Open Democracy has given a man called John Mills a platform for a while. He argues forcefully that the most important thing the UK government can do is devalue the pound – even calls the column “Devalue or Else”. And now, it seems, he’s written a book called “Exchange Rate Allignments” and some other guy on OD, Tony Curzon, has reviewed and commented on it. And Mills has replied.
What I find telling is that neither Curzon nor Mills in several pieces have tried to answer a fundamental question:
Who is supposed to buy those exports British depreciation will suddenly generate?
- It’s not gonna be the EMU – German capital and politicians are defending the export model tooth and nail, if Merkel has her way, the rest of the EMU will become “more competitive” as well, and to this end wages and other sources of income are slashed in the periphery, destroying demand there.
- Japan’s not go do it – they try to devalue themselves to increase exports.
- China’s not gonna do it – their entire business model is the one he tries and attain for the UK…cheap exports by cheap labor.
- South-east Asia and Korea are not gonna do it – same thing as for China and Japan.
So that leaves them with what? The US where politicians are notoriously paranoid about balance of payments? South America? Africa?
So he’d reduce the standard of living of the wage-earning population in the UK for the off chance that he’ll actually find a market in today’s depressed world economy and that other countries will not react by devaluing themselves?
And even if his plan works: then his beggar-thy-neighbor policy will reduce the standard of living of some other population whose elites run an export oriented business model.
The only way this works without someone having to lower their standard of living is if Mills find someone who doesn’t care about balance of payments but cares about their population.
At which point the question comes up: why shouldn’t this someone be the UK in the first place? If Curzon is right and Mill actually realize that the Bank of England can create unlimited pounds, why not spend those pounds within the UK and make a difference in those things that will create jobs immediately and might actually attract investors in the long run:
- Strengthen the education system, train and hire well-qualified teachers, make sure no one has to go into debt to get a higher education, build a skilled labor force instead of trying to outcompete developing countries in the cheap-unskilled-labor field.
- Renationalize critical infrastructure that have fallen into disrepair since privatization – rebuild the railway system, improve mass transit, reduce water wastage. Funny how this spending was there for a prestige project like the Olympics but can’t be found when it’s about the economic future.
- Nationalize the banks or at least crack down hard on the financial casino that adds nothing to the economy except for a handful of City jobs.
- Invest into renewable energies, and I am not talking about additional nuclear power plants here, and environmental reclamation.
All of these would create jobs, create domestic demand, build a skilled workforce and an environment that is attractive for investment. None of these requires devaluation and beggar-thy-neighbor policies.
Apparently, part of Mill’s thesis is that the so-called Asian Tigers did so well because of devaluation. Luckily enough, reality has something to say about this, as the Real World Economics Reviews Blog points out:
Even a very deep devaluation, as in Indonesia, is not guaranteed to change the relative prices of a country’s imports and exports.
Even if a devaluation is passed through to relative prices, as in Thailand, price elasticities may not be large enough to produce a favorable change in the trade balance.
Even if a devaluation moves relative prices, and demand is price-elastic enough for the price change to move the trade balance in the right direction, as in Korea, a short-term improvement in competitiveness may not persist.
When countries do achieve a long-term improvement in competitiveness, like Malaysia, they don’t necessarily do so through a relative cheapening of exports compared to imports. On the contrary: If the Marshall-Lerner condition is not satisfied, then a relative increase in the price of a country’s exports will raise export earnings. In the case of Malaysia, improved terms of trade (that is, a rise in the price of its exports relative to its imports) account for about half the long-run improvement in its trade balance.
The Asian precedent does not make a Greek (or Spanish, or Portuguese, or Irish) devaluation look like an obviously good idea.
Nor an English one.