Beggar Thy Neighbor OUT, Beggar Thy Roommate IN

“Beggar thy Neighbor” is a term used to describe policy measures aimed to boost the economy of a country at others countries expense . That policy is supposed to improve the competiveness of country through different means , just to mention a few : The formation of economic barriers for foreign competitors, a forced devaluation the currency and so on.

True, such “Win-Loose” strategy can generate some limited economic impact. However, history tells us that things can turn into a ugly story: "A form of this policy, notably the tariff barrier, was attempted at the beginning of the Great Depression with almost no success. A beggar-thy-neighbor policy in the United States caused other countries to follow suit, resulting in a massive decrease in international trade. This made the Depression worse.” Financial Dictionary). Retaliation became the key word in that context.

Was the lesson learnt? Up to a certain point. The calls for protectionist measures heard lately were not ( still) able to bring about a policy change and governments declare their commitment to open trade . But that´s not the whole story: Fearing from the neighbors’ response, countries turned to beggar their own poorer roommates. After all someone should pay for the party ....

The Spanish case will illustrate the last point. Spain is suffering from a combination of deep recession, current account deficit, soaring public deficit and huge unemployment rate (app.20%). Before becoming a full EU member , Spain used to overcome similar episodes by literally beggaring its trade partners, especially devaluating its currency, the Peseta ( and other policy tools as well). It had some limited impact when combined with other policy tools.

Spain membership in the EU brought about the loss of independence of its economic policy. Thus ,as many “experts” claim, the only way open to the country is an “internal devaluation”, or in a less PC parlour , lower salaries. The logic goes like that: Spain should gain competitiveness so the prices of Spanish prices must be lowered. Since such arbitrary reduction cannot be forced, (and companies might ,G-D forbid, lose money), the burden should fall on the regular cannon fodder, the wage earner ( lower salaries = lower cost = lower prices ). Moreover, that theory holds a moral argument : Spanish wages have risen “too much” in the last years, and THAT distortion explains the uncompetitive position of the economy. This position (held by the Nobel Laureate P. Krugman), could sound reasonable…. as long as you don´t analyze the data.

Lets see the data. The following graph shows the relative weight of the salaries in the Spanish economy, in other words how much of what the country goes to the pockets of the wage earners. (until 2009 real 2010 onward Forecast)


Source : Eurostat Data Compensation of Employees percentage of GDP

What is the meaning of the descending line? It means that for each Euro produced by the economy (similar to the price of a product in a private company),the workers received a smaller slice than what they used to receive a few years ago. Even if we accept the “loss of competitiveness” thesis, it is hard to see how it is related to the “growth” of salaries. If Spain suffered from a higher inflation rate than its trade partners, it was probably related to the rising prices and profits of the companies and less to the salaries . Although other European workers suffered from the same problem, in comparison to the European wage earner, the Spanish worker has suffered more .

But governments are not confused by facts. The “Socialist” Government already embraced the narrative that reduced social rights and lower salaries is the key for Spain´s recovery. Under the blessing ( or pressure) of the IMF, EU, Obama…etc…. the Government already marked the path by a 5% cut of wages in the public sector. The next step was the adoption of a set of decrees which overturn essential social rights (some of them dated from the Franco era!) including a dismissal "easy track" and a planned assault on the system of collective negotiation and pensions.

Spain is just a model though the narrative is being noticed in other countries. So from now on say "Beggar your neighbor OUT, your worker IN...." . That is the newspeak we´ll hear from now on from policy makers and the financial media. I humbly dare to foresee that the "beggar" policy is deemed to fail as it failed 70 years ago: it will pres each and every country to a lower salaries policy which will eventually depress consumption and economic activity.

I wish policy makers understand, before it gets really too late, that "beggar" cannot replace genuine and progressive economic policy. Moreover, it is more than the beggary policy is the path toward higher levels of despair and anger.