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Industrial policy puts global cooperation at risk

By Patricia Wruuck - posted Friday, 21 November 2008


And, given carmakers successful lobbying so far, other industries look likely to follow suit. Airlines already claim that they need government support, and construction businesses or retailers could be next.

It’s not only about firms increasingly demanding state-aid. Politicians also opt for pre-emptive protection. French President Nicolas Sarkozy called on European member states to establish sovereign wealth funds to protect ownership stakes in strategic industries. His proposal was met with reluctance by fellow European leaders, but the idea seems to go down well with the general public.

Although the German government criticised his proposal, a poll by the German weekly “Der Stern” found that an overwhelming majority, or 77 per cent of respondents, would appreciate nationalising energy suppliers. About two thirds favor a more active role for government in banking and finance, and 60 per cent agree that railways and airlines should at least partly be state-run.

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As for France, Sarkozy walked the talk and set up a national fund to provide an “industrial response” to the financial crisis. The idea to protect strategic industries from foreign takeovers is not new. Two years ago, France drew up a list of industrial sectors designated for protection. The rise of sovereign wealth funds from emerging economies like China or the Gulf countries further fueled this debate. Thus, why not create your own sovereign wealth fund to keep others at bay?

Apart from the question of whether this is necessary, as France already has laws that regulate foreign investments in selected industries, it certainly sends an alarming signal given the current state of the world economy. National politics and the desire for effective international cooperation are particularly incompatible in times of economic crisis.

People demand palpable help from their governments whereas talks to reform global governance structures for the financial system remain abstract. But industrial policies that skew competition and promote protection, imperil much needed cooperation on reforming financial markets.

To be clear, the point is not about strictly opposing government efforts to stimulate the economy. Rather, it’s about keeping in mind that actions at home often create repercussions abroad. Protectionism is popular, particularly in times of economic turmoil. But it does not provide a solution. Instead, it sends a dangerous signal just when cooperation is needed most.

In hindsight, it’s easy to look at the stock market crisis of 1929 when some government intervention went wrong. The crash led to the adoption of the Smoot-Hawley tariff act, which in turn triggered retaliation worldwide. Resorting to unilateral protectionist measures turned out to be a slippery slope, a lesson from the Great Depression that’s still valid.

Upcoming talks to rebuild the global financial architecture will take place based on the G-20 format, involving the United States, several European countries but also Russia, China, India and Brazil. With the US and large parts of Europe facing recession, growth in emerging markets is crucial to keep up the world economy.

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Chinese efforts to counter falling export demand with a huge stimulus package could provide a boost to other economies in the region and help cushion the global economic slowdown. Emerging markets have gained in economic importance over the last decade and this trend looks most likely to continue.

Therefore, a new financial architecture can only be effective if carried by industrialised as well as emerging markets. It involves technical issues as well as highly politicised questions such as determining the future role of the International Monetary Fund. Therefore, talks this week only mark the start of a long process to come.

Rebuilding the global financial architecture requires sustained cooperation between the US, Europe and emerging markets. José Manuel Barroso, president of the European Commission was right to make this point at the recent EU-Asia summit “either we swim together, or we sink together”.

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Reprinted with permission from YaleGlobal Online - (c) 2008 Yale Center for the Study of Globalization.



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About the Author

Patricia Wruuck is a researcher at Potsdam University in Germany and has published on economic patriotism and industrial policy.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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