The folly of beggar-my-neighbour policies
Samuel Brittan The Financial Times 01/02/13
The classic definition of beggar-my-neighbour policies was provided in 1937 by the British economist Joan Robinson. It is well worth revisiting in light of current policies being pursued in Japan and in other rich economies.
For any one country, Robinson argued, an induced increase in exports relative to imports leads to more jobs. In addition to the initial increase in employment, there is a secondary increase from the money spent by the newly employed workers. The snag, as she pointed out, is that an increase in the exports of one country leads to a decline in exports of other countries, "everything else being equal". At best "it leaves the level of employment for the world as a whole unaffected" and probably reduces it.
Robinson's explanation of the probable consequences is also worth remembering. She wrote that "as soon as one country succeeds in increasing its trade balance at the expense of the rest, others retaliate" and the volume of international trade sinks as a proportion of world activity. "Political, strategic and sentimental considerations add fuel to the fire and the flames of economic nationalism blaze higher and higher."
She contrasted this with an increase in domestic employment brought about by home investment. This "brings about a net increase in employment for the world as a whole". Today, for "home investment" we can substitute any purely domestic demand stimulus In my view, the persistence of the balanced budget dogma, which inhibits such stimuli, is one of the reasons for the continued attraction of beggar-my-neighbour policies.
The continued relevance of articles from the 1930s in contrast to the more rarefied mathematical contributions of the past few decades is itself an ominous sign. In her original essay, Robinson listed four beggar-my-neighbour weapons: officially induced exchange depreciation, wage reductions, export subsidies and import restrictions. Induced exchange rate depreciation is the element that now needs watching most closely. Needless to say, all such devices are banned by the International Monetary Fund, World Trade Organisation, EU and other international bodies. But are these bans effective in practice?
The difficulty of deciding is that most employment promotion policies are a mixture of purely domestic stimuli and export promotion. It would be churlish to stop visits by British prime ministers to developing countries to sell British goods.
The beggar-my-neighbour issue has come up more seriously in relation to the domestic expansion programme launched by the new Japanese government. My first reaction was to cheer. Here was the first G7 country outside the US to reject the stifling austerity mantra and take measures to promote domestic growth. Japan needs and can well afford a domestic expansion programme. The country's gross domestic product is still well below its 2007 peak and it has had on average a falling price level - that is, negative inflation - since that peak.
The most important aspect of Japan's new expansion programme is probably the new large fiscal stimulus, which is designed to further the government's objective of 2.3 per cent economic growth this fiscal year. The Bank of Japan will be more or less obliged to finance it.
German leaders have not hesitated to condemn the Japanese programme as a species of beggar-my-neighbour policy. But is it? The Japanese programme is still developing. Its centrepiece seems to be an increase in the inflation target from 1 per cent per annum - which the country has obviously fallen below - to 2 per cent. This is not the way I would have chosen to present a Keynesian stimulus, as any trade-off between employment and inflation is inherently temporary. But if that is the politically feasible way of articulating a more expansionist monetary policy then so be it.
The internationally controversial aspect of the programme has been the talking down of the Japanese yen, which has fallen from its 2011 peak. In itself this is not tragic. Economists from Bank of America Merrill Lynch have shown that the yen has been close to its historical average against the US dollar in nominal terms and well above its pre-crisis peak in real effective terms. German concerns may well derive ultimately from specific worries about threats to exports to China from a more competitive yen.
Still the Japanese government needs to watch that its campaign for a lower yen does not go beyond talking. The pretty open desire of the government for the BoJ to buy overseas bonds to prevent the exchange rate rebounding is the element that needs most scrutiny, although it would be hardly worse than China's use of its huge underlying payments surplus to buy up a considerable part of the developing world. The international economy is in too fragile a condition to sustain a currency war.
|Published on www.samuelbrittan.co.uk
Contact - samuel dot brittan at ft dot com