6-Potentials and Possibilities
This is the 6th and final part of a sequence of posts on policy implications of Modern Monetary Theory for Pakistan. The first five posts are 1-MMT For Pakistan,2-Two Sources of Monetary Injections,3-Three Way Partnership,4-Job Guarantee Programs, and 5-Sectorally Balanced Monetary Expansion.
Once we realize that money is not a constraint, the possibilities for utilizing idle resources to increase production are endless. There are a large number of Self-Financing Mega-Projects which we could create using the vast pools of idle unskilled labor at our disposal. Remember that Dubai was built by our laborers – surely we can also utilize them more efficiently to build Pakistan. Just a few of the possibilities are listed below. Link Roads from rural areas to cities are MASSIVELY productive; these increase farmgate prices and create incentives for agriculture. These can be built by unskilled labor, under direction from the Frontier Works Organization (FWO) which has experience in projects of this type. The financial burden would be quickly repaid by the boost provided to agricultural production. MMT provides us with the conceptual tools to see that money is a “time-machine” – it allows us to transfer gains from productivity in the future to jobs in the present. The government is ideally suited to create money to provide the “bridge-loans” which enable this trade. On this same principle, a large number of Public Works Programs can be undertaken. Especially relevant for our current context of impending climate change with massive impacts on the economy, making plans to counter it would be extremely important for a our future. China is planning to build more than 500 Eco-cities, which would be ecologically balanced and self-reliant. We can similarly plan to build several such Ecologically-Balanced cities. By planning for climate change, we can change this threat into an green opportunity. For example, the entire coastline from Karachi to Gwadar is now available for development of new cities. Building cities is a self-financing project because we start with very cheap desert land and turn it into immensely valuable commercial property. Thus, it is possible finance such development by selling stocks in ownership of the to-be-developed city. Large amounts of funding can be raised this way – making the future value of the city serve to finance its development now. On the principle of an earlier valuable project “Aik Hunar, Aik Nagar” we can build a number of ecologically balanced cities around a single theme. Malaysia would be interested in helping us develop a city devoted to Palm Oil production. We could build a Tourism industry on a beach city at a suitable distance from Karachi. We could build a modern city for a fishing industry, closer to Gwadar.
The Key to Development is to Invest in Future of Nation. The problem with capitalism is that High PRIVATE return projects are NOT highest in social benefits. Left to the private sector, we find capital flows into GAMBLING, FINANCE, Insurance, Real Estate. Speculative activities provide quick and high returns, which WIN big over REAL investment, which is slow and steady and provides long run reliable but modest gains. Because Money is CREATED by private sector, it becomes possible for the finance sector to take risk-free gambles. Losses are transferred to the public while gains are privatized. In the Pakistani context, the current regime has high interest rates. This is not, as commonly believed, a threat to growth because it lowers investment. Rather, High interest rates are THREAT to growth because they lead to preference for finance over real investments. Quick short run high gains in finance trump the uncertainties of the long run. But long run investments are essential for the future of the nation. The SOLUTION to this problem is DIRECTED LENDING PROGRAMS. We can NUDGE the private sector to INVEST in future of nation. This requires us to ALIGN incentives with LONG RUN prosperity, instead of short run payoffs. There are many different ways that SBP can work to accomplish this goal. The Central Bank wields an immense amount of power because it is a lender of the last resort. Private sector banks cannot function without support of the Central Bank. The SBP can use this power to incentivize – using carrots and sticks – banks to create credit according to sectoral development priorities. Exactly this kind of scheme was used to achieve the highest growth rates globally in Japan. See Princes of the Yen for documentation about this.
In conclusion, we can say that the Primary Lesson of MMT is that “Money is NEVER the constraint”. The Conventional Mindset is that We must RAISE TAXES in order to finance development projects. The MMT Alternative is that If development project is viable, we can BORROW from future revenues and create and invest money TODAY. It requires some skill to CREATE money and avoid adverse inflationary effects; we have discussed this issue in great detail earlier. In particular, we must manage Foreign Exchange liabilities SKILLFULLY – this is of VITAL importance, especially in the Pakistani context. The key to achieving this is to undervalue PKR and overvalue Dollars, the opposite of the policy pursued for the last three decades. Because the IMF program puts strong constraints on the government, we can shift money creation to the private sector, but utilize incentives to ensure that credit is created for the right sectors and at the right interest rates. In a high interest rate environment, Islamic alternatives based on Musharka are especially attractive, and Pakistan has a well-developed Islamic Finance industry with a huge potential for expansion of credit. Thus, MMT suggest a large combination of unorthodox economic policies which could serve to dramatically ramp up economic prosperity in Pakistan.
End of Talk – For a 30min YouTube video of the talk, see: “Policy Implications of MMT for Pakistan”. Some additional materials on MMT are listed below. My webpage lists a collection of videos and readings on MMT. MMT is much maligned and distrusted by public and by economists even though MMT makes sense of a large number of observable macroeconomic phenomena, and is vastly superior to conventional macro theories which continue to fail at explaining financial crises or providing us with useful economic policies. Some reasons for this are explained in my post on Power of False Names: Wrong names like “Deficits” play an important role in persuading public of false theories. This theme is explored in the video below, which explains how we need to FRAME MMT using an alternative set of concepts and frameworks, so as to persuade public of its inherent sensibility.