Month: January 2013

Rob Russo is an award-winning journalist with over three decades of experience. Rob has headed the Washington and Ottawa bureaus of The Canadian Press, and in June 2013 joined the CBC as managing editor of its parliamentary bureau.

Navigator recently spoke with Rob about journalism, social media and the rapidly changing media environment.

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In your career, you’ve covered a number of different governments — in provincial assemblies, on Parliament Hill and in Washington. How has the journalism business changed, particularly with the rise of digital media? Has it been a change for the better?
Editorially, the digital leap has generally been terrific for journalism. More people than ever people are reading, listening and watching our journalism. The walls between our audiences and reporters have been lowered or torn down entirely. We aren’t telling them what the most important story is of the day. They are making that decision. They are the editors filtering out what they do and don’t want to hear about. Then they are turning to us to make sense of it all. That’s broken some connections, but given birth to vibrant new connections with our audiences that didn’t exist before.
What we haven’t been able to do yet is find a way to make the kind of money we used to make as an industry, given the larger audience and the stronger connection.
But we’re in a period of transition and I’m confident that we’ll get there.

In a lot of cases, it seems like the desire to be the first to report a story has replaced journalistic standards, like proper sourcing and fact checking. Do you think the media’s credibility has been damaged as a result?
Pollsters aren’t the only ones who have blown calls lately. Reporters have got it wrong on some notable stories of late, notably the Boston bombings. If we openly admit it when we get it wrong and take thoughtful steps to ensure that errors aren’t repeated, we can rebuild credibility and, in many instances, enhance it. And the other truth is organizations like the one I work for now, the CBC, and the one I just left, The Canadian Press, have exceedingly rigorous standards on sourcing that make it very difficult for idle speculation to make it into the public domain. If those standards are adhered to we should be fine.

The nature of breaking news is such that the immediate vacuum is filled with a combination of both substance and speculation. Is the public interest better served through this instantaneous news cycle or upon sober reflection?
Reporters hone powers all of us have: powers of observation and recall. On breaking stories, we do very well when we rely on these two powers but can stray
into trouble when we draw conclusions as a story is still developing. I used to tell reporters in these circumstances to write only what they know—what they’ve seen, what they’ve heard and what they’ve been told by multiple, independent sources.
One of the best examples of this kind of reporting came during the assassination of John F. Kennedy. Merriman Smith, a reporter with UPI, won a Pulitzer for writing only what he saw and heard while others speculated wildly. His flashed dispatch: ‘Three shots were fired at President Kennedy’s motorcade in downtown Dallas.’ Second flash: ‘Kennedy seriously wounded.’ He got both of those dispatches out long before the competition and instantly captured the story for UPI with sparse, powerful and accurate reporting.

Is there room for both immediacy and thoughtful analysis? Or does the one undermine trust and credibility in the other?
There is no room for speculation in those circumstances. There is certainly room for analysis, but I would be very careful about that as well. Stick with what you know. Dig to find out more. Tell your readers and audiences you will keep working to find out everything you can that is relevant. But speculation in a developing news environment can be perilous.

Twitter wasn’t around when news of Monica Lewinsky’s stained blue dress or the impact of hijacked American Airlines Flight 11 first broke. How would it have changed the evolution of our understanding of these events?
I was in Washington and wrote about both of those events. I’ve no doubt Twitter would have had some impact on the reporting. But there was some top-flight old fashioned reporting done in both instances. Would Linda Tripp, Lewinsky’s older confidante, have tweeted about her friend’s tryst with the president of the United States? Perhaps. The 9-11 story happened as we watched it in real time on television. There were some heart-wrenching stories that came out in recorded telephone conversations, but they emerged days later. Some of the stories of those people trapped above the 80th floors of those buildings almost certainly would have been instantly tweeted out.

Can a 140-character limit lend itself to investigative journalism?
It can certainly be a way to obtain information and promote that information. For example, the Ottawa Citizen’s Glen McGregor is smart and active on that platform. He’s developed an important following as a result. I would not be surprised if that following has helped him get information he might not have otherwise landed. But I get a McGregor snack on Twitter. If I want his gourmet feasts I’ve got to read his full stories.

What implications does this technological and cultural shift have for your profession going forward?
They are myriad and impossible to accurately quantify right now. Smart phones and tablets are voracious consumption devices of our work. There will come a day soon when more reporting produced for television is consumed online than through the flat box in our living room. That is bound to have an impact on how television is produced. The whole ‘second-screen’ phenomenon—people watching television to take in a live event while following tweets or digging for analysis on a tablet or laptop—is opening up huge avenues of opportunities for intrepid reporters. But none of it will matter if we don’t keep investing in deeply researched, well-reported and carefully edited stories.

Foreign investment is the engine that drives the Canadian economy. At the same time, Canadian companies are increasingly globally oriented.

From our pre-Confederation colonial infancy, Canada has relied on foreign capital to finance its ambitions. Little has changed.

Since 1990, the value of direct foreign investment within Canada has grown fivefold. Iconic Canadian brands have been affected: Labatt is now owned by Belgians, Tim Hortons by Americans, and Falconbridge by Swiss.

Without noting the extent to which Canadian companies punch above their weight on the world stage, protectionist interests have decried the hollowing out of our economy.
Yet, since 1997 Canada has actually been a net direct investor abroad.

John Hancock Life Insurance, which dates back to 1862 and has all the American pedigree of a company named after an original signatory of the Declaration of Independence, was bought by Canadian insurance giant Manulife Financial.

It’s no surprise that the United States, Canada’s largest trading partner, is also the origin and destination for the majority of direct investment. Over 54% of foreign direct investment into Canada, and 42% of Canadian investment, is with our neighbours to the south.

But, where else does foreign investment come from? And where is it going?

The following infographics illustrate these monetary flows to give a better sense of Canada’s position in our interconnected world.

Understanding how and why politicians make decisions

In the era of what seems to be permanent election campaigning, government decisions more often than not come down to one thing: politics.
Any government’s ideology is an important indicator of its preferred agenda—of the decisions it would like to make. However, for the most part, political leaders will not make decisions or take actions that put them far out of line with public opinion. Rather, in most cases public opinion drives political action.

 
CANADA’S CONVERSATION DROVE POLITICAL ACTION
— Tracking Ottawa and Canada’s reaction to CNOOC and Petronas
Ottawa politicians, pundits and journalists rarely lost focus on the proposed takeover deals. While Canadians moved from one issue to the next—the proposed deals, CSIS, Huawei and trade talks with China—across all issues they were talking about one thing: protecting Canada’s security. Once satisfied that Mr. Harper’s new foreign investment rules would protect security, Canadians moved on.

 
PUBLIC OPINION AND THE NEW ERA OF FOREIGN INVESTMENT
In December 2012, Prime Minister Stephen Harper announced new rules to govern foreign investment in Canada. On the surface, Mr. Harper was announcing changes to Canada’s Investment Act. More importantly, however, taking a deeper look at Canadians’ conversation leading up to his announcement, it is clear that Mr. Harper was taking political action in response to public opinion.
Announcing the new rules, Mr. Harper’s message was clear: Canada is open for business, but not for sale. Understanding the Canadian conversation leading up to his announcement reveals why Mr. Harper chose his message.

For months prior to the announced changes in the Investment Act, media coverage focused on the proposed purchase of Nexen by state-owned Chinese company CNOOC and Progress Energy by Malaysian state-owned company Petronas. Journalists and pundits wondered whether Mr. Harper and his government would approve the sales. Canadian public opinion, though, was more nuanced in its concern.

Canadians understood the value of foreign investment and its economic merit; they knew foreign investment would promote economic development and job creation. However, Canadians were uneasy with the idea of state-owned companies having nearly limitless access to Canada’s resource sector. At the outset of the announced transactions, the opposition saw and seized the opportunity, and strategically pitted two key strengths of Mr. Harper and his government—economic stewardship and national security—against one another.

Ensuing developments didn’t help Mr. Harper’s dilemma.

CSIS, Canada’s spy agency, raised security concerns about foreign takeovers by state-owned companies, and in doing so provided further proof to help confirm Canadians’ suspicions.

Mere weeks later, news broke that the Canadian government was being investigated for putting North American safety at risk by permitting Chinese-based technology company Huawei to participate in major Canadian telecommunications projects. While barred by the U.S. and Australia, Huawei was making inroads in the Canadian market. Canadians made a connection between Huawei security concerns and foreign state-owned investments.

Amid CSIS warnings and news that Huawei could threaten Canada’s telecommunications system, Canadians’ anxiety about threats to national security came to define their understanding of foreign investment by state-owned enterprises.

Public opinion had shifted; Harper could no longer afford to approve the Nexen and Progress Energy deals without political action that effectively responded to Canadians’ concerns.

In the end, the proposed deals were approved, but Mr. Harper effectively responded to public opinion by raising the bar for future bids by state-owned foreign companies. By changing the rules, Mr. Harper created a new era of foreign investment governed largely by a single rule for companies: without the ‘social licence’ to proceed, don’t even consider bidding.

 
ON THE SENATE, HARPER TAKES HIS CUES FROM CANADIANS
For much of the final months of 2013, ongoing Senate scandals rocked Ottawa and dominated headlines. As far as Canadians were concerned, the scandals were by and large the only thing worth discussing. As their conversation persisted, Canadians began to demand action.
Canadians will not move on from scandals—including the Senate scandals—until a cogent and believable explanation has been
offered and action has been taken to ensure accountability. But what should this action look like? On the Senate, Canadians gave Mr. Harper clear instructions.

Senators Pamela Wallin, Mike Duffy and Patrick Brazeau had already been ousted from the Conservative caucus, but in October 2013, the government announced its intention to remove all three from the upper chamber without pay for ‘gross negligence.’

Before announcing its intention in October 2013, for a brief time the government indicated it was potentially open to more lenient punishments for Senators Wallin and Brazeau. Mr. Duffy, however, was always to face the strictest sentence. Mr. Harper wanted him as far from Parliament Hill as possible.

When the Senate scandal first broke, the conversation among Canadians focused on the Senate and the Prime Minister’s Office (PMO). However, as further details became known and after Mr. Duffy lashed out at Mr. Harper and his office, the conversation quickly shifted away from institutions and toward personalities: Canadians were beginning to point their fingers squarely at the Prime Minister and his 2008 Senate appointee.

Mr. Harper understood that he had to take extreme action or his leadership would be forever linked with Mr. Duffy’s financial irregularities. Whatever the short-term political pain or caucus fallout, the baggage had to be dropped. A few weeks later, all three senators were suspended from the Senate.

For weeks, NDP Leader Thomas Mulcair relentlessly and effectively attacked the government’s Senate scandal explanation during Question Period. Those attacks forced the Prime Minister to take clear positions on who he felt was guilty of any misdeeds—positions that, if rebuked by further investigations, could spell political disaster. However, up to this point, Mr. Harper has skirted contradictions and Canadians have not rewarded Mr. Mulcair for his stint as ‘lead prosecutor’ in the House of Commons.

Public opinion can drive action and it can drive inaction: understanding that he would have to score political points elsewhere, Mr. Mulcair has put Mr. Harper on the record and has moved on to other issues.

Meanwhile, Canadians applauded Justin Trudeau’s bold move to force senators who had been sitting as Liberals to now sit as independents. What Trudeau didn’t do, however, was drive a direct contrast with the government. Trudeau’s Senate surprise may have boosted the Liberal brand, but it didn’t further drive down the Conservatives’. To win the battle over accountability, Mr. Trudeau will have to do both.

After months of shifting explanations and endless revelations, the government’s goal now is to shift attention away from questions of accountability and fight the next election on more comfortable footing. Mr. Harper and his government will push an aggressive agenda. Moving forward, the economy will be central to almost everything Mr. Harper and his caucus says and does; free trade, jobs programs, budgetary restraint, economic mobility, immigration reform, pipelines, procurement and tax relief will drive a competing narrative.

The Hon. Jim Prentice is now a senior bank executive, following a distinguished career in public service. His leadership of various ministerial portfolios — including Industry, Environment, and Indian Affairs and Northern Development — led Prime Minister Stephen Harper to describe his role as ‘Chief Operating Officer of the Government of Canada,’ upon his departure from public life.
Navigator recently sat down with Jim Prentice to discuss politics, investment and pipelines.

 

 
NAVIGATOR: This issue is about the role of politics in shaping capital markets. Your professional experience, first as a cabinet minister and now as a bank executive, affords a unique perspective. How do you describe the interplay between the two spheres?
JIM PRENTICE: Well, I’ll answer that question as a banker rather than as a former politician. What I’ve learned since I joined is just how incredibly sensitive capital markets are to the public policy environment, generally. That’s certainly true of fiscal policy, it’s true of monetary policy, and it’s true as well of sectoral policies and policies affecting things like foreign direct investment. Capital markets are sensitive to all of those things.
There’s something else that I think that’s quite important: In the context of the global marketplace today, which is evermore interrelated all the time, markets are also sensitive to the differentials in terms of politics and public policy between countries.
 
Reflecting back on your time spent in Ottawa, to what extent was the potential impact on capital markets considered in day-to-day political calculations?
It was certainly considered and I think the strength of the Prime Minister and the Conservative government has been a sensitivity to how markets perceive public policy developments. I can tell you that whether you’re speaking of fiscal policies, energy policies, or environmental policies, there was certainly a close regard to the impact of those policy changes on the business community and on capital markets.
 
You’ve been quite vocal about Canada’s reliance on foreign investment. When speaking with global investors, how do you describe Canada as a place to invest?
Here’s the reality: We are a country that is small in population — barely half of one per cent of the world’s population — but we occupy a disproportionate share of the world’s landmass — something in the order of 15, 16 per cent of the world’s landmass. We own a disproportionate share of every single commodity that matters, and so capital markets are extremely important to us.
If you take the energy sector, just as an illustration of the point, the go-forward five-year average of what we would expect to invest in the energy sector in Canada is in the order of $50 billion per year; if you compare that to what we raise in domestic capital markets, it’s in the order of $15 billion per year. We have enormous capital requirements, almost double the capital that we have domestically that we require in the way of foreign investment.

It’s because we are a country that is small in population, but with enormous ambitions, that we have always needed other people’s capital to develop out Canada.

 
Much has been made of sovereign wealth fund and state-owned enterprise (SOE) investment. Can Canada afford to overlook certain classes of capital?
I think it’s important contextually to note that, particularly in Asian countries, there is a reliance on state-owned enterprises as a dominant form of assembling capital. These are economies that are more collectivist than ours. They are at different stages of development and so they have much larger aggregates of capital in the form of SOEs.
If you look at the world’s 25 largest energy companies you’ll find a disproportionate number of state-owned enterprises.

My position has been that they bring a unique perspective. I’m of the view that they should be welcomed in Canada. We need their capital. We need them to platform their international business in our country. Frankly, pragmatically, that’s because if they’re not platformed in Canada —in Calgary or Toronto or Vancouver —they’re going to be platformed in Houston or London or somewhere else.

It’s capital we need, it’s business we need, and we’re searching for those investment dollars. It’s not to say that we would accept those dollars under any terms and conditions. We need to be careful, and we have been.

We have enormous capital requirements, almost double the capital that we have domestically that we require in the way of foreign investment

Last year Canada experienced considerable contraction in terms of foreign investment. Many observers have attributed this to the Prime Minister’s policy announcement following the approval of the CNOOC and Petronas transactions that these decisions should not be viewed as the beginning of a trend but rather the end of a trend. How do you explain the drop-off?
Well, firstly, there has been a very clear drop-off. It’s demonstrable.
If you look at the inbound foreign investment in the energy space over the last five years, the numbers are massive (in the order of $70 billion invested in the Canadian energy space). If you look at what happened in the last year, there was a very significant drop-off in terms of inbound foreign direct investment, and Chinese state-owned investment essentially stopped.

My view is that there has been three causes. Certainly the fact that we have experienced difficulties in Canada in terms of developing infrastructure to export our energy off the continent has cast a bit of a pall over energy investments.

Secondly, the Canadian energy markets have been pretty active, pretty frothy if you will, and so there’s been a readjustment of prices in a downward sense. And until that happened, I think investment, generally, had begun to fall off.

But certainly a third reason has been the change in the foreign direct investment rules as they relate to state-owned enterprises.

I think it is the confluence of those three factors that has led to a very dramatic drop-off in mergers and acquisition activity, in inbound foreign direct investment, and consequentially a significant reduction in capital market activity, generally.

 
You’ve said in the past the policy has been mischaracterized or misunderstood in certain quarters. When asked by foreign investors, how do you interpret the Prime Minister’s remarks?
Well, the first point I would make is that Canada needs to continue to be open for business. We continue to have an imperative to get the message across that Canada is open for business.
Any changes to the foreign direct investment rules — specifically to the Investment Canada regime — are watched very carefully by international investors. We cannot reiterate too many times that we’re open for investment, that we want to see foreign investment, and that we’re an ambitious country that welcomes other people’s capital, including capital from state-owned enterprises.

My point has been that we need to continue to say that.

The changes that were made to the Investment Canada Act are very significant. They have had the essence of ring-fencing the oil sands, if you will, from majority ownership by state-owned enterprises.

That is a policy that I support, but we don’t want to see that misinterpreted as a policy that has walled Canada off from foreign investment in any way. And so we need to make sure people understand this.

These are also policies that are directed at state-owned enterprises generally, but not all state-owned enterprises are the same. So, Statoil is a different entity, being a state-owned enterprise from Norway, than, for example, Sinopec, being a Chinese state-owned enterprise. So we need to be careful and assiduous about making sure that people understand where we are coming from as a country and that we welcome capital.

 
To what extent should Canadians share Prime Minister Harper’s concerns around the re-nationalization of Canada’s economy through foreign SOE, and sovereign wealth fund investment?
If I understand your question, I think we all have a concern that state-owned enterprises are not the same necessarily as private-sector enterprises. They are different. We need to acknowledge that they are different.
They are very different forms of aggregation of capital. The important practical point is that they are a dominant form of capital in today’s global economy and we cannot exclude ourselves from that marketplace. But to be clear, state-owned enterprises represent an amalgam, if you will, of the power of the state and the power of combined capital, and so we need specific rules that deal with them.

As the Minister of Industry in a former life, I brought in Canada’s first set of specific policies that dealt with state-owned enterprises. I stand by that approach. But I think you have to go back to the fact that we are not concerned about the ethnicity of money that is coming to Canada. What we are concerned about is how that capital behaves once it’s in the Canadian marketplace, and ensuring that it behaves according to market principles. Ensuring that we have, for example, the standards of shareholder protection, minority rights protection, and transparency that we have in the marketplace in North America.

If the capital behaves according to our rules, we should welcome it on those terms.

 
In your judgment, what impact has the uncertainty surrounding the Northern Gateway, Keystone and other pipeline projects had on Canada’s attractiveness to foreign investors?
The difficulties that we have had in executing infrastructure to export our oil and natural gas, whether it’s to the United States or off the West Coast, have had a very significant effect on the Canadian energy space and, inferentially, on the Canadian economy.
We see that in a reduction in M&A activity. We see that in the inventory of properties that are for sale on the market today, where investors are actually exiting Canada and putting their properties up for sale. And we see it in the deferral of investment decisions for major capital projects.

The long and short of it is that if you look past 2020, Canada does not have the capacity to export incremental volumes of oil from the Canadian oil sands. We don’t have the transportation capacity to move the product to market. Investors are very cognizant of that. These are the most sophisticated companies in the world.

They are well aware, and they are being very careful in terms of their investment decision.

So this is having a profound effect on the energy space. We are seeing the consequences already; it’s not simply post 2020. We are seeing the market consequences today. You’ve noticed, for example, over the last couple of years there have been, at various points in time, enormous price differentials between the world oil price and the price we are recouping for Canadian oil. That reflects the fact that we’re unable to achieve world prices because we’re selling our oil as a world product, we’re selling it into a congested continental marketplace. And so the consequence for the private sector, and for governments, amounts to billions and billions and billions of dollars that we are losing as Canadians.

It is an extremely important issue, and I’ve gone so far as to say the most urgent economic priority that we face in the country is getting these pipelines and infrastructure built.

 
As Minister of Industry, you oversaw an amendment to the Investment Canada Act to reinforce the net benefits test, and developed the first set of guidelines that are applied to state-owned enterprises. How has the definition and application of net benefit changed over the past five years?
That’s an interesting question.
Firstly, I believe that the net benefit test is the appropriate test, and I stand by that test. The net benefit test is a good way to measure up the pros and cons of an individual investment choice: Is it to the benefit of Canada, or not?

I think we are still measuring the same microeconomic considerations — the ability to create jobs, the ability to secure technology, the ability to secure innovation, and the ability to make sure that we have a diversified economy and no concentration of ownership.

But to come to your question, I think some of those circumstances have changed; some considerations have changed.

We are probably more globally focused in terms of our ability to compete as a country, and in our ability and desire to recruit foreign capital into the Canadian market. I think, in a sense, the net benefit test has become a bit more worldly. We are in a competitive global marketplace where Canada, like other countries, competes for capital. We have a better sense of that today than we did 10 and 20 years ago, for sure.

The forward march of globalisation has paused since the financial crisis, giving way to a more conditional interventionist and nationalist model.

Five years ago George W. Bush gathered the leaders of the largest rich and developing countries in Washington for the first summit of the G20. In the face of the worst financial crisis since the Great Depression, the leaders promised not to repeat that era’s descent into economic isolationism, proclaiming their commitment to an open global economy and the rejection of protectionism.
They succeeded only in part. Although they did not retreat into the extreme protectionism of the 1930s, the world economy has certainly become less open. After two decades in which people, capital and goods were moving ever more freely across borders, walls have been going up, albeit ones with gates. Governments increasingly pick and choose whom they trade with, what sort of capital they welcome and how much freedom they allow for doing business abroad.
Virtually all countries still embrace the principles of international trade and investment. They want to enjoy the benefits of globalisation, but as much as possible they now also want to insulate themselves from its downsides, be they volatile capital flows or surging imports.
Globalisation has clearly paused. A simple measure of trade intensity, world exports as a share of world GDP, rose steadily from 1986 to 2008 but has been flat since. Global capital flows, which in 2007 topped $11 trillion, amounted to barely a third of that figure last year. Cross-border direct investment is also well down on its 2007 peak.
Much of this is cyclical. The recent crises and recessions in the rich world have subdued the animal spirits that drive international investment. But much of it is a matter of deliberate policy. In finance, for instance, where the ease of cross-border lending had made it possible for places like America and some southern European countries to run up ever larger current-account deficits, banks now face growing pressure to bolster domestic lending, raise capital and ring-fence foreign units.
World leaders congratulate themselves on having avoided protectionism since the crisis, and on conventional measures they are right: according to the World Trade Organisation (WTO), explicit restrictions on imports have had hardly any impact on trade since 2008. But hidden protectionism is flourishing, often under the guise of export promotion or industrial policy. India, for example, imposes local-content requirements on government purchases of information and communications technology and solar-power equipment. Brazil, which a decade ago compelled its state-controlled oil giant, Petrobras, to buy more of its equipment from local companies, has been tightening restrictions steadily since. And both America and Europe imposed, or threatened to impose, tariffs on Chinese solar panels, alleging widespread government support. At the same time, though, Western countries themselves offer hefty subsidies for green energy at home.
Capital controls, which were long viewed as a relic of a more regulated era, have regained respectability as a tool for stemming unwelcome inflows and outflows of hot money. When Brazil imposed a tax on inflows in 2009-10, it was careful to emphasise that not all foreign investment was unwelcome. ‘Nobody here is rejecting people that want to invest in our ports or our roads,’ says Luiz Awazu Pereira, a deputy governor at the central bank. ‘But if you are here just because you are running an aggressive hedge fund and noticed that our Treasuries pay 10% while US Treasuries pay zero, this is a less desirable outcome.’
The world has not given up on trade liberalisation, but it has shifted its focus from the multilateral WTO to regional and bilateral pacts. Months before Lehman Brothers failed in 2008, the WTO’s Doha trade talks collapsed in Geneva largely because India and China wanted bigger safeguards against agricultural imports than America felt able to accept. Shortly afterwards America joined talks to form what is now called the Trans-Pacific Partnership, which also includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Barack Obama has held up the TPP as the sort of agreement China should aspire to join.
The trend in foreign direct investment, too, is still towards liberalisation, but a tally by the UN Commission for Trade and Development shows that restrictions are increasing. Last December Canada allowed a Chinese state-owned enterprise to buy a Canadian oil-sands company, but suggested it would be the last. ‘When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments,’ explained Stephen Harper, the prime minister.
The flow of people between countries is also being managed more carefully than before the crisis. Borders have not been closed to immigrants, but admission criteria have been tightened. At the same time, however, many countries have made entry easier for scarce highly skilled workers and for entrepreneurs.
Mr. Obama sees globalisation not as something to be stopped but to be shaped in pursuit of broader goals. He wants other countries to raise their standards of labour, environmental and intellectual-property protection so that American companies will be able to compete on a level playing field and, perhaps, pay decent middle-class wages once again. When a clothing factory collapsed in Bangladesh in April, killing more than 1,000 people, Mr. Obama suspended America’s preferential tariffs on many imports from Bangladesh until it improves workers’ rights.
A clear pattern is beginning to emerge: more state intervention in the flow of money and goods, more regionalisation of trade as countries gravitate towards like-minded neighbours, and more friction as national self-interest wins out over international co-operation. Together, all this amounts to a new, gated kind of globalisation.
 
A state of imperfection
The appeal of gated globalisation is closely tied to state capitalism, which allowed China and the other big emerging markets—India, Brazil and Russia—to come through the crisis in much better shape than the rich world. They proudly proclaimed their brand of state capitalism as superior to the ‘Washington consensus’ of open markets and minimal government that had prevailed before 2008. But the system also covered up structural flaws that are now becoming more obvious. In China, state-owned enterprises and state-directed lending have siphoned credit from the private sector and fuelled a property bubble. In India and Brazil, inadequate investment in infrastructure has resulted in rising inflation and sharply slowing growth.
The globalisation in the West before 2008 certainly had its flaws. The belief that markets were self-regulating allowed staggering volumes of highly levered and opaque cross-border exposures to build up. When the crisis hit, first in America, then in Europe, the absence of barriers allowed it to spread instantly. Voters, who had never been keen on wide-open borders, took this badly, and support for anti-globalisation parties grew.
A few constraints on global finance are not necessarily a bad thing. Limiting banks’ foreign-currency borrowing, as South Korea has done, makes them less likely to fail if the exchange rate falls. But gated globalisation also carries hidden costs. Policymakers routinely overestimate their ability to distinguish between good and bad capital, and between nurturing exports and innovation and rewarding entrenched interests. The opening up before the crisis had done wonders for channelling capital to the best investment opportunities, lowering prices for consumers and promoting competition. Interfering with this process reduces a country’s growth potential.

Reprinted with licence from The Economist, October 2013. Graphics featured were not included in the original article.