ECONOMIC PATRIOTS
The reality of “economic patriotism” is that it is simply a slogan covering favours to a coterie of home country managers who have lost confidence in themselves. These favours are at the expense of shareholders and customers of the businesses affected, and/or of the taxpayers. The slogan has been used frequently in modern Europe. In general, its use has given a transient boost to the standing of the politicians concerned, followed by substantial damage to their standing over the medium to longer term. The link between the sloganeering and the damage has usually been identified in the little read opinion pages of the newspapers, not the front pages.
However, the Unit is startled that politicians’ sense of self preservation has not brought home the significance of the rapid downfall of the respected and life-tenured President of the Bank of Italy as a result of some relatively mild acts of “economic patriotism”. To see both the Prime Minister of France and the Spanish Minister of Industry offer their futures on the same chopping block almost immediately afterwards shakes even the Unit’s limited faith in politicians’ instincts.
Solon has sympathy with the feelings behind “economic patriotism”. In recent decades, when encountering overseas Chinese, he has been surprised at the extent to which their “extended clan” system for seeking partners and giving (limited) trust parallels the type of support that Athenian merchants were accustomed to give and expect from one another when trading in barbarian lands. There is something basic about this use in business of one’s links of ethical or ethnic (Solon sees the two as related) affiliation. As members of the Unit have gently explained to Solon, in the decades since the Second World War truly international business drawing its finance, its staff and its management from a range of countries has begun to be prominent and commonplace, and to displace large chunks of previously national economic activity.
Despite the success of international businesses in delivering more of what the consumers want, at less cost, the public perception of these businesses is that they are dangerous. In part, they seem dangerous because they are powerful, and in part because they are alien. The Unit is entirely in favour of the public authorities keeping a weather eye on unduly powerful private interests. Indeed, it sees one of the attractions of the European Union is that it is big enough to face down the Microsofts. But when people dressing themselves as patriots claim protection against international business because it is alien, the Unit asks “Protection for whom?”. The general interest of the consumers is clearly in favour of international competition, lower prices and wider choice.
Transitional protection to enable unexpectedly threatened local businesses to adapt has virtues. Arguably, it is a proper claim by our neighbours on our good will. But the lowest overall cost solution for giving that protection is direct temporary subsidy to the businesses affected from public funds. Arguing for bans, quotas or tariffs in place of such subsidies is economically perverse (1). It is a refusal to do the relevant accounting; and generally has its roots in a wish to hide from reality.
Protection for managements because they are made up of nationals of a particular country smells like a skunk of a different stripe. The people who benefit primarily are the generally wealthy and influential individuals who make up the managements concerned. And this is what “national champions” in business are really about.
The argument that “national champions” protect some identifiable general national interest is often advanced, but so far as the Unit is aware has never been established for the case of a world with a high degree of interdependence in goods and services. Every known general national interest is better protected through market regulation and emergency planning. (2) The Unit agrees that there are possible if dubious cases for advocating selective tariff protection in such a world; but even those options are clearly superior to “national champions”.
The people who lose in the short term from protection of the mangers of “national champions” are the shareholders in and the customers of these businesses. Those who lose in the longer term are again the customers deprived of lower prices and wider choice, and also all those who would gain in future from greater expansion of the national economy. In many cases those who will pay taxes in future also lose. This type of protection often leaves behind it liabilities which have to be met out of the public revenue.
The wealthy and influential managers who expect to gain from the designation of “national champions” must doubt their ability to retain or gain (all) their wealth and influence if exposed to international competition. That is to say they fear that the businesses which they run would satisfy consumers better and/or pay investors better if their rivals were free to compete for the management role. For obvious reasons, they do not say this; indeed, they probably rarely confess it to themselves. Nevertheless, if they had confidence in winning in international competition by delivering better results, they would be happy to meet all fair competition. Instead, they choose to bid for a greater share of a smaller total of national wealth by posing as “national champions”.
The conduct of such a bid necessarily entails seeking allies. To achieve and keep such alliances, the managers must be willing either to share their potential gains or to impose greater total costs on the rest of the economy. In seeking popular support, they favour the latter; giving assurances that job cuts will be avoided, but commonly making them contingent on supportive policies from government; encouraging national groupings of suppliers to their business, etc. In approaching politicians, they offer, directly or indirectly, support to causes dear to the politicians, be it their campaign funds or their favourite charity; and increased opportunities for patronage. All this is contained within a smokescreen of words about enabling national government to achieve its objectives more fully, but amounts in reality to a sharing of the prospective gains.
Just now, it appears to the Unit that France displays symptoms of this syndrome particularly acutely. The public and private sectors of the French economy, and much of France’s politics, are dominated by a closely integrated caste (3). They did a great deal in the past to modernise the French economy and to make it internationally competitive. (4) In the last twenty years they have seemed to suffer from declining confidence in their ability to achieve further success. The recent de Villepin project for a decree protecting a range of “French” enterprises (5) from foreign takeover seems to mark a total collapse of French managerial confidence. If the dominant managerial group is seeking to protect its interests in this way, both the cost to the rest of the French economy and the eventual backlash against what has been an uncommonly effective as well as an uncommonly powerful managerial caste are likely to be grave.
By comparison, the current Spanish episode of trying to prefer a takeover of an energy group by Spanish interests over one from a German company is opera bouffe. Nonetheless, the Unit advises the political friends of the current Minister for Industry (a Sr. Montilla) to distance themselves from him. He is too obvious a potential scapegoat.
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(1) Anyone who doubts this is invited to analyse the effects of a subsidy paid from a general sales tax or VAT in comparison with tariffs or quotas designed to exclude or minimise competition in specific goods or services. The same analysis points to a possible aid strategy. If an infant industries argument is accepted, an optimal form of aid to further it would be aid used as a subsidy to these industries on condition that tariffs or quotas are not imposed.
(2) The Unit is embarrassed to find itself putting forward such a categorical conclusion in an apparently empirical case. Nevertheless, U.S.E. members have failed to identify an exception.
(3) Often known as the” enarques,” but in fact including some non-graduates of the ENA and excluding some of that institution’s able and assertive products.
(4) There were also failures as in most processes of economic development. . In the French instance, however, many of the costs of failure ultimately fell on the French taxpayer rather than the shareholders. For example, the Unit judges that the various mismanagements of the Credit Lyonnais will have a measurable effect increasing the levels of French taxes slightly for about thirty years.
(5) Enterprises some of which have both the majority of their business outside France, and (in all probability) majorities of beneficial shareholders who are not French.
Should you wish to comment, an email to solon@use-solon.org may draw a response.
