'Beggar-Thy-Neighbor': A Dark View for Economic Policy Perspective

 

The term ‘beggar-thy-neighbor’ was popularized by the British economist Joan Robinson in the 1930s. She used it to describe economic policies - particularly competitive devaluations and protectionist trade practices- that aim to improve a country's own economic conditions at the expense of others.

While the concept existed earlier, especially during the Great Depression when countries tried to compete each other through tariffs and currency manipulation, it was Robinson who gave the practice its now-famous name in her critiques of such policies.

Let neighbors make beggars. It is a strategy to win over surroundings. Despite, it is frequently referred to as a policy. In the global economic arena, the pursuit of national interest often clashes with the principles of cooperation among international policies. One such item is the beggar-thy-neighbor' policy. It should be termed as economic strategies, particularly in the domain of monetary and exchange rate policies, that are designed to boost a country's economy at the cost of others. These policies can lead to a cycle of retaliatory actions which undermines global economic stability and cooperation.

The term 'beggar-thy-neighbor' gained prominence during the great depression of the 1930s, when countries adopted protectionist trade policies and competitive currency devaluations to protect domestic industries and employment. Such strategies, rather than fostering recovery, deepened the global downturn. Fundamentally, these policies are rooted in the zero-sum perception of international economics, where gains for one country necessarily mean losses for another.

In the context of monetary and exchange rate policy, beggar-thy-neighbor actions typically involve currency devaluation, interest rate manipulation, and quantitative easing (QE). While these tools can stimulate domestic economic activity by boosting exports and curbing imports, they can also distort global trade and investment flows.

Beggar-thy-neighbor policies work under some mechanism. Currency devaluation is one of the most direct beggar-thy-neighbor tactics. By weakening its currency, a country can make its exports cheaper and more competitive in international markets. Simultaneously, imports become more expensive, which discourages consumption of foreign goods and stimulates domestic production. This approach, however, can lead to retaliation. If one country devalues its currency, others may follow suit to protect their own trade interests, leading to a 'currency war'. Such tit-for-tat devaluations can disrupt international trade, create volatility in global markets, and reduce investor confidence.

Another mechanism is that central banks often use monetary policy tools - such as reducing interest rates or implementing QE - to stimulate economic growth. While these measures are primarily aimed at domestic objectives, they can have significant spillover effects. Lower interest rates reduce returns on investments in a country, leading capital to flow into other countries with higher returns. This can appreciate the recipient country's currency, making its exports more expensive and imports cheaper. Hence, an expansionary monetary policy in one country may inadvertently hurt the trade competitiveness of another.

QE, especially by major economies like the US, Japan, or the European Union, injects large sums of liquidity into the financial system. This flood of capital often seeks higher returns in emerging markets, leading to currency appreciation and asset bubbles in those economies. While the source country benefits from economic stimulation, recipient countries face macroeconomic instability.

During the Great Depression in the 1930s, the UK, US, and other major economies abandoned the gold standard and devalued their currencies to boost exports. The competitive devaluations of currency worsened global trade relations and deepened the economic crisis. The phenomenon exemplifies how nationalistic monetary policies can undermine collective recovery.

Following the 2008 global financial crisis, the US implemented successive rounds of QE. While QE helped to stabilize the US economy, it also triggered capital inflows into emerging markets, appreciating their currencies and harming export competitiveness. Brazil famously accused the US for engaging in a 'currency war', highlighting the beggar-thy-neighbor nature of QE.

In the early 2010s, Japan's prime minister Shinzo Abe introduced 'Abenomics', which involved aggressive monetary easing to end deflation and stimulate growth. The Bank of Japan’s policies led to a sharp depreciation of yen, boosting Japanese exports but causing concern among trading partners who suffered reduced competitiveness.

Exchange rate policy is a factor in this regard. The susceptibility of economies to beggar-thy-neighbour policies also depends on their exchange rate regimes. Countries with fixed or managed exchange rate systems are more vulnerable to the spillover effects of monetary policy in major economies. Floating exchange rate systems can absorb external shocks to some extent. However, even in such systems, capital mobility can transmit the effects of foreign monetary policy. For instance, the US Federal Reserve's policy changes often have immediate impacts on emerging market currencies due to global interconnectedness.

Policy coordination is another factor. International coordination is essential to mitigate the adverse effects of beggar-thy-neighbor policies, Institutions like the International Monetary Fund (IMF), the World Trade Organization (WTO), and the G20 play crucial roles in promoting cooperation and discouraging unilateral actions of global economic destabilization.

The IMF monitors exchange rate policies and offers guidance to avoid harmful practices. Similarly, the G20 has served as a platform for major economies to pledge against competitive devaluation and to promote balanced and sustainable growth. However, enforcement remains a challenge, and countries often prioritize national interests over global stability.

One of the criticisms of beggar-thy-neighbor policies is that they can create moral hazard. For example, when countries rely excessively on monetary stimulus and devaluation rather than structural reforms, they may postpone necessary but politically difficult adjustments. This reliance on external demand for growth can become unsustainable. Moreover, central banks often face a dilemma. Their mandate is typically domestic - focused on inflation, employment, and growth - yet their actions have global repercussions. The challenge is to strike a balance between national objectives and international responsibility.

Developing and emerging economies are often at the receiving end of beggar-thy-neighbour policies. They lack the economic heft to retaliate effectively and often suffer from capital flow volatility, currency mismatches, and trade imbalances caused by policy shifts in advanced economies. As an example, when the US Federal Reserve hints at tightening monetary policy, capital tends to flow out of emerging markets, leading to currency depreciation, inflationary pressures, and financial instability. These economies must maintain adequate foreign exchange reserves and adopt macroprudential measures to mitigate such shocks.

Preventing the adverse consequences of beggar-thy-neighbor policies requires a shift toward cooperative and transparent policy frameworks. Some recommended approaches include policy coordination, transparency in communication, etc.

Greater collaboration among central banks, especially during crises, can help to align monetary strategies and prevent harmful spillovers. Clear and predictable policy announcements reduce market volatility and allow other countries to prepare for spillover effects. Enhancing the authority and capacity of institutions like the IMF can help to enforce norms against harmful policies. Countries should focus on domestic demand and structural reforms rather than relying solely on exports for growth. Regional monetary agreements and currency swap lines can offer support during times of capital outflows or currency pressures.

Beggar-thy-neighbor policies, while often being effective in achieving short-term domestic goals, can sow discord in the global economic system. Competitive devaluations, expansive monetary policies, and protectionist measures may offer temporary relief but ultimately undermine collective prosperity. A rules-based, cooperative global economic order - founded on transparency, mutual accountability, and policy coordination - is essential to prevent a return to the destructive cycles of the past. As the world becomes more interconnected, national policies must be designed with an awareness of their international impact, promoting not just self-interest but shared stability.

For Bangladesh, the implications of such policies - whether implemented by the country itself or by its trading partners - are significant. As a small, export-dependent economy heavily reliant on garments, and remittances, Bangladesh remains vulnerable to shifts in global economic policies. For instance, if major economies like the US or EU devalue their currencies or impose higher tariffs, Bangladeshi exports become less competitive, threatening jobs and growth.

While Bangladesh has mostly refrained from adopting outright beggar-thy-neighbor tactics, its response to global challenges must be strategic. With a delicate balance of maintaining exchange rate stability and promoting exports, Bangladesh walks in a fine line. Instead of protectionism, it aims for regional cooperation, infrastructure development, and diversification of exports to strengthen its global trade position.

In the face of a volatile global economy, Bangladesh's best defense against the fallout of beggar-thy-neighbor policies is economic resilience, favorable demographic composition, and policy prudence that foster sustainable growth without undermining international trust.


Mehdi Rahman works in the 
development sector. He also 
writes on business phenomena 
and monetary issues.