Economic Nationalism

by seangljacobs

A reflection of poor leadership as much as poor policy

By Jordan Shopov

Earlier this year, as part of his failed re-election bid, Kevin Rudd famously declared himself “an economic nationalist.” This re-branding exercise followed a string of comments surrounding the state of Australia’s foreign ownership laws, and underpinned part of the Rudd campaign’s dubious effort to win over the more xenophobic elements of Australia’s electorate.

Thankfully, much of the Australian policy community were quick to condemn Rudd’s “policy on the run” for its potential to limit direct foreign investment and hamper economic ties with Australia’s key trading partners. Such nationalist economic sentiment, however, has not been unique to Australia.

Over recent months, Papua New Guinea’s Prime Minister, Peter O’Neill, has gradually revealed his own brand of “economic nationalism.” His government has steadily implemented an array of regulatory measures that not only risk derailing PNG’s recent economic progress, but also pose a threat to long term socio-economic development.

In September of this year, the PNG Parliament unanimously passed legislation expropriating a 63.4% shareholding in the nation’s largest company, Ok Tedi Mining Limited, held by the PNG Sustainable Development Program. The legislation also relinquished legal immunity for environmental damages caused by BHP Billiton – the Ok Tedi copper-gold mine’s former owner.

Since then, the O’Neill government has intervened in a takeover bid launched by the Malaysian firm Kulim for the publicly listed New Britain Palm Oil – PNG’s leading rural corporation. The takeover bid was blocked by the PNG securities regulator on the basis that it had violated a new “national interest” test, which has was added to the national Takeovers Code in August 2013.

Latest reports further suggest that the O’Neill government has enforced the sale of a majority share in PNG’s main television station, EMTV, and is seeking to control the nation’s second largest mobile network, Bemobile. O’Neill has also reportedly backed the creation of a new holding company to consolidate the government’s stake in a range of state-owned enterprises (SOEs).

These measures have, not surprisingly, been lauded by O’Neill’s political allies for ensuring that the people of PNG are guaranteed an equal share in the nation’s economic progress. Richard Maru, PNG’s Minister for Trade, Commerce and Industry, has gone even further stating that: “the country has to serve the interests of its people and not allow too much control of our resources by foreigners.”

In reality, such efforts to restrict foreign ownership will inevitably limit the flow of foreign capital and thereby reduce the rate of national economic growth. Even global ratings agency Standard and Poor’s has flagged an increasing perception of “sovereign risk” amongst foreign mining companies in PNG.

Secondly, the push to expand the influence and role of SOEs will gradually crowd out more productive private enterprises by absorbing large amounts of PNG’s scarce capital stock. This was confirmed by a recent Asian Development Bank benchmarking study, which found that PNG SOEs generally act as a drag on economic growth. A burgeoning state sector also has the capacity to exacerbate the already endemic state of corruption in PNG.

The opportunity cost of such “economic nationalism” has, unfortunately, never been greater. A recent report commissioned by Australian New Zealand Banking Ltd (ANZ) highlighted the full extent of PNG’s current economic potential (see previous post). It found that over $400 billion in exports from mining, agricultural and forestry sectors is feasible by the year 2030. But as ANZ’s CEO, Mike Smith, has pointed out “mobilising foreign capital will be critical to realising the opportunity.”

Despite this clear and compelling economic case for reducing barriers to trade, investment and minimising the role of SOEs political leaders like Rudd and O’Neill continue to champion policies that, to varying degrees, restrict freedom to exchange and ultimately hamper economic progress. These self-defeating measures, however, do not simply reflect poor economic policy; they also reflect poor leadership.

Reforms that seek to distort the free allocation of resources or redistribute the proceeds of ingenuity and hard work are usually those that benefit the well-organised, outspoken and vested interest groups that dominate the political discourse. They also usually appeal to unaware and ill-informed voters easily susceptible to simple but deceptive slogans. “Economic nationalism,” therefore, is quintessentially a form of populism. It not only reflects a lack of substance and conviction, it also best serves the interests of rent seekers, crony capitalists and the ruling elite.

In contrast, policies that promote free enterprise, self-responsibility and frugality generally benefit all members of society by enhancing individual opportunity and ultimately safeguarding the freedom to pursue happiness. True leadership, therefore, is the courage to champion liberty and free markets, whose benefits are much harder to articulate, but which more effectively serve the true drivers of prosperity – those whom Sir Robert Menzies aptly described as “the forgotten people”.

Nonetheless, populist leaders are eventually exposed for their true character. In the case of Rudd, his flirtation with “economic nationalism” was a rehash of the 2007 Australian federal electoral campaign, when he proclaimed to be an “economic conservative.” Although it prevailed in 2007, by 2013 the Australian public were wiser to such branding gimmicks and were thus able to recognise Rudd’s “economic nationalism” for what it truly stood for – a disingenuous Prime Minister.

In the end, “economic nationalism” and other similar reforms not only depress economic progress and place a shackle on the middle class; they also sow the seeds of political demise. Prime Minister O’Neill would be wise to heed these lessons. Only true leadership, with the audacity to promote more open, free and competitive economies, will ensure that all of PNG’s citizens are able to fulfil their immense potential in an emerging “Asian century.”

Jordan Shopov.