An Economics Blog Written By A Student, For Fellow A-Level Students. Putting Economic Theory Into Real Life Perspective. I have three types of article, CURRENT AFFAIRS, ESSAY BLOG and ECONOMIC HISTORY.
This second section to my essay addresses why the majority of economist’s oppose nationalism, and how this is reflected in their views of migration and labour mobility.
Economic Nationalism is further viewed cynically by economists due to its implications for international labour mobility. The basis of economic nationalism is its prioritisation of domestic socioeconomic interests over foreign interests. To this extent, increased regulation of inward immigration to a country is under the umbrella of economic nationalist policy. However, most economists view this branch of economic nationalism to again be harmful to the country’s overall development. Theoretically, as labour is a factor of production, increasing its supply would increase the country’s productive potential, therefore allowing for more short term economic growth with reduced threat of demand-pull inflationary pressures. On the reverse, reducing a country’s immigration would mean a reduction in labour supply and the labour market skill pool. The country equally loses out on potential entrepreneurial individuals, who could have been greatly advantageous to the economy in the long run.
Another economic nationalist argument supporting immigration restriction would be that increased immigrant density within an area pushes down wages, as labour supply increases relative to labour demand. However, counterintuitively, Professor Jonathan Wadsworth of Royal Holloway found “no distinct correlation between local average wage growth and share of immigrants in a local workforce.” This suggests that inward immigration does not impact local wage growth, but rather positively contributes to the labour skill set and entrepreneurial value of the area.
Populists may claim that nationalist economic policies solve the problems of globalisation, however these so called problems can be solved through other means that are mutually beneficial to other economies also. For instance, in order to increase employment from jobs that are lost to more efficient foreign producers, rather than increasing import tariffs to protect infant industries and create jobs, the policy makers can instead subsidise research and development for infant industries so that they develop more efficiently and become internationally competitive, without increasing import tariffs andthreatening protectionist retaliation.
In summary, in order to deviate from the negative connotations of “nationalism”, certain enthusiasts of the populist policy have opted instead to call it “economic rationalism”. However, the majority of economists would agree that the counterproductive nature of anti-globalisation and anti-migration policies should deem the practice to be “economic irrationalism.” The devolution of globalism towards isolationism disregards the importance of specialisation within economies, which can lead to maximisation of output, competition and consumer choice when combined with free trade. The consequent retaliation of foreign markets to economic nationalism is in itself detrimental to export led growth. In terms of migration, expansion of the labour market is fundamental to improving labour skills and productivity, whilst having no recorded negative impact on local wages.
Ultimately, Economic Nationalism is a branch of political Populism that is not grounded by economic theory, but rather intended to appeal to the “ordinary person,” parallel to the intended demographic of Populism. However the majority of economists understand that, contrary to the flawed basis of economic nationalism, modern economies are intertwined such that creating inclusively beneficial policies that generate international prosperity, such as free trade and movement of people, does not come at the trade off of sacrificing your own nations welfare.
This essay originally was entitled “Why do almost all economists oppose economic nationalism and how is this reflected in their views of trade and migration?”, but I have adapted it to focus also look at political nationalism’s impact on economic nationalism. To be published in 2 parts: the former focusing on trade, and the sequel focusing on immigration.
“Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded.” (Adam Smith, The Wealth of Nations – 1776).
“We don’t have victories anymore. We used to have victories, but we don’t have them. When was the last time anybody saw us beating, let’s say, China in a trade deal? They kill us. I beat China all the time. All the time.” (Donald Trump, Campaign Speech – 2016)
Despite the Economic Nationalism is a blanket term for the selection of economic policies that prioritise the prosperity and interests of one nation, over the interests of other nations. Generally, this comprises of the withdrawal from free trade agreements, and increased restriction on the movement of factors of production (labour, enterprise, capital and land). The rise in Populism has given impetus to the ideology that economic nationalism is the solution to the social backlash of globalisation, and the loss of local manufacturing jobs is a direct consequence of asymmetrically beneficial free trade agreements. In America, driven by the Trump administration, globalisation has become the scape-goat for the decline of industry and the deterioration of the balance of payments. However, despite the retreat of globalism, the majority of economists still choose to oppose its ideological antithesis- economic nationalism. To economists, the rise in economic nationalism represents a devolution of economic thought, such that by adopting nationalism, nations would not be maximising output, or designing a policy climate that best encourages prosperity through promotion of international competition and utilisation of inward immigration.
Indeed, David Ricardo’s Principle of Comparative Advantage states that even if one country has the absolute advantage in production of every good/service, the fact that other countries will have the comparative advantage in terms of production means that it is most beneficial for economies to specialise production, and then work in free trade agreements in order to maximise collective output. This would be the more effective alternative compared to functioning in a closed economy and attempting to domestically produce the entire spectrum of consumer demanded goods. The adoption of nationalist policies would naturally curtail trade due to increased tariffs. This would consequently reduce the ability to trade with countries who have a comparative advantage, and hence the reduction of consumer choice within a market will translate to reduced consumer utility.
Moreover, a politician may be attracted to the allure of nationalism as it stifles foreign market competition. By removing the more efficient overseas opposition, domestic firms and consumers are forced to purchase goods and services from domestic industries, rather than their cheaper overseas counterparts. This would supposedly lead to a subsequent increase in production for domestic industry, hence derived manufacturing employment would increase, and derived political support for said politician would presumably increase simultaneously. However, whereas the politician may revere the myopic social advantages to employment, economists must look to the long term implications for that country’s prosperity. By removing international competition through tariffs, there no longer exists incentive nor necessity for the domestic suppliers to invest in improving productivity, as the consumers have no choice but to purchase from the domestic suppliers. In terms of competitiveness, the country will then lag even further behind its foreign competition in terms of quality and efficiency. Hence, quality of good may fall, whereas price will rise unheeded. The curtailing of foreign competition through economic nationalist policies also makes the good’s demand more inelastic, which creates an economic climate more susceptible to potential cartelisation and ensuing market failure within an economy.
Furthermore, the trade restrictive nature of economic nationalism may have unintended consequences in terms of retaliation from other like-minded economies. If history does indeed repeat itself, then the Smoot-Hawley Tariff Act of 1930 is a menacing indicator of the consequences of overly-nationalist economic policies. The 1930 bill raised tariffs on over 20,000 US imports, in order to discourage economic leakages and encourage domestic industry. However, the Smoot-Hawley Tariff soon became dubbed as the Act that “intensified nationalism all over the world” (Lamont, T of J.P Morgan, 1930), and thrust America once more into isolationism. Foreign countries responded to American protectionism with their own tariffs aimed at American exports. In 1930 Canadian Prime Minister Mackenzie King imposed extra duties on American goods, whilst actually simultaneously cutting import tariffs for British Empire exports. By 1934, as many other developed economies followed suit, international trade had fallen by 66%, and the worldwide retaliation against American import tariffs meant that American export value fell from $5.2 billion to $1.7 billion per year. This global retaliation against nationalism was destructive to the American manufacturing industry, to the extent that even domestic demand could not maintain production levels, which combined with the impact of the 1929 Stock Market Crash, saw industrial unemployment increase by 4.3 million (35%) by 1933.
(Part 2 of this essay will be published in the coming days, and will focus on the impact of nationalism on border control and immigration)
Ha-Joon Chang’s “Kicking Away The Ladder” is a damning retaliation against the Now-Developed-Countries (NDCs) imposition of apparently “disadvantageous” policy and institutional standards onto developing countries. Chang argues that the practice of recommending blanket Anglo-American “good policies” and “good governance” is indeed counterproductive to the developing countries growth opportunities, and hypocritical seeing that the NDCs developed under institutions and policies that would be considered “bad policies and governance” by international organisations today.
In order to understand the fundamental hypocrisy of the NDC’s economic imperialism, it is first important to understand the climate and situation of the NDC’s own development. Chang focuses on this in the first half of the book, by analysing the growth patterns of the developed countries and concluding that growth was actually achieved in a climate of protectionism and technological espionage. The stealing of patents, tariff wars, and mercantilism provided the basis for infant industry protection, which allowed for the development of Industry, Trade and Technology (ITT). However, Chang then uses this basis as a platform to promote his own heterodox approach to development economics, by defying the notion that free trade which encourages the Law of Comparative advantage is indispensable to promoting economic growth within developing nations. He argues instead that because the NDCs were able to develop economically under protectionist policies, they should not encourage the same level of globalism to nations who are currently at the equivalent stages of development.
The second section of the book focuses on the institutional development of NDCs from a historic perspective. He argues that the level of institutional development in developing countries is much more advanced than when the NDCs (now developing countries) were at the equivalent levels of development.In terms of “per capita income band”, the UK in 1750 was at a similar level level of economic development as India in 1992. However, in the UK in 1750, there was no male suffrage (1918), established central bank, Income Tax (1842), Modern Patent Law (1852) or Child Labour Regulation (1802). Whereas India, at the same level of economic development, had established all of these institutions over the last century. Could it be that institutions within developing countries are too advanced for the respective levels of development? Chang supports this theory by arguing that the capital used to maintain expensive WTO laws could instead be used to support issues more appropriate to the developing country’s specific needs, such as training teachers or subsidising new agricultural technologies.
However, it is important to understand that the NDC’s delayed adoption of “modern” inclusive institutions occurred as these institutions were a result of development, rather than a cause of initial development. Indeed, the evolutionary process of finding the optimum level of central banking intervention in Britain occurred over generations of trial and error. This level of intervention is different to that of Japan, due to differing economic culture and circumstance. However, Britain and America seem intent on imposing the “Anglo-American” standard of institutions on developing countries, whether or not this is simultaneous with their growth situation. Therefore, surely it would be beneficial if these developing nations were to develop their own unique brand of institutions, that fits their idiosyncrasies, as a result of their style of economic growth, rather than being encouraged to adopt concrete Anglo-American systems that may be completely incompatible with that country’s situation.
In a dramatic conclusion, Chang concludes that developed countries are indeed “kicking away the ladder” in terms of preventing developing countries from developing, due to a toxic cocktail of “unequal treaties”, and aid given on the condition of crippling hypocritical policies, such as free trade for infant industries. The external imposition of these “Neo-Liberal Policies” have done little to encourage sustainable growth, and therefore the developed countries are preventing the developing countries from following in the same path that they themselves developed in. The stark contrast between the path of growth of the UK, and that of say Kenya is extremely clear. Britain developed under very lax institutional and social standards (development occurred without centralised bank, child labour laws, patent lawetc.) , whilst utilising asymmetrically beneficial trade policies such as mercantilism (1700s-1830s), in order to protect its infant industries until it was firmly the technological centre of the world. On the other hand, Kenya does not have the same opportunity to develop in this fashion, because international bodies expect “world standard” institutions within Kenya (that may or may not be beneficial to Kenya’s idiosyncrasies), whilst the WTO places Kenya in a myriad of Free Trade agreements, that turn out to be disparaging to infant industries development.
The comparison between NDC’s development 200 years ago, and modern development today, shows the hypocrisy of modern nations in their neo-colonial economic intervention towards developing countries. The modern push for “good policies” and “good governance” from NDCs is the equivalent of “do as I say, not as I do.” As such, the gap between the majority of developing nations and NDCs is growing at an alarming rate, which amounts to effectively “kicking away the ladder” of economic development.
Although I thoroughly enjoyed the book and would recommend it to anyone interested in development economics from a historical context, the heretical nature of Chang’s claims leaves the book more susceptible to criticism. The frequent use of sweeping statements such as “As a result to this switch to protectionism, the Swedish economy performed extremely well in the following decades,” suggests that the correlation must imply causation, which often can give way to oversimplifying complex relationships, for the sake of moulding evidence to fit an argument.
I would disagree with Chang on certain aspects of his argument also- yes, it makes sense that infant industries are protected with high import tariffs to encourage domestic consumption of said product, but an increase in tariffs across the board would only encourage economic nationalism, and would do nothing to help the long term growth of said industry. Indeed, Chang seems to disregard the fact that these policies are working to encourage prosperity. During Britain’s Industrial Revolution, a growth average of 1-1.5% was achieved, whereas currently developing nations such as Brazil have achieved an average growth rate of 2.6% in the last 35 years. These policies, even if they are hypocritical and seemingly selfish from the NDCs, are working to encourage prosperity and growth.
Indeed, it is a grim fact of international economics that currently, it is the NDCs that possess the bargaining power and hence “call the shots”. If a richer country demands that a poorer country change their policies against their will, then often they must abide by these demands to receive increased aid or win more preferential trade deals. I would say that this modern day institutional imperialism of developed countries towards poorer countries is not a far cry from the European colonialism of the 16th and 17th centuries, and may well act to further hinder the growth potential of these stagnating nations.
Within economics, the concept of rationality is an idealistic deviance from real life, and a tool used that grossly oversimplifies the complex irrationality of man. The assumption that consumers are rational allows economists to group together non-autonomous individuals into one singular organism, whose prime reason for existence is to maximise utility. However, this presumption is more of a convenience than a reflection of real life, as the recent development of “behavioural economics” driven by academics such as Richard Thaler, combine psychology and economics to theorise that humans are not indeed rational in the sense that idealistic economists previously portrayed them to be.
Classically, an economist would portray man to be rational. A rational choice, by definition, is a choice that grants the choice maker the greatest benefit. However, the subjective term “benefit” cannot be easily measured. Hence, economists apply an arbitrary measurement to benefit, so that utility can be valued. This arbitrary measurement of benefit is generally simplified as “highest potential monetary value obtained after transaction”. To an extent, this makes sense ; surely if a consumer had the choice between receiving two monetary values for the same work, the so-called “rational” consumer would choose the greater value, in order to obtain the largest value of money after the transaction.
However, the use of money as an arbitrary measurement of happiness is in itself an oversimplification of the complexities of the human psyche. The assumption that utility=money obtained, is in itself not compatible with human behaviour. For example, in Dan Ariely’s book “Predictable Irrational” he surmised : “People will work more when they have to work for a cause than for cash,” which contradicts the assumption that man’s prime motivation is derived from money obtained, but rather man can be susceptible to be more greatly driven by the immaterial concept of “cause”.
Therefore, if man can be more greatly motivated by “cause than cash”, then we cannot assume that utility is solely derived from money obtained. Hence, the classical application of human rationality (that man will act to purchase the best valued feasible good) cannot be assumed in such a broad-brush fashion.
Ultimately, the notion of rationality in economics is more a tool of convenience, rather than a real life reflection of human behaviour. To assume man’s rationality is to assume that consumers will collectively act as a mechanism driven purely to maximise their own utility/money obtained post transaction. However, rationality in this broad sense breaks down when economists must take into account that consumers have differing motivations, and hence differing interpretations of the subjective term “utility.” Therefore, humans may appear to be self-serving rational creatures, but in reality, man is driven by our own complex idiosyncrasies; which cannot be applied to a model or theory based upon the notion that man will always act rationally.
Trump and Brexit. “Make America Great Again” and “Take Back Control”. In 2016, both Britain and America took great steps against the development of modern trade norms. Trump wants wants to redesign the bulk of America’s trade deals, from South Korea to NAFTA, increasing import tariffs to encourage domestic industry and derived job creation. Whereas a hard Brexit’s promise to leave the European single market contradicts the economic principle that Free Trade is vital to sustain the theory of comparative advantage.
This is not to say that America and Britain have now entered a period of mercantilism, but rather the rejection of globalisation for a more economic nationalist approach is telling that Trump wishes to “Put America First.” Therefore, both nations must now act quickly to strike preferential trade deals in order to maintain trade and therefore justify their nationalist deviations. Who better to strike a trade deal with than each other?
At the G20 summit in July, Trump spoke of a “powerful deal” in development between Britain and America, stressing that it would be completed “very, very quickly.”
However, the spontaneity of these kind of trade deals may have long term repercussions for Britain’s feasibility to trade with Europe in the future. For instance, currently in the UK, the EU laws and regulations on financial and business services’ export potential has a “trade dampening effect equivalent of a tariff of 30%” (The Economist). Indeed, the recent controversy over American farmers’ potential to export chickens washed in chlorinated water to Britain is also symbolic of the bilateralism between the two nations. The conflicting laws and regulations between America and Britain gives Britain two options. Either, during Brexit negotiations, new British trade regulations can be more weighted towards EU legislation, or American legislation. Either way, this comes at the trade off of sacrificing potential trade for whoever Britain does not align with, as increased border checks and security reduces the attractiveness and ease of trade between nations.
Therefore, it is too simple to say that Brexit and Trump represent a return to isolationism. However, Britain should think carefully of the terms of trade it wishes to conduct with America, as this may come at the cost of losing out in European trade. Currently, British-EU trade accounts for 44% of British exports, whereas British-America exports accounts for 19%. Economists estimate that if Britain were to leave the European single market, then American trade would have to increase by 58% to make up for lost European trade. This is an improbable increase in trade, regardless of whether or not Britain ultimately agrees to allow the import of chlorinated chicken.
In Paul Collier’s “The Bottom Billion” (2008) Collier advertises the text as a guide on how to design the most effective G8 agenda in terms of reducing global poverty. To do this, he splits the world’s economies into three categories. Developed, Developing, and the Bottom Billion. The book is unsurprisingly aimed predominantly at helping the latter category. The Bottom Billion refers to the combined population of the worlds so called “failing states”, that are caught in a cycle of political unrest, economic stagnation, and falling levels of prosperity. From this point, the Oxford University professor highlights the causation for economic failure, the potential for globalisation as a saviour for these states, and an evaluation of the effectiveness of potential instruments that may be able to alleviate the level of poverty within these nations.
The first half of the book focuses on the reasons for why the poorest countries are failing. These reasons are split into four categories : Conflict traps, natural resource traps, landlocked with bad neighbours, and poor governance. To me, this section of the book was the least personal. Collier laid out the statistics of how much a typical civil war costs a country ($64), as well as describing the economic phenomenon of “Dutch Disease” (the negative impact of an inflow of foreign currency into a domestic market), and the importance of protecting economic reformers within failing states. However, at this point the chapters seemed more like a text book, rather than the personal plea that was so passionately argued in the preface.
The latter half of the book focuses on the plausibility of developed countries using instruments that may be able to create an economic climate more suited to growth within failing states. Unlike various other texts such as Jeffrey Sachs’ “The End of Poverty”, Collier does not take a clear political agenda that overshadows the book. He neither takes the left’s perspective of blindly throwing international aid at failing nations as a means of increasing social welfare regardless of its hinderance towards economic growth, nor the right’s perspective of aid being part of the problem of poverty as vehicle for “welfare payments to scroungers and crooks”.Instead of choosing sides, Collier focuses on case studies of prior uses of instruments to reduce poverty, then evaluates their successes and relates these to their situation. For instance, the controversial instrument of military intervention within a failing state was analysed through two different case studies : the failure of Iraq, and the success of Sierra Leone, ultimately arguing that military intervention is an invaluable tool to maintaining post-conflict peace and therefore encouraging the economic security that is necessary to attracting private investment.
To me, the final chapter of the book was the most compelling. Here, Collier links the policy instruments described in the second half of the book, with their potential for effectiveness in alleviating the traps laid out in the first half of the book. The bringing together of the first and second halves of the book, culminated in the ultimate argument of the book – currently, governments are not fully utilising their whole arsenal of instruments that would be beneficial to encouraging development within the bottom billion. In other words, the over reliance on aid is a dangerous pit to fall into, as often blindly giving aid without conditions or targets does nothing to encourage domestic industry, as the injection is leaked out of the economy through imports. For the nations most in need of assistance such as Somalia, increased aid conditions, military and international organisation presence, and mutually beneficial trade deals will provide the ideal climate to encourage growth that will work to lift the nation out of disorder and into self-sufficiency. If governments want to see the level of change expected from the UN Millennium Development Goals, they should not measure the extent of their altruism by the GDP percentage dedicated to foreign aid, but rather measure their success by the actual progress that these countries are making. It is only then that these failing nations will begin to see true development.
The science of Economics is at its truest sense when its theories are used to help improve and sustain quality of life. To me therefore, the study of Development Economics is the single most important area of economics, that deserves more weighting in the A-Level syllabus. Currently, only the surface of Development Economics is scratched during A-Level, as development is either paired with globalisation, or “Ways of Measuring Development”. Neither of these provide sufficient depth to understand the essence and importance of Development Economics, as a vehicle to reduce international inequality and poverty within developing countries.
Over the last 30 years, there has been an unprecedented high level of growth within developing nations. Nations such as Botswana, China, and Brazil have seen their GDP per capita’s increase vastly, to the point where they have become self-sufficient, and not reliant on developed countries’ aid. These are the developing countries, but are not the countries that deserve the most attention in Development Economics. In Paul Collier’s “The Bottom Billion,” international economies are split into three categories : developed, developing, and the bottom billion. He argues that currently, there are a selection of economies that are stagnating, caught in a cycle of conflict, myopic policies, and resource deprivation. These “Bottom Billion” countries are in need of the most research and study to escape their vicious cycle; and in order to encourage the new generation of economists to develop theories on how to help these countries, it is vital that Development Economics is given increased significance on the A-Level syllabus.
Indeed, as well as teaching Development Economics as a separate element to the course, it would also be important to implement aspects of Development Economics into pre-existing sections of the course. For instance, currently a great deal of the macro-economic section of the A-Level course focuses on different policy tools, and their usage and effectiveness. Perhaps when evaluating the effectiveness of said policy, the syllabus should also discuss its relative success when implemented in a developing economy, and the factors necessary for its potential benefit. This would allow the syllabus to become multidimensional, as students would learn about the necessary conditions for policy success through the lens of various economies and their various levels of development.
Therefore, the promotion of Development Economics is imperative to encouraging sustainable growth within the “bottom billion” countries, and thereby reducing international inequality and poverty. In order to encourage the next generation of economists to further deepen our understanding of Development Economics, it is vital that students are made aware of the challenges that developing countries face, as well as being receptive to discussion on how different economies may develop given their circumstance. If syllabi do not encourage this research, then the science of Economics will be poorly positioned to provide sufficient intellectual aid to developing countries, which may be detrimental to global efforts to help developing economies escape social stagnation.