remember the comparison of Brazil and Mexico over the free trade vs protectionism debate, and who is likely to emerge as the victor. The performance of all the gate-builders is disappointing, to say the least. Their policies are misfiring. Their growth, their productivity, as well as their currencies are declining, so now some of them are rethinking their strategies.
International economics is really hard to understand for most of the people, as they view it from a really narrow perspective: let's protect our domestic industries and encourage them to export, and this is the best way to achieve prosperity. Like the classical mercantilist view, the idea is doomed to fail, since the protected domestic industries will always underachieve precisely because of the protection. They will never operate under the proper market conditions and will never achieve their strength through competition. In economics it's all about incentives. If you don't give the domestic industry an incentive to compete and if you over-rely them on government support and subsidies, then they will never fully flourish on the international market and are bound to fail soon enough. This is true for rich countries as well - just look at the US automotive industry. The proper response to revitalizing the domestic industries is - and always will be - more competition, not less!
Finally, I call upon the opening paragraph of the earlier quoted article:
"Imagine discovering a one-shot boost for the world’s economy. It would revitalise firms, increasing sales and productivity. It would ease access to credit and it would increase the range and quality of goods in the shops while keeping their prices low. What economic energy drink can possibly deliver all these benefits?
Let's hope the West realizes this soon enough and once again leads the world economy to open up and put this crisis behind us.