Tuesday, 23 August 2011

Beggar-thy-neighbour policy

What is beggar thy neighbour policy?
The beggar thy neighbour policy refers to a policy that aims at addressing one's own domestic problems at the expense of others — trading partners in particular.
What are the instances of such a policy?
The most popular forms of a beggar thy neighbour policy are in the areas of foreign trade and currency management. Conventionally, countries often impose tariff barriers and restrict imports to protect their domestic industries. However, with globalisation, such practices are not popular.
But to achieve its domestic policy objective, for instance, encouraging exports, central banks devalue or encourage the depreciation of their own currencies compared to its trading partners to retain their respective competitive edge. Sometimes economies compete in encouraging appreciation of their currencies to tame inflation at the expense of hurting income in the exporting countries.
Is China adopting a beggar thy neighbour policy?
Many economists, especially in the US, say China has deliberately kept the value of its currency low to forge ahead in exports. But in this case, more than the competitors, the importing country, US, is complaining because more than anything else, cheap Chinese imports are hurting its domestic economy.
How do current economies policies compare?
Currently, the raging concern among most emerging market economies in Aisa is spiralling inflation on account of rising global commodity prices. Central banks in most economies, including India's, are (though not necessarily planned) encouraging appreciation of their respective currencies.
This is helping them curtail inflation arising out of imported goods as imposing tariff barriers is perceived to be against the principles of free trade. Such a practice hurts export earnings of the countries from where such imports are sourced. But the impact also depends on how crucial such exports are for each economy.
What are the limitations of such a practice?
In certain cases, such a policy may prove counter productive. If, for instance, even the competing country counters one policy move, of say, depreciation (to protect exports) then such a practice may not have desirable results, especially the country's imports are not price elastic (the imports are essential and not dependent on prices) and instead could end up hurting the trade balance through higher import price and resulting in inflation in such economies.

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