Satyajit Das: Rise of economic nationalism is threat to global prosperity

Midweek View: In a virtuous circle, globalisation both created and relied on strong economic growth

The post-war period saw remarkable expansion in global trade and capital flows, most notably after the collapse of the Berlin Wall and reintegration of China, Russia and Eastern Europe into the world economy. In a virtuous cycle, globalisation both created and relied on strong economic growth. Individual countries sacrificed national interest as benefits of integration outweighed costs.

Enlightened self-interest underpinned the system, as long as it delivered prosperity for most nations. For many, following the global financial crisis, the advantages of greater economic and monetary integration are now less obvious. Reversal of the trend to global integration and rise of new nationalism, including more closed economies with limited trade or capital flows, is driven by several reasons.

First, economic growth overall has slowed and is likely to be tepid for an extended period. By closing their economies and focusing domestically, some nations believe that they can capture a greater share of available growth and deliver greater prosperity for their citizens.

Second, emerging nations, less affected by the crisis, believe that the benefits of participation in the global economic system, which previously assisted improvements in their living standards, are now diminished. They are wary of having to pay for the problems of many developed countries.

Third, supply chains for goods and vital commodities are international rather than national. This makes them sensitive to changes in cost structures, currency values and transportation costs and increases vulnerability to competitive pressure from other nations or localities. It may also drive a shift to more closed economies.

Fourth, the financial crisis revealed that integration reduces the effectiveness of a nation's economic policies, unless other countries take co-ordinated action. Government spending to support the domestic economy may be dissipated through financial leakage, boosting imports rather than promoting domestic demand, employment, income and investment. Tax and industrial policies can be rendered ineffective if other countries do not follow suit. The new economic nationalism is manifesting itself in different ways. First, despite oft-repeated statements at G20 meetings about the importance of free trade and avoiding the mistakes of the 1930s, trade restrictions are increasing. Multilateral trade agreements are giving way to bilateral deals motivated by protection of national industries and iconic businesses, finding markets for exports and maintaining employment, incomes and competitive advantage.

Second, subsidies, government procurement policies favouring national suppliers, "buy local" campaigns, preferential financing and industry assistance policies are used to direct demand.

Third, direct intervention, artificially low interest rates and quantitative easing are deliberate policies to manipulate currencies, assisting individual countries to capture a greater share of global trade, boosting growth. Devaluation is also being used to reduce real debt levels by reducing the purchasing power of foreign investors holding a nation's debt.

Fourth, free movement of capital has become increasingly restricted. Since 2008, the growth in cross-border capital flows has slowed. Nations with high levels of government debt that face financing difficulties seek to limit capital outflows. Low interest rates and weak currencies in developed economies have led to destabilising capital flows into emerging nations, with higher rates and stronger growth prospects, driving up the value of currencies and creating inflationary pressures. Many countries have implemented controls on capital inflows.

Fifth, nations are increasingly using regulatory initiatives to gain advantage. Under the guise of strengthening regulation of financial institutions to prevent future crises, complex regulations whose extraterritorial application may give some banks a business advantage are being promoted.

Evidence of the end of globalisation and greater integration is mounting. Growth in trade and cross-border investment that has underpinned prosperity and development is being reversed in a historical shift.

Satyajit Das is a former banker and author of 'Extreme Money' and 'Traders, Guns & Money'

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