Neomercantilism
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Neomercantilism is a term used to describe a policy regime which encourages exports, discourages imports, controls capital movement and centralizes currency decisions in the hands of a central government. The objective of neo-mercantilist policies is to increase the level of foreign reserves held by the government, allowing more effective monetary and fiscal policy. This is generally believed to come at the cost of lower standards of living than an open economy would bring at the same time, but offers the advantages to the government in question of having greater autonomy and control. China, Japan and Singapore are described as neo-mercantilist. It is called "neo-" because of the change in emphasis from classical mercantilism on military development, to economic development, and its acceptance of a greater level of market determination of prices internally than was true of classical mercantilism.
Its policy recommendations sometimes echo the mercantilism of the early modern period. These are generally protectionist measures in the form of high tariffs and other import restrictions to protect domestic industries combined with government intervention to promote industrial growth, especially manufacturing. At its simplest level, it proposes that economic independence and self-sufficiency are legitimate objectives for a nation to pursue, and systems of protection are justified to allow the nation to develop its industrial and commercial infrastructure to the point where it can compete on equal terms in international trade. In macro-economic terms, it emphasizes a fixed currency and autonomy over monetary policy over capital mobility.
(See also Free trade, Globalization, New classical economics, Protectionism, Mundell-Fleming Model)
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[edit] History
[edit] Rise of mercantilism
As feudalism became incapable of regulating the new methods of production and distribution, mercantilism emerged as a system for managing economic growth through international trade. It was a form of merchant capitalism relying on protectionism. It was developed in the sixteenth century by the European nation-states to enrich their own countries by encouraging exports and limiting imports. In modern terms, the intention was to achieve a "favourable" balance of trade.
[edit] Example
The East India Company is one of the best examples of the collaboration of state and merchants in exploiting market opportunities. The benefits that occurred as a result where:
- it slowly encouraged the evolution of regional into nation states;
- a commercial class emerged which, in return for paying taxes, received state protection in the form of monopolies and tariffs;
- once colonies were established, managing the transport of private goods and the volume of trade enriched the imperialist states and provided both significant employment for the general population and opportunities for upward class mobility for the more enterprising individuals.
[edit] Early criticism
In The Wealth of Nations, Adam Smith criticised the implicit political corruption of mercantilism in limiting the benefits of trade to the elite classes, and asserted that free trade should benefit all interested parties. But, because Britain adopted his call for free trade policies, it fell behind the United States and Germany by 1880, having gained its dominance under the mercantilism of Cromwell and Elizabeth I. The success of the United States and Germany drove the reintroduction of protectionist regulations in the rest of Europe.
[edit] Philosophy
Neomercantilism is founded on the use of control of capital movement and discouraging of domestic consumption as a means of increasing foreign reserves and promoting capital development. This involves protectionism on a host of levels: both protection of domestic producers, discouraging of consumer imports, structural barriers to prevent entry of foreign companies into domestic markets, manipulation of the currency value against foreign currencies and limitations on foreign ownership of domestic corporations. While all nations engage in these activities to one degree or another, neo-mercantilism makes them the focus of economic policy. The purpose is to develop export markets to developed countries, and selectively acquire strategic capital, while keeping ownership of the asset base in domestic hands.
This use of protectionism is criticized on grounds that go back to Adam Smith's The Wealth of Nations, which was aimed directly at classical mercantilist policies, and whose arguments are applied to neo-mercantilistm. Namely that protectionism is effective as a means of fostering economic independence and national stability; and questioning the conclusion that it allows for substaniable development of the nation's industrial base in the most efficient manner. Instead market economics has for over two centuries argued that increasing competition within the nation which will more effectively promote capital development and efficient allocation of resources. "Free traders", argue that by closing an economy, resources will be spent duplicating products that could more effectively be bought from abroad, and that there will be less development of exports which offer a comparative advantage. Market economists also argue that protection denies a nation's own consumers the opportunity to buy at cheaper market prices when quotas or tariffs are imposed on imports.
The subsidy of goods has also been advocated under neomercantilism. The fair trade movement claims that the protection of stability in emerging economies by guaranteeing a minimum purchase of goods at prices above those available in the current world markets, can contribute to restoring economic and social balance as well as promote social justice. Proponents of the fair trade movement argue that this may help to avoid the instability generated by the influence of global corporations on developed and developing nations.
Neomercantalists claim that "Free Trade" results in a negative philosophy that a nation that is not competitive deserves to decline and perish, just like an under-performing corporation should. They argue that "free trade" does not work well whenever dumping is practised or the international rules do not take into account the differences between wages, costs environmental regulations, and benets from nation to nation. For instance, there is a major difference in the cost of labour between a "First World" and "Third World" country for two equally skilled (or unskilled) sets of workers. When this economic reality is exploited by "First World" manufacturers, the benefits accrue to "First World" shareholders and consumers at the expense of "First World" workers and their status in the "Middle Class".
The language of neomercantilist policies repeats the claims of earlier centuries that protective measures benefit the nation as a whole and that governmental intervention secures the "wealth of the nation" for future generations. In doing so, neomercantilist admit that the interests of large corporations might as often be represented and protected as pushed aside for the national interest.
As a neomercantilist nation's industrial production capacity and improving research and development grow as a threat to the hegemon's (who usually unilaterally practices free-trade as Britain in the 19th century and the USA in the late 20th century) domestic markets, so protectionism is the usual response, initially through political and, when necessary, military means (see World War I).
[edit] Examples of neomercantilism
[edit] United States and Germany in 19th Century
By 1880 the United States passed the British Empire in economic strength becoming first ahead of Germany who was second in strength due to Bismarcks adherence to neomercantilist policies like those in the United States.
After 1900, Britain was unable to remain an effective hegemon, having followed its "free trade" philosophy since the 1840's, but the United States was still pursuing policies of its American School rooted in Hamilton's three reports, that it had embraced in the 1860's under Abraham Lincoln and Germany was following Bismarck's policies based on List's "National System," and American economic practices - allowing both powers to continue their dominance in world economics and power. Germany chose to use its strength to pursue a 'balance of power' with the British Empire leading indirectly to World War I, whereas the United States refrained from European power struggles through its foreign policy of 'isolationism' or non-interventionism in foreign conflicts.
[edit] Criticism
Classic liberal economic theory states that free trade, sound money, and prosperity are mutually interdependent parts of a single economic policy but, when inflation intruded into the world trade system, protectionism followed.
In Two Hegemonies, Pigman describes a hegemon's principal function as, "...underwriting a liberal international trading system that is beneficial to the hegemon but, paradoxically, even more beneficial to its potential rivals." As it grows in significance, the hegemon expands its sphere of influence to include interests that have to be promoted through liberal economic policies. During this period, the hegemon will benefit directly from the increased international trade. But other economies also prosper. They are not burdened with high defence spending and the costs associated with overseas development. The "hegemon's dilemma" is whether to revert to neomercantilist policies if its hegemony is threatened, or to continue free trade and risk a relative decline. History suggests that all the global powers experience a period of growth under mercantilistic policy followed by a period where they are benign and focused on promoting international peace and liberal trade which is followed by a period of contraction when they become progressively more unstable.
[edit] References
- O'Brien, Patrick Karl & Clesse, Armand. (editors) Two Hegemonies: Britain 1846-1914 and the United States 1941-2001. Aldershot: Ashgate. (2002)
