Harmful Protectionism in Eastern Europe

Fisher Investments |

Harmful Protectionism in Eastern EuropeTwenty-three years after the Iron Curtain’s fall, there’s a new dividing line in Eastern Europe: A sharp contrast in quality of life between those nations where free markets and free society have flourished, and those where the state keeps an iron grip. Free nations like the Czech Republic, Latvia and Estonia (to name but three) have grown and thrived, with the majority of the populace enjoying the fruits of capitalism. In more oppressed nations like Russia and Hungary, however, life hasn’t been nearly as sweet—and the more economic malaise sets in, the more their governments intervene, to the detriment of their citizens. Both nations were at it again this month, passing new protectionist measures that will only hurt their people.

Hungary struck first, passing a constitutional amendment allowing “only Hungarian farmers” to purchase domestic farmland. On the surface, the law’s origins were noble: When Hungary joined the EU in 2004, land prices were depressed, and many folks feared EU accession would allow foreign speculators to bid up land prices at the expense of local farmers. Thus, the EU allowed a temporary ban on foreign ownership, believing that would allow Hungarian land prices to more gradually catch up with the rest of the region, with Hungarian citizens reaping the benefits. However, the permanent extension—and inclusion of all Hungarians who aren’t farmers by trade—makes it clear Hungary’s leaders have no intention of restoring a free agricultural market. Its aims are purely nationalist. According to the Ministry of Rural Development’s statement, the law “protects Hungarian farmland, our heritage and the basis of our livelihoods from foreign and domestic speculators alike.”

What the law really does, however, is rob Hungarian agriculture of two important sources of capital: foreign and domestic investors. It also lowers the likelihood Hungarian farmland is used to its fullest potential. Much of the Hungarian farmland in foreign hands (which have skirted the ban by purchasing the land through Hungarian shell corporations) is owned by family farmers who’ve cultivated land that previously went to waste. In the process, they’ve introduced new, more efficient farming methods, bringing more and cheaper meat and produce to their towns. By barring more foreign would-be farmers from doing the same thing, Hungary’s effectively denying its people better, cheaper food.

Limiting domestic land purchases compounds this. Party members say the law promotes “a network of local small and medium-sized family land ownership,” which suggests corporate owners—anyone not technically a “Hungarian farmer”—aren’t welcome. This stance assumes all purchases by non-farmers are somehow harmful. But this isn’t so! Consider a Hungarian company or business owner that decides to expand into agriculture—they’re investing capital, hiring workers and, ideally, improving agricultural output. The same is true of many potential foreign corporate landowners. If it bans this very healthy form of commerce, the government’s banning measures that would revitalize Hungarian farming and benefit the entire nation.

The economic impact of Russia’s newest trade barrier isn’t as immediately obvious, but it’s just as harmful—and socially, even more so. Dictator—err, President—Vladimir Putin has signed a bill banning Americans from adopting Russian children. Some Kremlin officials are pushing for a ban on all foreign adoptions.

The immediate victims, of course, are Russian orphans. According to UNICEF, Russia has 740,000 orphans or “social orphans,” whose parents have abandoned them. Many of these children live in orphanages, often under deplorable conditions and separated from their siblings. Over the past 20 years, US adoptions have provided over 60,000 of these children tickets to better lives—family, shelter, friends, education. Overall, foreigners account for roughly half of Russia’s adoptions each year. Banning them would deny countless children even basic opportunities.

Over time, this likely means hundreds of thousands more undereducated Russian adults who could very well struggle to meaningfully contribute to the country’s future growth and advancement—many of whom may rely on state welfare their entire lives. The state’s burden—whether on adult welfare or state-run orphanages—will grow, likely forcing even higher taxes on Russian workers and businesses. Lost output, higher state spending and higher taxes are a recipe for economic decline.

From tariffs to import restrictions and everything in between, history’s riddled with evidence protectionism hurts those it aims to help. In my view though, Russia and Hungary’s latest actions belong in a special category: protectionist measures that don’t even pretend to have economic goals and will only bring societal ill.

Why do these leaders seem so bent on hurting their people? In short, nationalism trumps the common good. In Russia, it’s Putin’s desire to play hardball with the West and show some post-Cold War might—the adoption ban is a retaliatory measure against US sanctions on proven human rights violators. In Hungary, it’s proto-fascist Prime Minister Viktor Orban’s quest to protect Hungary from what he sees as EU imperialism. These are very shallow political aims—society doesn’t benefit from a strong state in either nation. Rather, society thrives when markets are open, commerce is free and political choice abounds—that’s what fosters the most transparency and the freest movement of goods, services, capital and labor. And oddly enough, this free commerce is what ultimately provides the economic growth that brings the political clout these leaders so crave.

If Putin, Orban and others like them were willing to risk losing their personal power, relax their parties’ control and allow more open political and economic systems to take hold, their countries would be much stronger in the long run—and their citizens much better off. For now though, unfortunately, they seem too blind and insecure to realize it.

This article constitutes the views, opinions, analyses and commentary of the author as of December 2012 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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