Beggar Thy Neighbour - Great Depression ahead? - RBI clarifies
RBI Governor Raghuram Rajan is reported to have said in London on 25 June,
I do worry that we are slowly slipping into the kind of problems that we had in the thirties in attempts to activate growth….
And, I think it's a problem for the world. It's not just a problem for the industrial countries or emerging markets, now it's a broader game.
The question is, are we now moving into the territory in trying to produce growth out of nowhere we are in fact shifting growth from each other, rather than creating growth. Of course, there is past history of this during the Great Depression when we got into competitive devaluation.
Now, the RBI clarifies that the Governor has been misquoted. An RBI Press Release states,
A section of the press has mis-characterized Governor Dr.Raghuram G. Rajan's remarks at the AQR conference at London Business School on June 25, as saying "the world is at risk of a Great Depression". What Governor Rajan did say, in his remarks made off the attached written text, was that the policies followed by major central banks around the world were in danger of slipping into the kind of beggar-thy-neighbour strategies that were followed in the 1930s. He then called for new rules of the game in the international monetary system, a call that he has made before, and is gaining some traction. The Great Depression was a period of great turmoil, caused by many factors and not just beggar-thy-neighbour policies. Governor Rajan did not imply or suggest that there was any risk of the world economy, which is in steady recovery notwithstanding uncertainties like those in the Euro area, slipping into a new Great Depression .
Beggar-thy-neighbour is a policy attempts to cure a country's balance of trade, inflation, and unemployment problems by practices that harm the economic interests of its trading partners, usually by restricting imports by quotas or by raising tariffs, currency devaluation that makes imports more expensive and exports cheaper, and/or currency appreciation that reduces domestic inflation but makes its products more expensive in the importing countries.
This was explained by the British Economist Joan Robinson as early as in 1937. According to her,
1. An induced increase in exports compared to imports leads to more jobs for any country. In addition to the initial increase in employment, there is a further increase from the money spent by the newly employed workers.
2. The snag is that an increase in the exports of one country leads to a decline in exports of other countries, other things being equal.
3. It leaves the level of employment for the world as a whole unaffected and perhaps reduces it.
4. 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.
5. Political, strategic and sentimental considerations add fuel to the fire and the flames of economic nationalism blaze higher and higher.
The four beggar-my-neighbour weapons according to her are:
1. officially induced exchange depreciation,
2. wage reductions,
3. export subsidies and
4. import restrictions.
No Breakfast? In a recent paper, Tim Worstall, Fellow at Adam Smith Institute in London writes about a situation where a morning News Bulletin announces:
It's 7 am. Currently there is food in the fridges of the nation for breakfast. But in two hours time that will be eaten, gone, there will be no more. Therefore everyone will die because NO BREAKFAST."
Mineral reserves are disappearing at an alarming rate. Official figures show that within 30 years most of them will be used up and there are no more reserves. Industrial civilisation will crash, billions die, because NO MINERALS.
But Worstall counters this ‘No Breakfast fallacy' as there is a vast industry dedicated solely to replenishing that breakfast before 7 am tomorrow.
He questions, "Are we likely to run out of any of the minerals or metals that we like to use in anything of a timescale that should be of concern to us today?" And the answer is an emphatic NO.