The spectre of economic nationalism

That includes foreigners

Many politicians are falling over themselves to draw parallels between the present economic crisis and the Great Depression of 1929 to around 1940.

The comparison should be more chilling than you realise. The original market collapse in 1929 was triggered then, as now, by highly over-inflated share prices. Then, as now, governments stepped into the breach to intervene.

One such intervention was signed into law in June 1930. It was the Smoot-Hawley Tariff Act. A petition signed by 1,028 of America’s top economists begged US president Herbert Hoover to veto the bill. JP Morgan's chief executive, Thomas Lamont, said he "almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot tariff."

Despite this, the Act was signed and the US raised tariffs on 20,000 imported items. Overnight, US imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932. This was precisely what the protectionists had hoped for. However, protectionism doesn’t happen in a vacuum and European governments promptly instituted their own tariffs. US exports to Europe collapsed from $2,341 million in 1929 to $784 million in 1932.

Overall, world trade crashed by more than 66% between 1929 and 1934.

One of the biggest losers in this global meltdown, was Weimer Germany. There, economic nationalism became political nationalism and Europe began its inevitable march to 1939.

There are parallels today. At the recent Davos economic summit, everyone from Russia’s Prime Minister Vladimir Putin to the UK’s Gordon Brown was quite explicit about the dangers of protectionism to world trade. Back home, though, they are egging on the crowds.

Brown has promised, “British jobs for British people.” A national strike across France has demanded protection for French businesses. The $800 billion stimulus bill being championed by US President Barack Obama contains significant “Buy American” requirements.

Economists are already predicting that capital flows to emerging markets will drop from a peak of $929 billion in 2007, to only $165 billion this year.

These are all chilling reminders of the fragility of international commerce and private enterprise. Good relations between governments underpin economic growth. The interconnectedness of supply chains means that a collapse of business in one market rapidly becomes a problem for all markets.

If the US decides to bail out its car manufacturers but attaches the requirement that their inputs must be sourced from the US, it becomes a major problem for components manufacturers around the world, including South Africa.

Smaller and economically peripheral countries will be hardest hit by such actions.

In other words, things were precarious enough before the South African department of Home Affairs added their colossal incompetence to the list of things that businesses have to worry about. South Africans are now one of only around 10 countries who are required to get a visa before visiting the UK.

The UK is well aware of the consequences of this action. South Africans are considered the fifth largest group of visitors to the UK, and the business ties between the two countries are deep. Numerous companies have dual listings on both the JSE and FTSE.

What the credit crisis has brought home to many is that – whatever warm fuzzy things you demand from business – the primary thing that we require of companies is that they remain profitable, return on their investment promises, and continue to provide the jobs and products that all of us depend on.

At the same time, government’s job – whatever the electioneering – is to provide a stable and equitable environment which supports and enables businesses to function.

Trevor Manuel’s conservative budget indicates that he knows full-well his responsibilities. Unfortunately, the same cannot be said for his fellow ministers.

It would be good for politicians to remember just how precariously balanced the economic fundamentals on which they depend are based.