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Published: 3-05-2011, 14:57

Beggar-thy-neighbor policies

Beggar-thy-neighbor policies are those that seek to increase domestic economic welfare at the expense of other countries’ welfare. What might be called the classic case of beggar-thy-neighbor policies occurs when one country devalues its currency in order to boost its domestic output and employment but, by so doing, shifts the output and employment problem onto other countries. This occurred in the 1930s when, faced with a worldwide recession, countries sought to increase their own output and employment by devaluing their currencies, a policy that would boost domestic output by reducing the demand for imports and increasing the demand for exports. This exacerbated the recessions in other countries, however, and invited the response of devaluations by other countries and countries became locked into a series of competitive devaluations.
The experience of the 1930s played a significant part in the design of the BrettonWoods system. This system, by restricting the flow of capital internationally, provided countries with sufficient policy autonomy to target domestic output and employment levels without having to resort to changing the exchange rate.One of the aims of the BrettonWoods system in introducing fixed exchange rates was therefore to obviate the need for competitive devaluations and remove the temptation of beggar-thyneighbor policies.
With the move to flexible exchange rate regimes since 1973 after the collapse of the Bretton Woods system, beggar-thy-neighbor policies or the possibility of them have occasionally resurfaced. For instance, following the Asian crisis of 1997, when the currencies of Thailand, Indonesia, Malaysia, and South Korea all plummeted, China came under considerable international pressure not to devalue the renminbi, which would likely have further destabilized the crisis-affected countries and led to a new round of currency depreciations. China maintained the value of the renminbi. Similarly, one of the argumentsmade for trading rivals adopting dollar or euro pegs is that it removes the possibility of beggarthy- neighbor exchange rate policies. The creation of the euro provided similar benefits to its European members.
Historically, the classic term beggar-thy-neighbor has been associated with countries devaluing their currencies to increase domestic output and employment at the expense of other countries. More recently, however, the term has been used more generically to describe policies pursued by one country (or jurisdiction within one country) to increase its economic welfare at the expense of other countries (or jurisdictions), whether the mechanism is exchange rate policy, tax policy, competition policy, or foreign investment policy. Any policies that may have negative spillovers for other jurisdictions are nowoften referred to as beggar-thy-neighbor policies (Guha 2006).
The solution to the use of beggar-thy-neighbor policies in the 1930s was found in the international policy coordination instituted under the auspices of the Bretton Woods system. In the post Bretton Woods period, the International Monetary Fund and theWorldTradeOrganizationface the challenge of providing of such coordination. See also Bretton Woods system; currency crisis; dollar standard; euro; exchange rate regimes; financial crisis; International Monetary Fund (IMF); international policy coordination; World Trade Organization
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