Beggar-Thy-Neighbor Policy

Whenever there is an monetary expansion (i.e total supply of money in the economy increases more rapidly than usual) in the home country, it leads to exchange depreciation, an increase in net exports and therefore an increase in output and employment. But our increased net exports correspond to a deterioration in the trade balance abroad. The domestic depreciation shifts demand from foreign goods towards domestic goods. Output and employment in other countries decline, and hence for this reason that a depreciation induced change in the trade balance has been called a Beggar-Thy-Neighbor Policy. It in a way export unemployment or create domestic employment at the cost of Rest of the world.  Beggar Thy neighbor policy are in the areas of foreign trade and currency management. Earlier countries often impose tariff barriers and restrict imports to protect there domestic industries but with globalization, such practices are now less popular.

In countries like China, many economists says that China deliberately keep the value of its currency low to encourage exports. But due to this many competitors faces huge losses and Chinese exports are hurting many domestic economy. Also recently, Mr Raghuram Rajan (Governor RBI) made a statement that 1930s Great depression problem are resurfacing which created a flutter, but RBI clarified and commented that he didn’t imply there being an imminent risk of the world economy slipping again into Great Depression however Mr Rajan indeed said that the policies being followed by major central banks around the world were in danger of slipping into kind of Beggar-Thy-Neighbor strategies that were followed in 1930s. In great depression there was a severe global economic downturn and affected almost all countries across the world and great depression is the longest and widespread depression till date .

This policy also faces limitations. In certain cases such a policy may prove counter productive. Even competing country counters one policy move, of say depreciation  such a practice may not have desirable results, especially the country’s import are not price elastic and instead could end up hurting the trade balance through higher import prices and resulting in inflation in such economies.

Nevertheless, from the point of view of an individual country, exchange depreciation works to attract and do raise domestic output. If every country tries to depreciate to attract world demand, there would be a competitive depreciation and a shifting around  of world demand rather than an increase in the worldwide level of spending . If everybody will start depreciating to approximately same extent then we would end up with exchange rates about where we started.

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