Made in Holland: A Case for Economic Nationalism & Industrial Policy (Introduction and Part I) | Sam Volkers
Since the 2008 crisis one term has become increasingly prevalent again in world politics: economic nationalism. Others have referred to it as economic patriotism, protectionism, developmentalism or mercantilism. Its rise has been praised by some and decried by others, and its ideas appeal to a wide variety of political groups from both the left and right.
Another policy that has been increasingly relevant recently is industrial policy. This policy (which was a political and economic taboo for years in the West) has been gaining ground again due to the many problems caused by the Covid-19 pandemic and the decline of manufacturing industries in developed countries.
But what are economic nationalism and industrial policy exactly? How are they related? And what are the problems with free trade? In this article series I will explain just that, while also making the case for a system of economic nationalism and industrial policy suited to the Netherlands.
In part one of the series, I will explain what economic nationalism and industrial policy are and look at the history of both ideas. In part two of the series, I will talk about the problems caused by free trade and globalization. In the third and final part of the series, I will make a case for economic nationalism and industrial policy, and give an outline for what this new system should look like.
What are Economic Nationalism & Industrial Policy?
Economic nationalism might sound like a scary term to some, who will equate it with expansionist nationalism or imperialism. Those people do not need to worry though, since “economic nationalism” is just a name given to a way of thinking about economic and international trade, and the policies related to this. It does not have much to do with expansionist forms of nationalism or imperialism perse, as shown by the fact that the idea itself has been adopted by many different political groups from both the left and right, some very nationalistic and some not at all.
Economic nationalism can be defined as an umbrella term for a set of economic ideologies that prioritize a country’s economy above that of other countries for the benefit of its citizens. Economic nationalists want to make a country and its economy as rich and strong as possible (Morrison 2017). The central idea of economic nationalism can best be defined as (Gilpin 1987: 31):
“Its central idea is that economic activities are and should be subordinate to the goal of state-building and the interests of the state. All nationalists ascribe to the primacy of the state, of national security, and of military power in the organization and functioning of the international system.”
For economic nationalists, wealth is very important. It is not only a tool to provide better lives for a nation’s citizens, but also the essential key to expand a nation’s power and protect its national sovereignty (Gilpin 1987: 32). This is why economic nationalism puts a great emphasis on economic growth and value-added industries.
Although economic nationalism comes in many forms — it is different for every country where it is implemented — it can be divided in three general forms: protectionism, mercantilism and developmentalism.
Protectionism can be regarded as a defensive form of economic nationalism (Morrison 2017). Its goal is to protect domestic industries against foreign competition, usually by using tariffs, import quotas and subsidies for domestic industries (Britannica 2004). Mercantilism, however, is an active, expansionist form of economic nationalism. The goal of mercantilism is not just to protect domestic markets and industries, but also to grow the domestic economy by investing in it and actively seeking to expand international markets for their products (Morrison 2017).
Then there is a third form called “developmentalism”, which can be seen as a middle ground between defensive protectionism and expansionist mercantilism. Developmentalism is a form of economic nationalism that has developing (usually) less developed economies by creating a varied internal market as its main goal. It is mainly focused on helping economically less developed countries catch up with more advanced countries. This is done by placing an emphasis on the development of more sophisticated production capabilities, for example high-tech manufacturing industries, using measures such as tariffs, subsidies, government regulations, investments in strategic sectors and in R&D (1) (Chang 2014: 134–135, 137). Developmentalism is the form of economic nationalism that is most closely associated with industrial policy, and thus the form of economic nationalism — albeit with some modifications — that I will be arguing for in this article.
As we can see, all forms of economic nationalism share a set of similar policies. Some common policies used are import tariffs, development subsidies and investment in education and infrastructure, with the goal to create, attract, and retain as much economic activity as possible within the country’s borders (Morrison 2017).
Import tariffs are especially important to economic nationalism. The idea behind import tariffs is that (Britannica 2004):
“They raise the price of imported articles, making them more expensive (and therefore less attractive) than domestic products.”
This will then lead to domestic producers having an advantageous position on the domestic market, which gives them the ability to expand their business and lower their prices, creating new jobs and factories.
Alexander Hamilton, one of America’s Founding Fathers, justified these tariffs with what became known as the “infant industry argument”. According to this argument, developing countries — or in the case of the Netherlands (and the rest of West), countries that are developed but de-industrialized and want to rebuild their strategic industries — are justified in placing tariffs on imported goods if this is done to diversify the economy and help with the development of new industries (Pettinger n.d.). These import tariffs will then protect these still developing industries from already developed foreign competitors and will gradually be lowered as domestic industries become more self-reliant.
For most economic nationalists, industry is the key to national development and prosperity. They understand that industry — manufacturing industries in particular — have spillover effects which will spill-over and create growth in other sectors (e.g. a factory that needs steel will buy it from the local steel mill, causing this steel mill to gain more profits and expand its operations). This will help develop the entire economy. Economic nationalists also believe that having a strong industrial base will strengthen and protect a country’s economic self-sufficiency and political autonomy. They recognize that having a strong manufacturing sector is important to building and maintaining a strong military, which is central to a country’s national security in the modern world (Gilpin 1987: 33). This is why, throughout history, most economic nationalists have embraced some form of industrial policy.
This brings up a second question: what is industrial policy? Industrial policy can be defined as (Dadush 2016):
“Government intervention in a specific sector which is designed to boost the growth prospects of that sector and to promote development of the wider economy.”
Industrial policy usually comes in the form of a program of economic reforms which serve to empower the government to change a country’s industrial structure. The government will use these powers to further develop the economy and correct market failures (Herman 2019). To further explain industrial policy, we should look at the three general characteristics of industrial policy (Herman 2019):
1: Industrial policy is focused on building up a nation’s manufacturing base and infrastructure, with an emphasis on selected industries which the government thinks are crucial for economic growth and national competitiveness.
2: Industrial policy goes together with government regulation of trade. The government directs the nation’s trade policy towards national goals, such as economic development.
3: Industrial policy often is paired with a mixed economic system in which the power of the state and the market are balanced.
Mixed economic systems serve as a middle ground between laissez-faire capitalism and communism. Most mixed economies consist of a capitalist market system which is regulated, and in some sectors controlled, by the state. This is combined with a strong welfare state and a well-protected workforce. The combination of the stability offered by state intervention and the innovation provided by market competition, makes a mixed economic system ideal for industrial policy.
Just like economic nationalism, industrial policy is different in each country where it is implemented, because each country has its own specific set of problems and opportunities which an industrial policy needs to be adapted to. Industrial policy can range from government intervention in a specific sector to boost its prospects, to a full-on policy of import substitution industrialization (ISI) (2), which is a more rigorous form of industrial policy which was implemented mostly by developing countries between the 1950s and 1980s. Some economists also consider interventions in non-manufacturing sectors such as agriculture or the service sector with the goal of stimulating economic activity and making structural changes as forms of industrial policy (Rodrik 2008).
As mentioned before, industrial policy comes in many shapes and sizes, but there are some general measures that (almost) are included in almost all industrial policies. Most industrial policies combine tariffs, import quotas and investments in infrastructure and domestic industries, something which it shares with most forms of economic nationalism. Industrial policy also comes with investments in education, regulatory reforms, and sometimes even the direct ownership (nationalization) of enterprises by the government (Dadush 2016).
To make sure all this goes well, most governments that implement industrial policy coordinate their efforts by making use of state planning, often in the form of indicative planning (3). They set long-term goals for the national economy and then work together with business, labour unions, scientists, and other experts and interest groups to achieve these goals. Based on these goals they also coordinate taxes, state investment, the building of new infrastructure, import tariffs, (de)regulations, environmental protections, foreign direct investments, and other things related to economic growth and (re)industrialization.
Although in our current era of neoliberal globalization, free trade has become the status-quo, for most of history it was not. History has seen many great nation’s rise by implementing policies inspired by economic nationalism. Most developed nations got rich by combining protectionist trade protections such as tariffs and import quotas with forms of industrial policy (Chang 2002: 2). And unlike neoliberalism, it was not a phenomenon tied to one specific era. Forms of economic nationalism can be found through the ages, from Venice during the Renaissance to Japan and the Four Asian Tigers — South Korea, Taiwan, Singapore and Hong Kong — in the mid-late 20th century.
Pre 17th century: Early forms
As mentioned before, economic nationalism has inspired government policy across the world and throughout history, which makes it hard to pin down when it was first implemented. There are however some good examples of early forms of economic nationalism.
One of the first examples of economic nationalism can be found in 15th century England, when the country was ruled by Hendrik VII. Hendrik VII had lived in Bretagne for most of his early life, where he had seen the wealth that was created by Flanders’ wool industry. After coming to power in England as an adult, he would make it his mission to break Flanders’ monopoly in the wool industry and in turn build up England’s own wool industry. For this he would use policies not too dissimilar from later forms of economic nationalism, such as import tariffs, investments in infrastructure and local industries.
Another early example of economic nationalism were the proto-mercantilist policies implemented by the Italian city states during the Late Middle Ages and Renaissance periods, with Venice being the most successful. During the crusades, Venice made a lot of money by shipping pilgrims and crusaders to and spices from the Levant (Morrison 2017). These incomes would be re-invested in building up a strong naval fleet and local industries, to create a self-sufficient and diverse economy. This would pay off, as Venice became a regional powerhouse that could produce almost everything it needed — from sails to guns — domestically.
17th — 18th century: The Mercantilist Era
During the 17th and 18th centuries, the British and French would attempt to break Dutch hegemony and solidify their own power in the world. For this, they would adopt mercantilist policies. Mercantilists believed that a favorable balance of trade — exporting more than you import — was necessary for a nation to be wealthy and strong. To achieve this favorable balance of trade, Britain and France adopted policies such as protective import tariffs, investments in infrastructure, state support for local industries, tax reforms and the establishment of overseas colonies.
This last aspect is also one of the big differences between mercantilism and other forms of economic nationalism, such as protectionism and developmentalism, which were opposed to colonialism.
Some famous mercantilist thinkers were Jean-Baptist Colbert, who served as France’s First Minister of State under King Louis XIV, and the statesman Robert Walpole in Britain.
Economic Nationalism in “The New World”
The mercantilist hegemony would be challenged by economic liberals such as Adam Smith and David Ricardo, who rejected the view that trade was a zero-sum game. Instead, they posited that every country should specialize in producing what they are good at. They also believed that the invisible hand of the free market would be a better guide for the economy than any government management could be.
Their ideas would not find immediate success though, with most countries holding on to their mercantilist policies. In the United States, Britain’s refusal to let the colonies trade with other countries on their own would lead to a rebellion that led to the creation of the United States.
Right after this new country was born, it would be divided on what the government’s role in the economy should be. The debate about American capitalism was divided in two camps: Jeffersonianism and Hamiltonianism. The Jeffersonian view of capitalism was that of an agricultural society made up of small independent farmers and little reliance on industry, while the Hamiltonian view was that of a strong, industrialized US in which the government used its power to manage the market and support domestic industries by offering them subsidies and protection against (more developed) foreign competitors.
Although Hamilton’s ideas would gain little traction at first, this changed after the War of 1812, during which the US suffered many defeats, including the White House being burned down. After the war many of Hamilton’s critics would come around a realize that their dependence on other nations — Great Britain in particular — for the production of important goods (e.g. arms and ammunition) was a threat to American sovereignty. One of the strongest supporters of Hamiltonianism in the post-1812 era was the statesman Henry Clay, who would actively argue in favor of them during his time as a member of both the Senate and House. He would expand upon Hamilton’s ideas and create a coherent practical economic policy which he dubbed The American System. His system consisted of three main points: protection of infant industries by using import tariffs, a national financial system and investments in infrastructure and industries.
These ideas would inspire one of America’s greatest presidents: Abraham Lincoln. Lincoln pursued a policy of government investment in infrastructure, raised tariffs on imported goods, and signed an act that enabled the government to set up a national financial system capable of issuing paper money backed by federal debt (King 2020). From the Civil War up until the Post-WWII period, the United States would remain the world’s most protectionist nation, with the average tariff rate in this period being between 40–50% (Chang 2002: 17, 28). In the century after Lincoln died, subsequent presidents continued the course that was started by Lincoln which helped create a strong, industrialized nation with the fastest growing economy in the world in the period between the 1800s and the 1920s (Chang 2002: 30).
It was only after WWII that the United States started to slowly liberalize its trade policy. This liberalization sped-up enormously from the 1980s onward, which is when the era of neoliberalism and globalization started, leading to the tragic decline of many respected American industries.
Post-WWII: Japan & Asian Tigers
During the 20th century these policies were further developed into the developmentalist tradition. This form of economic nationalism was implemented with great success across the globe, with Japan and the Four Asian Tigers — South Korea, Taiwan, Singapore, and Hong Kong — being the most successful examples. These countries would combine an economic nationalist model with strong industrial policies.
In an effort to build-up their economies, the governments of Japan and the Asian Tiger would implement import-substitution industrialization policies, with a focus on creating a potent and self-sufficient industrial base that could export its goods all over the world. Policy planners would seek out industrial sectors with high productivity growth potential, for example electronics, and then designate them as priority sectors.
To stimulate and protect these sectors, governments used a wide variety of measures, such as import tariffs, investments in infrastructure, import quotas, tax cuts, investments in education and R&D and subsidies for local industries, state control over foreign investments, and forced mergers of businesses in sectors which the government deemed strategic. To guide the implementation of these policies, the governments would make use of economic planning. South Korea became known for its many successful economic plans, with the Financial Times even reporting in the 1980s that South Korea was the most planned economy outside of the Soviet Bloc (Chang 2019).
Although they were seen as risky at first, these developmentalist strategies would be very successful for Japan and the Four Asian Tigers. They would be transformed from poor agricultural societies, into developed industrial societies, with high living standards and strong economic growth. A good example of this rapid economic growth is South Korea’s car manufacturing industry. South Korea went from a country where barely anyone owned a car in the 1960s, to the world’s sixth largest car manufacturing country in the 2010s, accounting for 10% of global car production (Yülek 2018: 258).
Today: Still Relevant
Today still, some of the world’s most promising and fast-growing economies have embraced economic strategies and industrial policies inspired by economic nationalism. A good example of this is China. Although it is often heralded by neoliberals as a prime example of successful economic liberalization, I would argue otherwise, for although it has liberalized its economy — going from a socialist planned economy to a less planned mixed-economy — it has not embraced neoliberal economics. If we compare China to other, once promising developing countries in Africa and Latin-America that did do so, we can see that they did not take-off economically, while China did (Chang 2010: 92).
1: R&D (Research & Development): Research and development (R&D) includes activities that companies undertake to innovate and introduce new products and services. It is often the first stage in the development process. Definition found on: https://www.investopedia.com/terms/r/randd.asp.
2: Import Substitution Industrialization (ISI): A theory of economics typically adhered to by developing countries or emerging market nations that seek to decrease their dependence on developed countries. The approach targets the protection and incubation of newly formed domestic industries to fully develop sectors so that the goods produced are competitive with imported goods. Under ISI theory, the process makes local economies, and their nations, self-sufficient. The primary goal of the implemented substitution industrialization theory is to protect, strengthen, and grow local industries using a variety of tactics, including tariffs, import quotas, and subsidized government loans. Countries implementing this theory attempt to shore up production channels for each stage of a product’s development. Definition found on: https://www.investopedia.com/terms/i/importsubstitutionindustrialization.asp
3: Indicative planning: Indicative planning a method of controlling the economy that involves the setting of long-term objectives and the mapping out of programmes of action designed to fulfil these objectives, using techniques such as input-output analysis. Unlike a centrally planned economy, indicative planning works through the market (price system) rather than replaces it. To this end, the planning process specifically brings together both sides of industry (the trade unions and management) and the government. Definition found on: https://financial-dictionary.thefreedictionary.com/indicative+planning.