Competitive Devaluation

Reviewed by Sweta | Updated on Aug 27, 2020

Introduction

Competitive devaluation refers to a specific scenario in which one country matches an abrupt devaluation of national currency with another. One nation’s act stands matched with a currency devaluation of another country. The event occurs more frequently when the currencies of both the countries did manage exchange-rate regimes instead of market-determined floating exchange rates.

Understanding Competitive Devaluation

Competitive devaluation consists of a series of sudden depreciation in currency of two national currencies due to both the countries taking tit-for-tat actions with a purpose to gain mileage in international exports. Many economists view currency devaluation as a ``beggar-thy-neighbor” economic policy which does not consider the ill effects on the economies of both countries. In the view of many economists, competitive devaluation is harmful or damaging for the world economy because it can trigger a bout of currency wars which could carry unforeseen ill consequences, such as an increase in protectionism and raising of trade barriers. And, competitive devaluation can almost immediately lead to currency volatility and higher costs of hedging for exporters and importers. Competitive devaluation alters the economic situation such that it becomes worse for other countries where neighboring countries become beggars. The devaluation hurts international trade policy and a country's trading partners. Such a policy of devaluation is often employed to fight depression in the domestic economy and high unemployment. A country may engage in competitive devaluation as currency devaluation or a currency depreciation improves the country’s export competitiveness. By lowering the cost of goods, the exports become more appealing in international markets. Also, currency devaluation makes imports more expensive and can have a favourable impact on a country’s trade deficit.

Conclusion

Currency devaluation forces a country’s domestic economy and consumers to search for suitable local alternatives to the expensive imports. This in turn boosts the domestic industry. Competitive devaluation offers a combination of an increase in exports and decrease in imports thus enhancing the scope for increasing domestic manufacturing of goods. All these factors together contribute to higher domestic economic growth.