The Dangerous Rise of Economic Interventionism

Abstract:     
This paper reviews the economic interventions by governments and central banks in response to the 2007-2009 financial and economic crisis. In the area of trade policy, we find that protectionism has increased substantially, with governments targeting in particular the products of declining industries and financial services. Nevertheless, spiraling protectionism as in the 1930s has so far been avoided. In investment policy, the crisis has not led to a general increase of protectionist pressures for the time being, although the long-term general trend towards liberalisation has recently been complemented by a parallel trend towards re-regulation. The main areas of economic interventionism, however, have been fiscal policy (mainly through stimulus programs and emergency actions to stabilise the financial system) and monetary policy (mainly through interest rate cuts, quantitative easing and various other actions). Given their cumulative size, these interventions hold a substantial potential for distortions and undesirable side-effects on both the microeconomic and the macroeconomic levels. These include protectionism, political mismanagement and state failure, the degradation of government finances and the threat of future inflation. These concerns can be addressed, but this requires constant monitoring of the policy areas affected and decisive actions towards achieving a timely exit.

This essay has been written within the research initiative “Global Governance in a Plural World” which was hosted by ASERI and co-sponsored by Regione Lombardia. It was first presented at a conference in the Leading scholars’ programme at ASERI on 16 November 2009. This version of the paper reflects developments until 20 January 2010. The author has prepared this paper exclusively in his personal capacity as a researcher. All the views expressed in this paper are exclusively those of the author and shall not be attributed to any institution to which the author is affiliated.

Number of Pages in PDF File: 58

Keywords: Financial And Economic Crisis, Government, Interventions, Trade Policy, Protectionism, WTO, Investment Policy, Fiscal Policy, Stimulus Measures, Emergency Measures, Bailouts, Deficits, Debt, Monetary Policy, Central Banks, Interest Rates,Quantitative Easing, Exchange Rates, Inflation, Exit Strategy

JEL Classification: E52, E58, E62, E63, F13, F21

Accepted Paper Series