Beggar-Thy-Neighbor by Other Means

Jaakko Markkanen, Markku Siikanen and Nelli Valmari

No 141, ETLA Working Papers from The Research Institute of the Finnish Economy

Abstract: Abstract A country that cannot devalue its currency can still cut its exporters’ costs through industrial policy and steal business from foreign rivals. We call this beggar-thy-neighbor by other means and measure it for Finland’s 2017–2019 internal devaluation policy. We estimate the export demand for nine large manufacturing industries, together accounting for roughly 4 percent of Finnish GDP, using a BLP-style demand model and a sufficient-statistic identity for cost incidence. We document super-pass-through to export prices, averaging about 1.18, above the CES gravity ceiling. The realized policy cut labor costs by 3.6 percent and raised Finnish export revenue by €239.0 million over 2017–2020, 0.6 percent of baseline. A more ambitious original government proposal with 5 percent cost decrease would have shifted €567.8 million in revenue away from rival exporters in the same destinations. A hypothetical four-day work week would have cost €2.4 billion with wage costs rising 28 percent. Internal devaluation captures export-market share from foreign rivals. The cross-border revenue transfer is comparable in magnitude to the domestic gains.

Keywords: International trade; Markups; Pass-through; Industrial policy; Internal devaluation (search for similar items in EconPapers)
JEL-codes: F12 F14 L11 L13 L52 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2026-06-15
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