The Dilemma of 'Currency Wars' and 'Trade Wars' as a Strategy to Leave the Crisis Behind : The Impact of Different Unit Labor Costs on Developing Nations

Abstract: The developments that took place since the beginning of the global crisis indicate that the comparison of unit labor costs of different economies would have a continuously growing impact. Unit labor costs and/or relative differences in unit labor productivity as a determinant of international competition – particularly in case of manufacturing – also constitute the basis of real and effective exchange rate calculations by various agencies. In this respect, it is possible to ponder over the question of “trade and currency wars” among both within the bloc of developed countries of the center, and among the developed countries and developing and emerging nations. The reason lies in the fact that these countries have faced substantial short-term capital inflows (Quantitative Easing1-2). Outside OECD, Brazil and China are also examples of countries facing the impact of short-term monetary infusions. This trend explains why developing countries are now imposing measures associated with tight monetary policies. The objective of the present study is to analyze the grounds and potential outcome of quantitative tightening in developing countries