Normally central bankers stick to monetary policy issues when giving speeches, occasionally venturing into fiscal policy matters if they bear on monetary policy. Why did Chairman Bernanke deliver a 13-page lecture, supported with 48 academic references and 11 footnotes, on an issue, which although important in its own right, is not one with which he and his institution deal with directly? I believe that Bernanke’s warning about the widening inequality in the United States reflects the US political and business establishment’s concern with the rise of economic nationalism, a phenomenon which is not confined to the United States. Although rising economic nationalism in the United States partly reflects national security concerns in the aftermath of the September 11, 2001 terrorist attacks, it is on the rise around the globe, including Turkey. Last week, the Turkish State Minister Ali Babacan felt compelled to label the intense backlash -- not only from the political opposition but also from several business leaders -- against inward foreign direct investment, especially in banking and public utilities, as “quixotic and paranoid.” Recently, YASED, which used to stand for the Foreign Investors’ Association, changed its name to the International Investors’ Association to avoid the appearance of “foreignness.” Turkish public opinion, which used to heavily favor joining the EU, is now mostly against it, most likely due to the EU’s increasing reluctance to allow Turkey to join but also due to the opposition in Turkey to greater economic as well as political integration with the EU. Of course, economic nationalism in Turkey has deep historical roots dating back to the perceived pernicious effect of the Capitulations during the Ottoman Empire.
Economic nationalism is historically referred to as the national system of political economy, which advocated protectionism and import substitution, which Turkey practiced with at best mixed results until the early 1980s in order to develop its infant industries and catch up with developed countries. The recent rise of economic nationalism, especially in developed countries such as the United States and France, is a reaction against the increasing globalization of production and markets -- which has generated significant economic and non-economic benefits for some of the world’s population but is also perceived to have widened income and wealth inequalities. This rising economic nationalism, which blames other nations for a nation’s economic problems, differs from economic populism, which blames a nation’s rich for the problems of that nation’s poor. It has manifested itself as opposition to takeovers of a nation’s firms by foreign investors, violation of the national treatment principle in international trade and investment as discrimination against some countries deemed as less trustworthy than others, suspicion of either multilateral or regional free trade agreements, and as a vehemently xenophobic opposition to immigration.
Economic nationalism mistakenly blames globalization for a nation’s ills, especially widening income and wealth inequality, and proposes measures to restrict globalization through curbs on immigration, international trade and investment, which would ultimately backfire, especially if other nations were to retaliate. Although widening inequality is a fact, due primarily to forces of technological change, the wiser approach to deal with it in the short run is through the strengthening and widening of the social safety net by offering retraining and job-search assistance, unemployment insurance for the unemployed and income tax credits for the poor. Making labor markets more flexible would also help, especially in Turkey (see my column Ease of doing business around the globe and in Turkey). In the longer run, more investment in human capital through both formal education and vocational training is called for. There is nothing inevitable about globalization as a process driven by policy as opposed to technical progress. If the winners from globalization do not address the concerns of the losers from it, it could easily come to a halt by policy as has happened before, in the early 20th century.
