It is now clear that the ambitious Bharti-MTN merger deal floundered on the rocks of economic nationalism.

The South African government evidently refused to budge from its position that MTN was a national champion and should thus be controlled by South Africans. It was downhill for the deal makers from then on. Every move to sidestep this requirement led them to new dead ends.

Such mixing of economic and political interests has been quite common, especially when it comes to cross-border mergers and acquisitions. Consider some recent examples: opposition to the takeover of Arcelor by Lakshmi Mittal, US legislators blocking the takeover of oil company Unocal by Chinese firm CNOOC, the French government’s decision to treat Danone as a strategic company to prevent it being taken over by PepsiCo, and the New Zealand government’s decision to block the sale of a controlling stake in Auckland Airport to the Canadian pension system.

Blocking corporate deals in the cause of economic nationalism seems an alluring idea. There was a time when economic nationalism was built on misguided hopes of self-reliance and industrial development behind high tariff walls. But there is too much empirical evidence that trading with the rest of the world raises income levels rather than engendering poverty. That style of economic nationalism seems to have been given a proper burial. The sort that broke the Bharti-MTN deal survives.

All this assumes that governments have the foresight to decide which industries and firms are indeed strategic in terms of national interest. Development economists are divided down the middle on whether governments can indeed pick the winners of tomorrow —industries and firms that can lead a country out of poverty.

On the one hand, there are economists such as Dani Rodrik who believe that government-led industrial policy has paid off in many Asian countries such as South Korea and Taiwan. On the other hand, there are economists such as Bill Easterly who disagree.

In a 14 May blog post, Easterly said that Rodrik had got it wrong when he had written in a syndicated column: “… the countries that have produced steady, long-term growth during the last six decades are those that relied on a different strategy: promoting diversification into manufactured…goods."

Easterly wrote: “Unfortunately, Dani is also reversing conditional probabilities. Dani’s evidence is based on what he believes is the high probability that if you have had steady growth for six decades, then you had industrial policy. This is interesting, but this is not the right probability in deciding whether to choose industrial policy, which is “If you have industrial policy, then what is your chance of steady growth for six decades?" (italics added; Easterly had used capital letters).

“This second, correct, probability would seem to be pretty low, since many other countries—especially African and Latin American—extensively tried industrial policies over the past six decades with low and erratic growth as a result." He could very well have added India to that list, given our unhappy tryst with state-led industrialization in the first three decades after independence.

This debate resurfaced recently in the corridors of the World Bank. Its chief economist Justin Yifu Lin presented a thoughtful paper on what he describes as a framework for rethinking development. A draft is available for download on the World Bank site.

Lin does not call for a return to state-directed investment, but presents a more subtle case on why and how governments can design industrial policy to spur growth. He bases his view on three core ideas. One, a country’s factor endowments of capital, labour, human capital etc., are given at each stage of development, but change as the country moves ahead. Two, countries do not leap from being poor countries to being rich countries; there is a whole spectrum of intermediate stages. Three, though the market is the best mechanism for resource allocation at each stage of development, “the government should play an active, facilitating role in the industrial upgrading and in the improvements of infrastructures".

The old problem remains. Lin himself points out: “When the endowment structure in an economy upgrades, the optimal industrial structure in an economy will change. The firms that are viable in the previous endowment structure will become non-viable."

The ability of a government agency to understand and adapt to changes in endowments and technology is suspect. And that is why the current rush to protect national champions is almost doomed to failure. What looks like a champion and strategic necessity today may end up as a burden in the future, but a burden big enough to soak up public revenue that has better uses.

Forget MTN. Just think of Air India.

Niranjan Rajadhyaksha is managing editor of Mint. Comment at