Beggar-Thy-Neighbor: Meaning and History in Forex

What Is Beggar-Thy-Neighbor?

Beggar-thy-neighbor is a term used for a set of policies that a country enacts to address its economic woes that, in turn, actually worsen the economic problems of other countries. The term comes from the policy's impact, as it makes a "beggar" out of neighboring countries. 

Understanding Beggar-Thy-Neighbor

Beggar-thy-neighbor often refers to international trade policy that benefits the country that enacted it, while harming its neighbors or trade partners. Protectionism is often seen as a key example of policies that are intended to strengthen a domestic economy, but which may negatively impact trading partners.

Beggar-thy-neighbor policies came about, originally, as a policy solution to domestic depression and high unemployment rates. The basic idea is to increase the demand for a nation's exports, while reducing reliance on imports.

This means driving consumption of domestic goods up, as opposed to consumption of imports. This is usually achieved with some kind of trade barrier—tariffs or quotas—or competitive devaluation in order to lower the price of exports and drive employment and the price of imports up.

A currency war is a prime example of beggar-thy-neighbor in action since it amounts to a nation attempting to gain an economic advantage without consideration for the ill effects it may have on other countries. Also known as competitive devaluation, this is a specific pattern of tit-for-tat policies in which one nation matches an abrupt national currency devaluation with another devaluation.

In other words, one nation is matched by a currency devaluation of another in a negative feedback loop. Often the country devaluing first intends to boost its exports on the global market, and not necessarily cause harm.

Beggar-Thy-Neighbor: A Brief History

The term is widely credited to the philosopher and economist Adam Smith, who used the term in The Wealth of Nations, a critique of mercantilism and protectionist trade policies. Smith saw mercantilism and its zero-sum understanding of the market encouraging nations to beggar each other in order to increase economic gain as misguided; instead, he believed that free trade would lead to long-term economic growth that was not zero-sum, but would actually increase the wealth of—you guessed it—all nations.

Nevertheless, many country's have deployed mercantilist and protectionist economic policies through the years. A number of countries did so during the Great Depression, Japan did after WWII, and China did after the Cold War.

With the rise of globalization in the 1990s, beggar-thy-neighbor fell by the wayside—for the most part. Recently, though, protectionist policies have been making a comeback, at least in visibility, as evidenced by former President Donald Trump's 'America First' rhetoric.