Internal devaluation

Internal devaluation is an economic and social policy option whose aim is to restore the international competitiveness of some country mainly by reducing its labour costs – either wages or the indirect costs of employers. Sometimes internal devaluation is considered as alternative to 'standard' external devaluation when nominal exchange rates are fixed, although social implications and speed of economic recovery can significantly differ between the two options. While proponents usually blame fiscal profligacy or loss of competitiveness as the reason for a need to devalue internally, critics oftentimes view macroeconomic imbalances and the absence of a fiscal transfer mechanism within a currency union as culprits. Internal devaluation is an economic and social policy option whose aim is to restore the international competitiveness of some country mainly by reducing its labour costs – either wages or the indirect costs of employers. Sometimes internal devaluation is considered as alternative to 'standard' external devaluation when nominal exchange rates are fixed, although social implications and speed of economic recovery can significantly differ between the two options. While proponents usually blame fiscal profligacy or loss of competitiveness as the reason for a need to devalue internally, critics oftentimes view macroeconomic imbalances and the absence of a fiscal transfer mechanism within a currency union as culprits. Internal devaluation was first considered during the Sweden economic crisis during the 1990s and Finland's accession to the European Union in 1995. Internal devaluation gained popularity during the economic recession of 2008–2010 when several countries pursued such policies with aim to restore competitiveness and to balance national budgets. Latvia is often named as successful case of internal devaluation by popular media, although its poor performance in the international development indices (e.g. Global competitiveness indices, European Union Innovation Scoreboard, the miserable rating levels had not changed in the following year as well ) as well as severe emigration have been claimed to prove the negative impact of internal devaluation on the development of the human resources and potential GDP (whose performance can be measured by the notable inflation rate). 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.