Beggar-Thy-Neighbor

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Beggar-Thy-Neighbor

In economics, the term beggar-thy-neighbor describes economic policies that aim to enrich one country at the expense of other countries. Most commonly, the term beggar-thy-neighbor is used in relation to such international trade policies as the application of tariffs and other restrictions on imports, as well as currency devaluations that are intended to improve the international competitiveness of the goods the country is exporting. The policy is considered to be beggar-thy-neighbor when the welfare gain in the country imposing the policy is offset by the welfare loss in the countries affected by the policy.

Beggar-thy-neighbor trade policies could be aimed at protecting domestic industries that compete against imported goods. These policies may take the form of import quotas or import tariffs, both of which are aimed at restricting imports and also making them more expensive. For example, an import tariff will benefit the country because the tariff improves the nation’s terms of trade. That is to say, by raising the price of imports the tariff causes the ratio of export prices to import prices to fall and thus makes the country’s sales to others (exports) cheaper, while simultaneously making the price of purchases from its trading partners (imports) more expensive. Thus, an import tariff is a beggar-thy-neighbor policy (Feenstra 2004, chap. 7).

One of the roles of the World Trade Organization is to prevent such beggar-thy-neighbor trade policies. However, it should be noted that if import tariffs or currency devaluations are accompanied by other policy measures designed to increase economic growth in the country, they might not be beggar-thy-neighbor. The tariff, for example, will reduce imports but economic growth encourages an increase of imports.

Currency devaluations are considered beggar-thy-neighbor if they are conducted solely for the purpose of boosting the country’s exports by making them cheaper for foreigners to buy and therefore increasing the country’s global market share. The trading partners of the country that undertakes a beggar-thy-neighbor devaluation may retaliate by devaluing their currency as well. Such a phenomenon, known as competitive devaluation, is an example of a beggar-thy-neighbor policy. Similarly, wage repression policies could be beggar-thy-neighbor if their sole purpose is to increase a country’s competitiveness in the international markets, which forces their competitors to repress wages as well.

During the Great Depression, the countries that were adhering to the gold standard, fixing the value of their currency to the value of gold, engaged in a series of competitive devaluations. In addition, many countries, including the United States, imposed protective import tariffs (the Smoot-Hawley Tariff Act of 1930 raised U.S. tariffs to historically high levels). Many economists have argued that such beggar-thy-neighbor policies worsened the economic decline during the Great Depression. Nevertheless, Barry Eichengreen showed that “competitive devaluations of the 1930s redistributed the Depression’s effects across countries but did not worsen it overall” (1988, p. 90).

In July 1944 the delegates of forty-four countries met at the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, and established the system of fixed exchange rates known as the Bretton Woods system. In addition, the conference instituted the International Monetary Fund and the World Bank. One of the purposes of the creation of these institutions was to avoid the return of the beggar-thy-neighbor policies of the 1930s.

In the early 2000s exports from China increased substantially. Some economists argue that such a fast increase can be partly attributed to the Chinese policy of keeping Chinese currency, the renminbi, at an artificially depreciated level in order to make exports from China very competitive. If this is the only reason the Chinese government keeps the value of the renminbi low, the policy could be classified as beggar-thy-neighbor.