One blog that I’ve recently added to my regular reading list is De Minimis. I have no idea who the blog author is, but on general business and economic matters, I happily concede that he (I assume that the author is a “he”) is far more learned and well read that I am. He even appears to be a Star Trek fan, what a nice coincidence!

I’m pretty unhapppy about a post he made however. It’s an interview with PBB group chairman Datuk Oh Siew Nam about what measures Malaysia should take in the face of the current economic downturn. What upsets me is that in addition to the expected suggestion of a generously funded and carefully targeted stimulus plan, there are also two proposals that are explicitly protectionist in nature, and De Minimis appears to agree with both of them.

The first one is that foreign workers in the country should be sent back to where they came from and their jobs be given to Malaysians who have been laid off, both domestically and from their jobs overseas. Aside from the obvious fact, which fortunately the Datuk does concede, that returning Malaysians from countries like the U.S. and Singapore would likely rather starve to death than take on the jobs that these foreign workers were doing in Malaysia, it’s also galling to me that we as a society are perfectly happy to, on the one hand, demand that returning Malaysians who were themselves immigrants in their host countries be treated as well as possible, and on the other hand, demand that the immigrants in Malaysia itself be kicked out as quickly as possible. So much for the humanitarian aspect of socialism! Since I’ve long argued that discrimination based on nationalities is just as bad as discrimination based on racial groups, I won’t dwell on this point.

The second point is that during a downturn, all Malaysians should as much as possible spend their money on goods and services that are made in Malaysia by Malaysians. The idea is that this keeps the money flowing around in our own national economy. The Datuk even calls this being patriotic. Now, the point above about immigrants is wrong because it’s immoral. If you want to be evil, there’s really not much that I can say to that. But this second point is wrong because it’s like scoring an own goal. The intention is to help the Malaysian economy, but will actually end up hurting it.

Why this would be the case isn’t hard to figure out. As I commented earlier, if it is justifiable for Malaysia to act in this way, then it is equally justifiable for all other countries to act in the same way. Every country would encourage its citizens to buy goods and services that are produced domestically as much as possible and if their citizens actually complied, this would cause the global volume of international trade to plummet. This means giving up on the benefits of trade and ample evidence indicates that the countries that experience the most economic growth are the ones that trade the most while countries that are the most isolated tend to remain economically stagnant.

One parallel that I tried to compare this to is what is happening with banks all around the world today. Due to the credit crisis, every bank is starved of liquidity and is hoarding all the cash that it can get its hands on. Each bank wants to reassure investors, creditors and depositors that its balance sheet is stronger than its peers, and so refuses to lend any money out in order to improve its capital to loans ratio. Whenever a bank successfully does this and publishes its results, the bar has been raised for all the other banks who will come under pressure to match the new ratio or risk looking weak and undercapitalized. While it might make sense for each bank’s managers to act in this manner, when every bank does this, the economy tanks due to lack of liquidity and all the banks in the system get pummeled.

That isolationism doesn’t work can easily be proven by the observation that if it did, why aren’t advocates asking for it at an ever more local level? If Malaysians should buy Malaysian to help Malaysia, why shouldn’t the residents of individual states, cities and towns do the same? Perhaps residents of Kuala Lumpur should only buy stuff from other residents of the city and leave the rest of the country out to rot? Then Penang should try to be as self-sufficient as it can too. It’s an island, after all! The reason why no one asks for it is that the benefits of trade between the different states, cities and towns of Malaysia are easy to see: specialization, division of labour and making full use of different comparative advantages in different parts of the country. But what goes for the national level goes for the international one as well, because there is no difference between domestic trade and international trade.

Of course, what the Datuk probably means isn’t complete isolationism, but rather “beggar thy neighbour” mercantilism. Simply said, we want foreigners to buy our goods, but we don’t want to buy any of theirs’. Good luck making your case with a straight face to our neighbours then, because that doesn’t sound to me like a good way of making friends. Either way, it’s still wrong-headed. Asian countries have overcompensated for the lessons they learned from the 1997/1998 crisis and have tried to build up huge trade surpluses in the old-fashioned belief that this is good. As The Economist notes, however, this is not. It writes:

Countries that have lived beyond their means may feel a justifiable remorse as their booms turn to bust. Surplus countries are simply stupefied by their plight. They should not be. A persistent current-account surplus is a symptom of unbalanced growth, just as a big deficit is. Countries that save too little to cover their capital spending are at the mercy of foreign investors; countries that save too much are at the mercy of foreign demand.

In short, if you persist in refusing to buy goods from other countries, they won’t have enough money to buy your goods from you. When that happens, everybody loses.