Academic research
While internal devaluation has been discussed in newspapers and has been put into work as a policy already for some years in the several countries, peer-reviewed research on the topic is sparse and has started to appear only recently. Much of it is restricted to qualitative observations (e.g. ScienceDirect database list more than 3 times more articles for such emerging discipline as geo-engineering (human control of global climate) than for internal devaluation). merely mentions some well known news items about the internal devaluation. recognizes that "the most efficient way to reduce the cost of labour is to run high levels of unemployment". But apparently, that can be acceptable only in the countries where the gray economy is tolerated. In fact, there is research about the labour market policies that has been implemented during the internal devaluation and the researcher concluded "I will argue that the seemingly flexible reaction of the ... labour market to the crisis is to a large extent due to weak law enforcement". acknowledges (without quantitative estimations) that the policy of internal devaluation is "painful and slow". Currently is the most exhaustive manuscript about internal devaluation. It acknowledges that the internal devaluation can be politically costly and that it requires that the "labour market institutions need to allow for more flexibility, and more product market competition is required", but it misses the point that the development of the human capital cannot occur without the necessary investments. It also mentions the limitations of what can be achieved by the internal devaluation—internal devaluation can result in the "interesting trap of no-downward wage adjustment as the flexible part of earnings vanishes". The article also proposes idea about internal revaluation. Paul de Grauwe argues that the competitiveness of Portugal, Ireland, Italy, Greece and Spain deteriorated during the period from 1999 to 2008/9, and that since 2008/9 dramatic turnarounds of the competitive positions have occurred in Ireland, Spain and Greece. de Grauwe estimates Ireland to have completed an internal devaluation amounting to 23.5%, Greece 11.4%, Spain 8.9%, Portugal 3.2% and Italy 0.6%. Pisani-Ferry argues that internal devaluation would optimally entail a simultaneous cut of, say, 10% to all wages and prices in a country. While this is difficult to achieve in practice, he says internal devaluation is not impossible to implement in a meaningful way. Pisani-Ferry says Latvia was rather successful in performing its internal devaluation following the crisis of 2008–09. While the process was painful in terms of unemployment and wage cuts, exports did pick up, the external deficit was eliminated and Latvia's economy returned to growth. Another alternative (mentioned in old textbooks) is to cut taxes, hence making labour cost cheaperCriticism
Given the lack of solid empirical studies on the topic, the success of internal devaluation has been considered as anPractices
Critics say some practices of internal devaluation are quite dirty: * There was at least one case when the right wing majority of the parliament consciously voted into law a bill whose annotation clearly stated that this bill (if adopted) could violate some articles of the constitution, including the article of the "core" of the constitution that defines the country as independent and democratic republic. Later the constitutional court found that the bill indeed had violated the constitution, including the "core" article of the constitution. The initial bill (with annotation) was approved and signed by the right wing prime minister and minister of finances. * In many cases there has been lack of necessary public debate and discussions by the experts about the necessary changes in the legislation when the measures of the internal devaluation had been adopted (in fact, the previously mentioned anti-constitutional bill had explicit note that the bill (despite its potential violation of the constitution) had not been discussed with the experts). In many cases such measures were adopted in artificially created rush when the right wing governments in power had not wanted their proposals to be questioned. Right wing politicians in command of the internal devaluation in some cases had managed to create impression in the general public (especially before elections) that they were more centric or left leaning that it was in reality. Similarly, the right wing politicians also used (in some cases) ethnic tensions and public debates about uncertain but divisive questions about history to garner public support (ethnic tensions are artificially created by some politicians before elections in the mentioned country, there are no tensions in everyday life, e.g., the mixed marriages are mundane). Actually, lack of clear understanding of the differences between left and right wing economic policies by the general public and the focus on the ethnic questions arguably have been the true reasons why at least one right-wing government has survived the elections even after the internal devaluation had been implemented. * The growing unemployment resulted in the reduction of wages indeed but the actual result was miserable - e.g. - at least one company had even reported that it was retracting the use of technologies and was restarting the old practices of manual labour, because it was cheaper to find new human employees than to use the technologies. The Internal devaluation can indeed increase the productivity that is defined as the ratio between the added value and labour expenses, but the internal devaluation usually fails to increase the productivity that is defined as the ratio between the added value and the hours worked. Therefore, the capital owners are the main winners of the internal devaluation (in the short-run, namely, because there is no long-run winners of the internal devaluation), but the general welfare is stagnating or even decreasing because of the smaller income per hour and because of wasted human capital that is used inefficiently in the companies that are building its profit margin on the low cost workforce and not by the use of technologies. * Usually it is advised to combine the internal devaluation with the structural reforms in the government and the economy. In practice there had been lot of calls to implement more structural reforms and not to have flat (bookkeeper-style) cuts of expenditures across all parts of the economy. But one should take into account that structural reforms usually contradicts the internal devaluation, because the structural reforms require flexible and skilled workforce. Structural reforms usually result in high unemployment and attract a lot of criticism if workforce can not adapt and this lack of flexibility usually is due to lack or available resources (education expenses, time for gaining new skills and experience, etc.). There is at least one case when the country is left with immensely large structural unemployment after the internal devaluation. * Some of the right wing politicians who are the biggest defenders of the internal devaluation have questionable moral standards. They are keen to complain about the lack of money in the treasury but at the same time they can adopt questionable practices for privatisation of state owned bank (as could be seen from the interpolation debates in the parliament) or they can even exploit loopholes in the tax code for personal gains. At the same time there was at least one case when the representative of the right wing government has stood in the parliament and reported that the government has consciously refused to issue at least one regulation (related to the social security matters) that was required by the standing laws of the country because of lack of money in treasury. * Central government can be keen to transfer its responsibilities to municipalities, sometimes without providing them with the necessary tax incomes. The debate about seniority of claims on mortgage debtors was some example how such governments prefer to create favourable conditions for foreign banks and decrease the opportunities of work for municipal companies. There are lot of other examples as well. * There is question whether it is justifiable to have bailouts of failing banks when the country is going through the internal devaluation and when the country requires additional resources (that could be transferred from the bailout funds) for structural reforms.Future
There are cases when the internal devaluation can be seen as the right solution indeed (as opposite to the external devaluation or other measures). E.g. for some countries which participate in the monetary unions and for countries whose currencies are considered to be already undervalued. But in both cases the internal devaluation can be no more than the substitute for the more profound and effective measures which should be taken. E.g. one should greatly improve the movement freedoms for workforce, goods, services and capitals for the monetary unions to attain the situation where the single currency regime functions smoothly for all the regions some of which are in the different positions of the economic cycle than others. The estimation of any political decision should take into account the global development of the economy as well. E.g. one can consider the total income and how it is split into the two parts - the income from the capital and the income from the labor. One can observe that the share of the total income that is generated by the labor has declined by some 10% in the last decade or so. This can be partially attributed to the decreased workforce costs (because many large economies has adopted the free market principles and became more integrated in the global trade) but large part of this can be attributed to the development of the technologies. Therefore, - if the internal devaluation is all about the costs of workforce then it can be dreadful for the future, because the future economies apparently will require more and more skilled (and not cheaper) workforce and companies will adopt technologies for all the job positions where it will be profitable (the development of technologies is making more and more technologies available for profitable use in companies) and therefore those work positions will be lost for employees altogether.Footnotes
References
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