Competitive Devaluation

Background

Competitive devaluation refers to the strategic lowering of a country’s currency value relative to other currencies by governments or monetary authorities. The primary purpose of competitive devaluation is to enhance the competitiveness of a country’s domestic industries by making exports cheaper and thus more attractive in international markets.

Historical Context

Competitive devaluation has a historical context stretching back to the Gold Standard era and the Great Depression, where nations resorted to devaluing their currencies to outdo each other economically. Instances were particularly noticeable during the 1930s when multiple countries abandoned the Gold Standard in pursuit of economic relief through currency devaluation.

Definitions and Concepts

Competitive devaluation involves actions taken by countries to gain a competitive edge in international trade through deliberate depreciation of their currency’s value. The process typically motivates other countries to devalue their currencies as well, leading to a cycle of devaluation, sometimes referred to as a “currency war”.

Major Analytical Frameworks

Classical Economics

Classical economists generally are skeptical about the long-term efficacy of competitive devaluation due to the market’s self-correcting nature. They argue that any temporary benefits realized through devaluation will be neutralized by inflation and other market adjustments.

Neoclassical Economics

Neoclassical economics focuses on supply and demand aspects. An initial advantage might be perceived through competitive devaluation, but it will often lead to retaliatory actions and instability in markets, negating the intended effects over time.

Keynesian Economics

Keynesians might view competitive devaluation as a useful short-term stimulus for a struggling economy. They emphasize its role in reducing unemployment and boosting economic output through increased export competitiveness, albeit with a caution on the potential global disruptions that could ensue.

Marxian Economics

Marxist theorists highlight the role competitive devaluation plays in the broader dynamics of capitalist economies, often critiquing it as a mechanism exacerbating not just national inequalities, but international economic disparities and tensions

Institutional Economics

Institutional economists would explore the roles of policies and frameworks governing competitive devaluation. They would analyze the coordinated or uncoordinated economic policies that trigger competitive devaluation cycles, often advocating for reforms to stabilize currencies at the institutional level.

Behavioral Economics

Behavioral Economics would look into the psychological and likely irrational behaviors of policymakers during competitive devaluation scenarios. It emphasizes the often reactive, rather than proactive, processes driving such decisions amidst economic pressures.

Post-Keynesian Economics

Positioned against orthodox economic thoughts, Post-Keynesians might advocate for more sustainable economic solutions rather than competitive devaluation. They maintain that coordinated global efforts are more desirable compared to competitive mechanisms for economic advancement.

Austrian Economics

Austrian economists criticize competitive devaluation for interfering with market forces. They argue that free markets should determine exchange rates, and any manipulation is considered detrimental to the natural economic adjustments.

Development Economics

In the context of developing economies, competitive devaluation can represent an attempt to stimulate industrialization by giving domestic producers an edge. However, it can also trigger inflation and other macroeconomic instabilities that can undermine longer-term development.

Monetarism

Monetarists would caution against the inflationary impacts of sustained competitive devaluation. They argue that sound monetary policy focusing on controlling inflation and maintaining stable prices is more effective in the long term.

Comparative Analysis

Competitive devaluation rarely offers a sustained economic advantage and often incites similar actions from other economies. Hence, it can lead to a detrimental cycle with neither country achieving lasting gains, instead fostering global economic instability.

Case Studies

1. The ‘Beggar-Thy-Neighbor’ policies during the 1930s.
2. The currency devaluations in Asian economies during the 1997 financial crisis.
3. The US-China currency exchange tensions and accusations of currency manipulation.

Suggested Books for Further Studies

1. “Currency Wars: The Making of the Next Global Crisis” by James Rickards
2. “Money: How the Destruction of the Dollar Threatens the Global Economy – and What We Can Do About It” by Steve Forbes and Elizabeth Ames
3. “Globalizing Capital: A History of the International Monetary System” by Barry Eichengreen

Related Terms with Definitions

• Currency Manipulation: A country’s policy actions intended to influence its currency’s exchange rate for economic advantages.
• Devaluation: The deliberate downward adjustment of a country’s currency value against another currency, group of currencies, or standard.
• Exchange Rate: The value of one currency for the purpose of conversion to another.
• Beggar-Thy-Neighbor Policy: Economic policies that a country enacts to address its domestic problems that end up causing similar problems in neighboring countries.