Antidotes for Economic Nationalism

Calmfors, L.; Corsetti, G.; Devereux, M.P.; Honkapohja, S.; Vives Torrents, Xavier Publisher: SP-SP: Centro Sector Pblico - Sector Privado Original document: Nacionalismo econmico Year: 2007 Language: Spanish Note: This article is part of "The EEAG Report on the European Economy 2007," prepared by the European Economic Advisory Group at CESifo. English version is available on its website.

Economic nationalism is defined as any interference by a government in private transactions benefiting the companies in that country. Basically, it means one-off discretional interventions that aim to protect the national economy. Such interventions may end up discriminating against the residents of other European Union (EU) states, which goes against numerous European treaties. For instance, it is not efficient to favor a national company if a foreign company is capable of providing the same good at a lower cost. Nevertheless, despite their pledge, some countries are intervening in financial markets to block or alter cross-border mergers involving prominent national companies. Should economic nationalism be combated? The European Economic Advisory Group at CESifo, which prepared "The EEAG Report on the European Economy 2007," thinks so and believes it will require coordinated antitrust policies and the phasing out of public ownership of companies operating in a competitive environment. First off, they say there must be more effective antitrust policies, which would be achieved by getting regulations in unison, coordinating the regulators and establishing European regulatory authorities. The national regulatory commissions should be integrated by sectors into a European system with common rules, which would help avoid opportunism. Also, the barriers put up by other member states should be lifted simultaneously, in order to avoid strategic maneuvering and positioning on the part of large companies. Regarding state ownership, the experts recommend eliminating it by implementing a European regulation that restricts companies from full or partial public ownership. Government support for economic activity can only be justified from an economic standpoint where there are market failures, and in those cases, it should be based on taxes and nondiscriminatory subsidies. Types of Economic Nationalism These protectionist practices can be carried out by governments seeking to improve the welfare of their nation's citizens or through policies driven by private interests, and could materialize in a variety of ways. One possibility is to offer subsidies or special conditions to influence the choice of location by large companies. However, this is not economically justifiable and could prove quite costly, as seen with the production of Airbus aircrafts scattered across the various shareholder countries. If the goal is to ensure that the leading brand in a given sector be nationally owned, the government could block foreign companies from acquiring national firms or support the acquisition of foreign firms by domestic companies. This is what the French Government did in preventing Italian giant Enel from taking over Suez, a private banking group. It supported the merger between Suez and Gaz de France, a natural-gas company with a national monopoly. Another way to intervene is through state aid. Instead of subsidizing an industry, product or activity, the government chooses a bunch of national winners and covers their losses (if there are any). Bull, a French computer manufacturer, lost 500 million Euros in 2002, but has survived thanks to state aid. A country can also allow political intervention for securing contracts in national industries, such as the oil or arms sectors, or impose its own standards in order to boost the value of their national patents, as has happened with the GSM mobile phone standard, a European-developed product. Government Motivations Why the rise in economic nationalism? One of the main arguments used is that of national security, based on the idea that in strategic sectors - whose impact goes beyond the economic realm - direct foreign investment must gain prior government approval. Another argument often cited is the desire to preserve or spur on employment by offering subsidies to deficient industries or by blocking foreign acquisitions so as to avoid jobs from being destroyed. Although improving the job market is a legitimate goal, using economic nationalism to achieve it is likely inappropriate and ineffective.

The argument of attracting large companies is also used to justify government intervention. Some countries offer subsidies or special conditions to convince foreign companies to locate within their jurisdiction. Other reasons for the rise in economic nationalism include the transfer effect, which happens when a national government tries to maximize the well-being of its citizens by ignoring that of foreign residents. Political benefit consists of using nationalist policies for the good of the politicians and the elite, such as by using state-owned companies for political financing. Economic Costs for Society Nationalist policies tend to divert resources from activities of greater social benefit toward others that are inferior in that regard, when priority should be given to projects that yield greater social returns. Furthermore, these measures make it difficult to efficiently assign resources, as they reduce incentives and destroy market discipline. A company that receives state aid is not very concerned about cost cutting, improving the quality of its product or innovating. One example of this is the Crdit Lyonnais scandal, in which political interference led to disaster for this national powerhouse. Also, economic nationalism forces bad decisions on companies, leaving them with productive inefficiency. The case of Airbus illustrates this perfectly: The proliferation of production centers reduced productivity and had a negative impact on the quality and costs of the workforce. This type of interventionism also brings about competition distortions; a company backed by the guarantee of the state has an advantage over its competitors. It can even eliminate them, as was the case with Air France, a partly state-owned airline that already had 96 percent of the market share in France. Lastly, economic nationalism leads to coordination failures. This happens because the potential benefits for the home country are offset by the nationalist policies of the competing countries, while the costs tend to remain unchanged.