Thursday, March 30, 2006


From the Beltway panic over the Dubai ports deal to Europe's bout of merger anxiety, ambitious politicians are baring their protectionist teeth. Now would seem a good time to recall how well their countries and others have done by flinging doors open to trade, capital, services and people.

The emergence of China and India as global giants in the making dates directly to their decisions to liberalize. The current U.S. expansion is powered in part by capital from abroad. The Asian Tigers grew off trade. The singular achievement of the European Union was to create the biggest zone on the planet for the free trade of goods, capital and people.

In the past four decades, open economies (mostly from Europe, East Asia, North America) have fared far better than closed ones (Africa, Latin America, parts of Eastern Europe). Economists Jeffrey Sachs and Andrew Warner found that from 1970-1989 average annual growth in open developed economies was 2.3%, compared with 0.7% in the closed. In developing countries, those numbers were 4.5% and 0.7%. That trend hasn't changed much as trade and foreign investment have powered global growth.

As befits the dismal science, not to mention the dismal profession of politics, this evidence hasn't settled the intellectual argument. So New York Senator Chuck Schumer and French Prime Minister Dominique de Villepin can make their case for "economic patriotism," to use the Frenchman's phrase, with a straight face.

But Europe is a good laboratory to test the link between market access and prosperity. Forget about old and new, south and north; the real EU divide is between open and less open economies. The former category include the "Anglo-Saxon" success stories of the past decade, Britain and Ireland. Starting with the Thatcher era, the U.K. put a "For Sale" sign out. A swath of British industry, including its car makers, is now in foreign hands. But -- Mr. de Villepin, take note -- the world didn't end. Britain focused its attention on services, turning London into a global financial center. Britain's rate of growth and employment is the envy of Europe.

The real star pupil is Ireland, which went from the bottom of the EU league tables in GDP per capita to the top in a generation by slashing taxes and barriers to investment. Of the OECD countries, Ireland has the highest share of foreign-controlled affiliates in terms of employment (nearly 50%) and turnover (78%). In Portugal, which puts up higher obstacles to foreign investment, it's 15% and 8%. Portugal is today the poorest country in Western Europe.

Less well-known is Austria. Having emerged from the Cold War with a state-dominated corporatist system, Austrian fortunes changed with the opening of the east and its own economy. Barriers to foreign direct investment went from above to below the OECD average. In 1998 Austria had the most legal barriers to investment; by 2003 Vienna had the least after New Zealand, another socialist backwater that liberalized its economy starting in the 1980s.

An open-door policy may be the only proven way that EU countries will be able to salvage their beloved "social model." Consider the Nordic states. Other Europeans envy their high economic growth and welfare spending but don't want to see what makes it possible. These countries have deregulated product and service markets and are open to foreign investment. Volvo and Saab aren't owned by "Swedes" anymore.

The human capital in those countries, often cited as one reason for their strong performance, didn't spare them the downturn of the 1990s. That's when Sweden, Denmark and Finland embraced market reforms to become the most dynamic economies in Europe. Call it "a second-generation Nordic Model," socialist mainly in the welfare sphere.

Foreign capital and free trade have also kept the more protectionist EU states afloat. No Western European country has more barriers to foreign investment than France, according to the OECD. (Britain has the least.) But investors have nonetheless moved into France. By one measure -- the stock of foreign direct investment as a share of GDP -- France (41.8%) is ahead of Britain (36%) and Germany (21.3%), according to Eric Chaney of Morgan Stanley. French multinationals are flourishing abroad. With the state eating up half of GDP, the private sector drives the little growth -- a paltry 1.4% last year -- that France has.

Imagine what a freer market for capital and services could do for France. But the government's nationalist turn of recent years is proving costly. Outside investment is dropping, amounting to half the level of 2003 in each of the past two years. French investors may in turn soon find themselves unwelcome in other countries. When the French political class vilified Indian-born steel baron Lakshmi Mittal and his hostile bid for Arcelor, the Indian finance minister warned that the French may not be so welcome in his booming economy.

Globalization is a two-way street. Nations can't take advantage of it abroad and try to protect themselves from it at home. Maybe in the halls of Congress, this message will eventually sink in. The world's prosperity depends on it.


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