As David just noted, this morning’s Lex column in the FT is relatively upbeat about the dangers of protectionism, arguing that “the disaggregation of global supply chains, the source of the huge efficiencies that companies pass on to consumers, will not be easily undone.”
Whether or not that’s right (and like Willem Buiter, Martin Wolf is also a good deal more downcast than the Lex team), it’s interesting to compare today’s Lex column with what they had to say about capital flows to emerging markets just a couple of days ago. Here’s the bit that made me sit up:
Take Brazil and India, the globe’s ninth and 12th biggest economies, according to the International Monetary Fund’s latest estimates. While the developed world is expected to shrink by 2 per cent this year, the IMF reckons Brazil will grow by 2 per cent, and India by 5 per cent. Why? One answer is that they have stable banks, relatively closed economies, and large internal markets. This has insulated them from much of the global turmoil.
The contrast with East Asia is stark. Singapore’s economy shrank at an annualised 17 per cent rate at the end of last year, South Korea by some 20 per cent. Yet this is not for lack of capital. Asian economies, after all, are global creditors. Their economies have shrunk instead because they are heavily oriented towards collapsing international trade. Meanwhile, their local markets are undeveloped and weak. Asia’s challenge is how to best deploy its accumulated surpluses to boost domestic demand.
None of that amounts to a rationale for protectionism as a response to the crisis, of course; Buy America is still a stupid plan. But the data does seem to me to put a question mark over a core plank of current orthodoxy in international development thinking.
For one thing that everyone agrees on in the development world is that integration in the global economy is a central route out of poverty. (The disagreements have been about the extent to which such integration necessarily implies trade or financial liberalisation, not the more basic point about integration per se – hence the old argument over protection of infant export industries a la China or South Korea, where the subject of dispute is ‘how’, not ‘whether’).
There’s a kind of parallel here with last summer’s panic over export restrictions on food, when import-dependent countries that had placed their trust in the reliability of liquid international markets for food (like the Philippines) suddenly felt very burned when export restrictions appeared in over 30 countries.
In both examples, the underlying analytical issue is the apparent trade-off between growth and profitability in the good times and resilience when the shocks and stresses start to pile up. Unfortunately, for countries that lack the benefit of Brazil and India’s insulation, it’s probably too late to think about putting buffers in place. (If you wait until the panic buying is already underway before you start assembling a stash of canned food under the stairs, then you’re just making the problem worse…)