ABSTRACT
International competitiveness can theoretically be restored either by increasing labour productivity or by reducing wages in relation to the level in a country’s trading partners, or by a combination of these two. However, lack of competitiveness means productivity-boosting investments are hardly possible. So, in real life, if an economy is uncompetitive, first of all competitiveness must be restored by reducing wages relative to trading partners’ wages. Theoretically there are two ways to do this: weakening the currency, or deflation. In practice, only the former is effective. Currency weakening isn’t a panacea, but in emergencies, where there is a structural worsening of competitiveness, currency weakening combined with the appropriate fiscal and monetary policy is in the interest of the country and its partners.
