Fri, Mar 24, 2006 page9

• Fear and those scoundrels of economic patriotism

  Several foreign takeovers have been axed recently because of fears about national security and identity - some rational, some not

  • By Harold James
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  Samuel Johnson called patriotism "the last refuge of a scoundrel." If that is true, what should we think of today's mounting economic nationalism, sometimes euphemistically described as "economic patriotism?"

  Indeed, economic nationalism is exceptionally vigorous at the moment. Vigorous popular opposition to a Dubai company's plan to take over ports in the US shocked the American government. Poland is witnessing a populist backlash against foreign ownership of banks. France is blocking the acquisition of French utilities by the Italian electricity company Enel. Together with other European governments, France is also agitating against the takeover of the Luxembourg-based steel company Arcelor by a Netherlands company largely controlled by an Indian steel magnate.

  Defenders of these ill-fated cross-border takeovers worry that a sinister whiff of the 20th century's worst moments is in the air. An outraged Italian minister warned of a new mobilization of populist nationalism in an "August 1914" scenario. The better analogy is from the 1930s: In 1933, the year in which Hitler came to power, the world's most famous economist, John Maynard Keynes, produced a plea for "national self-sufficiency."

  Both the 1914 and the 1933 analogies point to the most striking characteristic of the current debate: the key role of security worries in justifying protectionism. Nobody worried about foreign ownership of US ports as long as the owner was a British company; the new fears reflect the belief that Dubai might be a channel for Islamic fundamentalism and terrorism.

  Likewise, the deterioration of international relations before World War I and World War II was marked by governments' increased propensity to use economics as a tool of power politics. In 1911, the diplomatic crisis over Morocco was accompanied by a French speculative attack on German financial markets. In the 1930s, both France and Germany used this kind of technique as a way to bolster their own security. The US tried to control Japanese expansion in Asia by limiting Japan's energy (especially petroleum) imports.

  The most obvious reason for increased worries about security in the US is the challenge of meeting the threat of terrorism after the attacks of September 2001. But that can scarcely explain European nervousness and the protectionist reaction.

  In Europe's case, two contrasting explanations exist. The first is that the new worries are a strange case of psychological transference. People in places like France and Poland who worry about national decline seek to blame somebody outside the country.

  There was certainly a great deal of this type of sentiment in the 1930s, when the populist response to the Great Depression attributed it to the sinister forces of "international capital." The modern version of this explanation holds that the world is changing so quickly that national security and, indeed, national identity, are under threat.

  An alternative scenario suggests that these fears emanate from a real problem. Modern economic growth still depends in almost every advanced industrial country on imported energy (Norway is an exception). Because of fears about pollution, or about the safety of nuclear energy, most countries neglected to build up their own capacity.

  The resulting vulnerability was highlighted by the Russian reduction of gas supplies to Ukraine in January, which resulted in reduced flows to central and western Europe. The experience made Poles particularly jittery, and pushed the country's populist right-wing government down the road of economic nationalism. But West Europeans remember their own traumas, including electricity grid failures and widespread blackouts. Wouldn't an Italian company facing grid failure prefer to shut down French rather than Italian consumers?

  These two scenarios of the origins of economic nationalism, one irrational and the other not, are not real alternatives, but describe responses that intertwine: the more rational the fear, the more that fear can be used as an instrument of politics.

  Fear creates a demand for state action. Politicians like this because it increases demand for their services. They point out the potential problem and then attempt to sell solutions that lie within their nationally defined spheres of competence.

  One modern politician, in particular, has been effective in placing nervousness about energy supply at the center of a new political vision. According to Russian President Vladimir Putin, the need to control and secure energy justifies a massive extension of state intervention in the economy.

  Putin's vision was apparently vindicated by the aftermath of the terrorist attacks on the US. Since then, Putin has projected his vision of politicized energy in a way that makes all Europeans, not just Russians, nervous. That bolsters his strength in the Russian setting. But a Putin in one country has a tendency to produce Putin imitators elsewhere.

  We should be concerned about the efficiency losses in markets where restrictions stemming from economic nationalism have so far been imposed. But we should be far more worried that fear about the collapse or manipulation of markets creates a demand for action that makes such a collapse more rather than less likely. Fear generates a demand for more security that is in the end paralyzing.

  Harold James is professor of history and international affairs at Princeton University.
  Copyright: Project Syndicate
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