It has been more than a century since Ambedkar鈥檚 second disquisition in the discipline of economics was published; The problem of the rupee: its origin and its solution was published in the year 1923. Ambedkar was awarded a Doctor of Science (D. Sc) upon completion of the aforementioned dissertation from the London School of Economics. Later, during the same year, it was published as a book (Jadhav 2015, p. 39).

This essay is fundamentally a tribute to The problem of the rupee; it aims to serve as a primer by discussing the theoretical gravitas and intellectual depth that Ambedkar鈥檚 second disquisition entails. While it is well-recognized that Ambedkar was trained in economics鈥攈olding two doctoral degrees^[1]鈥攁nd made significant contributions to law and politics, this essay sheds light upon a few interactions with different economists and economic conditions that Ambedkar鈥檚The problem of the rupee engages with and subsequently invites for more extensive and nuanced engagement with the monograph.

Earlier, there have been multiple scholarly contributions that engaged with The problem of the rupee. However, they present only the overarching arguments i.e., the arguments are void of the details that explain the intellectual brilliance that is present in Ambedkar (1923). For instance, Jadhav claims that, after evaluating the Indian monetary system and operations, Ambedkar was in favour of a gold-standard rather than a gold-exchange standard (1991, p. 980). In a rudimentary sense, what gold standard and a gold-exchange standard mean is that the former indicates a monetary practice where gold is the direct form of currency that would be available for circulation. On the other hand, the latter i.e., the gold exchange standard is a condition where gold would not be a medium of exchange, but another form of currency would be the medium of exchange as gold would be held for reserve exchanges.

鈥淲hat is wanted to maintain the value of currency, or of any other thing for the matter of that, is an effective limit on its supply. Convertibility is useful, not because it directly maintains the value of a currency, which is nonsense, but because it has the effect of putting a limit on the supply of currency. But convertibility is not the only way of achieving that object.鈥� (TPR, p. 499)^[2]

Jadhav misses out the ideal position of Ambedkar i.e., it is not the gold-standard, but a uniform currency regime that Ambedkar favoured; and this is the position in the dissertation. Likewise, this essay, as mentioned earlier, intends to provide details that were not presented in any scholarly material, heretofore. It would include details of various thinkers that Ambedkar鈥檚 dissertation engaged with, nature of the writing and a few notes that deserve to be noticed to explain the intellectual rigour present in the dissertation.

Before delving deeper, it is important to understand that The problem of the rupee is written in the form of a historical survey. Indeed, it was a deliberate attempt by Ambedkar to make it that way. Nonetheless, previous popular engagements, such as Ambirajan (1999) and Narendra Jadhav (1991)do not shed any light on that. The primary motivation of the dissertation was to engage with the historical discussion and debates that led to the Indian currency reform in 1893. The year 1893 marks the beginning of the colonial government鈥檚 reforms and efforts to manage the gold standard. It also marks the year of revision of the Indian Coinage Act, 1870. It was the only Act that was concerned with the currency management of the Indian subcontinent under British rule (Simha, 1970). Therefore, Ambedkar makes it a point to present the most ignored parts of the Indian currency system from 1800-1893 in the form of a historical survey.

It is only in Nancharaiah (2007) that the relevance aspect of The problem of the rupee was conveyed. In the context of analysing the economic reforms of India with respect to the liberalisation of international trade during the early 1990鈥檚, Nancharaiah visits Ambedkar鈥檚 The problem of the rupee and explains that gains via export trade was not necessarily beneficial for the economy in totality, but it just remains beneficial to certain classes in the system.

In regard to preferring gold-standard over gold-exchange standard, Ambedkar sheds light on the idea of exchange rate as well. He believed that a lower exchange rate^[3] meant a higher export trade, but also an increased price-level, simultaneously. Therefore, the onus of lower exchange rate would fall on the working class because of an increase in the price-level (ibid., p. 55).

As far as the intellectual rigour is concerned, Edwin Cannan, Ambedkar鈥檚 doctoral supervisor, much appreciated the form of writing that is present in The problem of the rupee. However, while Cannan was not in any favour of any argument/position, he appreciated the nature of the argumentation that was present in the dissertation.

鈥淚 do not share Mr. Ambedkar鈥檚 hostility to the system, nor accept most of his arguments against it and its advocates. But he hits some nails very squarely on the head, and even when I have thought him quite wrong, I have found a stimulating freshness in his views and reasons.鈥� (TPR, p. 31)

It is not just Cannan that Ambedkar interacted with, intellectually; there were other popular figures who were referred throughout the dissertation. However, this piece engages with only interactions with two of them鈥擩ohn Maynard Keynes (1883-1946) and Edwin Kemmerer (1875-1945).

With Keynes, Ambedkar in his dissertation, disagrees more than he agrees. In fact, Ambedkar demonstrates a serious disagreement with Keynes from the first chapter itself. Firstly, Ambedkar elucidates that, in order to attain a stability in regard to the rupee in the currency system, the general purchasing power ought to be stabilized. In contrast, Keynes held a different opinion i.e., Ambedkar asserts that the stabilization of the rupee鈥檚 general purchasing power is the necessary condition for true currency stability. In his view, Keynes overlooks this requirement which is vital to the stability aspect of rupee in the currency system.

鈥淏ut the conclusions he [Keynes] has arrived at are in sharp conflict with those of mine. Our differences extended to almost every proposition he has advanced in favour of the exchange standard. This difference proceeds from the fundamental fact, which seems to be quite overlooked by Professor Keynes, that nothing will stabilize the rupee unless we stabilize its general purchasing power. That the exchange standard does not do. That standard concerns itself only with symptoms and does not go to the disease: indeed, on my showing, if anything, it aggravates the disease.鈥� (TPR, p. 328)

In total, The problem of the rupee refers to Keynes at 14 different instances. In all of the instances, the agreement between Keynes and Ambedkar is meagre. Perhaps, the disagreement is emanating from the fact that Keynes was a British economist whose vantage point of analysis of the Indian currency system was from a colonial perspective. In other words, the lack of agreement between Ambedkar and Keynes could be also owed to the difference in context, perhaps. On the other hand, Ambedkar demonstrates close affinity and agreement with the American economist Kemmerer.

Kemmerer was a monetary economist with significant influence in the public domain as well. He was instrumental in designing and shaping the Federal Reserve System of the United States of America. Ambedkar鈥檚 dissertation refers to Kemmerer and his work in seven different contexts. The agreement between Kemmerer and Ambedkar鈥檚 disquisition is vivid. In the context of evaluating the gold standard and the gold exchange standard, the dissertation holds a position that is in alignment with Kemmerer鈥檚 views i.e., the inclination towards a gold standard. Nonetheless, there are limitations to the affinity between Ambedkar and Kemmerer, but they are strictly contextual in nature.

The dissertation鈥檚 conclusion that gold standard is an efficient system over the gold exchange standard emerges from the fact that Indian prices, on average, were higher than those in countries adhering strictly to the gold standard. This discrepancy undermines the assumption that the exchange standard鈥攁 system where currency value is tied to foreign exchange reserves鈥攊s as reliable or beneficial as the gold standard. In sum, stability in the rupee鈥檚 gold value does not guarantee overall price stability, challenging the idea that the exchange standard matches the gold standard鈥檚 efficiency.

As he brings a conversation between Keynes鈥檚 and Kemmerer鈥檚 views with respect to the different currency regimes, in the fifth chapter, 鈥楩rom a Gold Standard to a Gold Exchange Standard鈥� and in the (seventh and) final chapter 鈥楢 return to the Gold Standard鈥�, Ambedkar argues in favour of a uniform currency regime, but with its own limitation.

鈥淚f it is desirable to do away with the management then convertibility is an insufficient measure; for with convertibility the rupee will still remain a managed rupee. 鈥� Queer as it may seem, safety lies in an inconvertible rupee with a fixed limit of issue.鈥� (TPR, p. 614)

In essence, Ambedkar鈥檚 second disquisition i.e., The problem of the rupee could be considered as an entry point into understanding the evolution of different currency regimes that prevailed during the colonial time period. The intellectual engagement is undoubtedly rigorous; however, only two interactions, with Keynes and Kemmerer, are provided in this essay, but the writing contains tables and documents that are concerned with the Colonial Indian currency systems in abundance.

For instance, the dissertation documents various forms of currency that were in circulation under different provincial rules. The dissertation refers to Useful Tables (1840) by James Prinsep; the treatise deals with coins, weights and measures of British India. Therefore, Ambedkar鈥檚 The problem of the rupee is not just a concern for the historians of Indian economics, but also economic historians, historians of colonial India and scholars with a particular interest in different currency regimes as well.

Footnotes

[1] His first disquisition i.e., The evolution of provincial finance in British India was published as a book in 1925 but it was accepted at Columbia University as a dissertation in 1917; Ambedkar was at Columbia University from 1913 to 1917 and at LSE from 1920 to 1923 (Jadhav 1991, p. 24, p. 39).

[2] The citation scheme 鈥楾PR鈥� is the abbreviation for The problem of the rupee: its origin and its solution and it is followed by the page number. The version of this primary text (TPR)that was consulted for this essay was compiled by the Education Department of the Government of Maharashtra鈥�Dr. Babasaheb Ambedkar: Writings and Speeches (1989).  The problem of the rupee is present in volume 6 of the compilation.

[3] In Ambedkar, exchange rate is defined as the number of units of pound-sterling that is required to obtain a single unit of Indian currency.

References

Ambedkar, B. R. (1989) [1923]. The problem of the rupee: its origin and its solution, as republished in volume six, Dr. Babasaheb Ambedkar: Writings and Speeches, compiled by Vasant Moon, Bombay: Education Department, Government of Maharashtra, pp. 315-618.

Ambirajan, S. (1999). Ambedkar’s Contributions to Indian Economics. Economic and Political Weekly, 34(46/47), pp. 3280-3285.

Chikoti, S. S. H. (2021). Ambedkar鈥檚 Economics: Correspondence with the Austrian School of Economic Thought? Unpublished BA Honours Thesis. Bengaluru: Azim Premji University.

Jadhav, N. (1991). Neglected Economic Thought of Babasaheb Ambedkar. Economic and Political Weekly, 26(15), 980-982.

Jadhav, N. (2015). Ambedkar An Economist Extraordinaire. Konark Publishers.

Nancharaiah, G. (2007). On Exchange Rate, Trade Balance and Distribution. In S. Thorat & Aryama (Eds.), Ambedkar in Retrospect: Essays on Economics, Politics and Society (pp. 49鈥�57). Rawat.

Simha, S. L. N. (1970). Currency, Exchange and Banking Prior to 1935. History of the Reserve Bank of India 1935鈥�51. Mumbai: Reserve Bank of India.

Prinsep, James. (1840). Useful Tables, Forming an Appendix to the Journal of the Asiatic Society: Part the First, Coins, Weights, and Measures of British India. Bishop鈥檚 College Press.

Sai Srihari Chikoti (Srihari) has聽an聽MA in Economics from Azim Premji University,聽Bengaluru. His primary research interest is in the history of economic thought聽with a specific聽focus聽on Indian economics and macroeconomics. He is a founding member of the Indian Society for the History of Economic Thought (ISHET).听He tweets at .

Acknowledgements

I am deeply grateful to Alex M. Thomas for his guidance and continuous encouragement throughout the development of this essay. I would also like to sincerely thank Ashwath R, Dontha Prashanth and Thair Ahmad for their valuable comments and feedback.

The agreement recently negotiated between the Government of Ethiopia and the International Monetary Fund (IMF) not only imposes austerity on the government, but also risks destroying the country鈥檚 model of economic development.

Ethiopia, Africa鈥檚 second-most populous country, has featured tremendous progress in its economic development in the past twenty years. A developmental state driving public investment while imposing tight regulations on the financial sector, a managed exchange rate, and capital controls, achieved a significant decline in hunger and malnutrition, and improvements in literacy and other relevant human development indicators.

Nonetheless, Ethiopia is facing serious macroeconomic challenges including high inflation of close to 30 percent, a current account deficit, foreign exchange shortage, and slowing growth, jointly with domestic conflicts and climate change impacts. This situation has forced the country into negotiations with creditors on its external debt, even though Ethiopia鈥檚 external debt stock compared to GDP is less compared to other low-income countries. International financial institutions see government budget deficits as the main culprit in causing inflation and an overvalued real exchange rate that causes trade deficits and balance-of-payments problems while crowding out private investment in the country. End of July 2024, the Government of Ethiopia and the International Monetary Fund (IMF) concluded an agreement on policy action to be taken for a stepwise release of a loan of USD 3.4 billion from the IMF, starting with the immediate release of USD 1 billion, as well as additional grants and loans from the World bank. The agreement is built on the following : 1) floating the exchange rate; 2) modernizing the monetary policy framework going from reserve targeting to interest rate targeting; 3) ending monetary financing of the government budget via the National Bank of Ethiopia (NBE) and exiting financial repression; 4) improving mobilization of domestic government revenues; 5) debt restructuring with external creditors; 6) strengthening the financial position of state-owned enterprises.

What is wrong with the analysis?

This analysis of Ethiopia鈥檚 situation is misguided. Starting with inflation, at the Ethiopia鈥檚 government budget shows that over the past years, there have only been deficits if capital expenditures and current expenditures are considered jointly. Yet, keeping capital expenditures separately (it is appropriate to finance new investment with new loans to match additional output with additional money) reveals that current expenditures are more than covered by revenues meaning that the current budget is not even facing a deficit. Rather than by the narrow monetarist focus on government budgets, inflation can be better explained by past currency devaluations as well as various supply-side bottlenecks. For instance, multiple domestic conflicts in Ethiopia have impaired agricultural output, which, all along with population growth and urbanization, led to increasing food prices.

To be clear, there are problems arising from Ethiopia鈥檚 current economic framework in a situation of foreign exchange shortage: for example, instead of investing export revenues in production capacity, exporters often decided to use the part of foreign currency, which they were not obliged to surrender to the NBE, to exchange it at a favorable rate in the illegal parallel market or to illegally import consumer goods, which are sold at high prices domestically due to import restrictions. As another example, coffee farmers are forced to export coffee via marketing facilitators to earn the country foreign exchange. Yet, farmers would prefer to sell it in the domestic market where they could realize higher prices and better cover ever-growing living costs.

Yet, such phenomena, including the large disparity between the official and the parallel market exchange rate, are symptoms rather than causes of the existing problems. The bottom line is that increasing incomes stemming from Ethiopia鈥檚 strong economic growth have given way to growing import demand, which has hit the country鈥檚 balance-of-payments constraint. It is import substitution (for instance domestic renewable energy for fossil fuel imports) and export promotion that must do the job to improve the current account, ease foreign exchange shortage. Moreover, the country needs domestic investment, particularly in agriculture, to bring down food prices and overall inflation. This would correct the current wrong systemic incentives and move economic activity away from the parallel foreign exchange market.

What is wrong with the agreement?

In the IMF鈥檚 ideal world, the policy action agreed on in the deal will solve the problem: a floating exchange rate means that there is no parallel market anymore; austerity will stabilize prices. Both actions combined will restore international competitiveness because the market exchange rate will be such that imports and exports balance. Private investment will not be crowded out anymore by the government鈥檚 borrowing. Instead, it will prosper both domestically and via foreign direct investment (FDI), thus earning the country鈥檚 foreign exchange in the future and bringing it on a lasting growth path.

A lot is wrong with this optimistic projection. The most essential question is: how will the availability of foreign currency change as a result of the agreement鈥檚 implementation? The trade balance, on the one hand, may improve thanks to exchange rate depreciation but it is not clear how significant this effect is because exports (imports) are much more affected by changes in foreign (domestic) incomes than by changes in relative prices. Moreover, we are still to see how much relative prices even change once inflation goes up, thus undoing the nominal depreciation. On the other hand, the agreement has led to the , which is now increasing import demand. Income flows will lead to an additional loss of foreign exchange because foreign investors are now allowed to repatriate their profits more easily. It is doubtful that this can be counterbalanced by inflows from growing foreign investment itself. Other flows such as remittances and official development assistance, beyond international financial institutions鈥� bailout, will supposedly not change significantly. 鈥淪trengthening the financial position of state-owned enterprises鈥� essentially comes to privatization such as it has been announced for , meaning that the government is planning to sell out precious and strategic assets. This will yield short-term returns, including conditional finance from the World Bank, but a continued drain of foreign exchange from profit repatriation.

At the time of writing this text, the exchange rate has depreciated by about 100 percent. The NBE facilitates the floating regime by holding foreign exchange auctions with commercial banks to determine the rate. For the time being, this is quite a restricted foreign exchange market with the NBE as the key regulator by deciding on foreign exchange supply. Moreover, the current regulations still include some foreign exchange retention requirements and relatively tight capital account restrictions. Exchange rate floating thus only takes place within restrictions, which is why the parallel market is expected to stay in place since on the capital account side of the balance of payments, money is still trying to leave the country.

Taking stock of the economy鈥檚 expected structural change, it seems like in the short term there are additional foreign exchange losses whereas the additional inflows may or may not take place in the middle to long term. Immediate crisis is avoided by injections of foreign exchange from international financial institutions and, maybe, privatization returns. Overall, a larger share of foreign exchange trading may go through official channels than via the parallel market as compared to the previous situation, but a loss of foreign exchange is still a loss. It remains to be seen how far the Government of Ethiopia is willing to satisfy the IMF鈥檚 expectations once inflation has started increasing and foreign exchange shortage intensifies again once the additional liquidity that followed the IMF agreement is used up. That would be the opposite of the expected outcome.

If, in such a situation, the journey continues towards more liberalization to give the country more of the same medicine, the next step would be the removal of capital controls. Money currently being restricted from leaving the country could turn into a surge of capital flight, putting further pressure on the exchange rate and becoming self-enforcing. The NBE would have to use foreign exchange reserves to entertain capital flight. Inflation would shoot up from an already very high rate. In the worst case, balanced trade is not achieved via depreciation directly but indirectly due to collapsing import demand caused by a deep economic crisis. As the that the NBE 鈥渕ay have to take further policy action by raising interest rates to ensure inflation quickly returns to a downward path鈥�. To be less diplomatic, the NBE would have to increase its policy rate by an enormous amount in its fight against currency depreciation because the alternative policy instruments such as capital controls would have been removed. Given such a scenario, it is hard to imagine how private investment shall come in and bring the economy on a sustainable growth pattern, let alone the investment in key sectors to ensure food security, external balance, and internal structural change. There is still a window of opportunity for the Government of Ethiopia not to pursue this path to its end but to embrace more effective reforms.

The reforms needed

This critical view shall not deny that there is need for reform. The new that the NBE announced while the negotiations were still going on is a step in the right direction. So far, the monetary policy has been conducted in a rather monetarist way by targeting reserve growth, which constrained lending to productive and green investment. In contrast to the IMF鈥檚 misguided approach to monetary theory, this framework will and finance public investment to co-exist with private investment without any crowding-out. Public investment must play a key role to achieve the joint goals of domestic growth, price stability, poverty reduction, and a stable balance of payments. Austerity, high interest rates, and selling out public assets are the opposite of what is needed. Instead, regulation of the external account is necessary to maintain the Government鈥檚 policy space.

Moreover, while the real exchange rate may not be the most critical variable defining trade performance, it is clear that a fixed rate has led to real overvaluation after years of high inflation. Yet, this does not require a floating rate and the removal of capital controls. A (stepwise) devaluation can achieve the same goal. Likewise, increasing mobilization of government revenues is a welcome move if it takes poor households鈥� financial constraints into account. But again, this is a domestic issue that does not need financial liberalization.

It also must be admitted that Ethiopia needs FDI to facilitate technology transfer and increase the economy鈥檚 productivity. But this should not come with treating all capital flows the same way, irrespective of whether they contribute to long-term growth or are merely looking for short-term profits.

The coming months, and possibly years, including the continued debt restructuring negotiations with creditors, will show if the Government of Ethiopia is willing to maintain and improve the key parts of its successful development model. The alternative will be most likely be capital flight, austerity, and a tight constraint on long-term development.

Basil Oberholzer is Senior Associate Research Scientist at the Centre for Development and Environment, University of Bern, Switzerland. You can reach him at: basil.oberholzer@faculty.unibe.ch.

Photo: Addis Ababa. Rights reserved to DevEcon and the author

Over the past decade, two, intertwined research agendas on (IFS) and (SF) have proposed to identify how an increasingly finance-dominated global capitalism incorporates the (Semi-)Peripheries.

The IFS research agenda recognizes that a 鈥渟ubordinate鈥� national currency comes with a risk premium increasing the costs of financing public debt 鈥� in other words, the current, US dollar-based currency hierarchy acts as a structural fiscal constraint in the Global South, limiting the scope for badly needed public investments. Foreign capital 鈥� in the form of foreign currency-denominated sovereign and private debt-, foreign aid, and foreign direct investment – is then to this artificial and unfair developmental constraint.

The SF agenda examines how this straightjacket on fiscal space has been further compounded with the liberalization of global capital mobility over the past forty years, diffusing credit-based accumulation strategies from the Core to the Peripheries: from socially and environmentally vital public goods and transformative industrial policies towards developmentally regressive strategies of accumulation driven by speculation and asset-price inflation.

Programmatic visions for liberating (semi-) peripheral economies from the dual constraints of a national fiscal space suffocated by the global currency hierarchy and globally mobile capital flows which deepen financialization are underdeveloped. Two scales of action are plausible: At the international level, , but it remains uncertain what forms of international financial solidarity and collaboration, if any, will materialize under its aegis. The national level comprises an alternative scale as the State continues to be perceived as the most likely candidate for ringfencing domestic social, environmental, and developmental objectives from the pressures of global capital mobility and the structural constraints of the global currency hierarchy.

In a with P谋nar E. 顿枚苍尘别锄, we study the politics governing the management of money in Hungary and Turkey, two semi-peripheral economies where the executive has built a vast array of direct and indirect tools to intervene in monetary policy, retail banking and credit allocation to manage financial subordination.

It would be tempting to equate (semi-) peripheral economies with passive states dispossessed by global capital mobility and financialization. Contra this narrative, we observe that over the past decades, governments in many developing countries have developed new forms of political control over money not despite, but because of their exposure to- and previous experience with- debt crises, capital flight and foreign exchange volatility. Enhanced public interventions have often been necessary to manage the structural risks borne by economies which entered global capital mobility from a structurally weaker position due to their subordinate position in the global currency hierarchy. But an expansion in public control over finance should not be confused with de-financialization: credit-based accumulation strategies are often economically attractive for incumbents to boost GDP, while they also enable new forms of political control over the social allocation of credit, which stabilize patron-client relationships between state and particular social groups while further deepening capitalist social relations and the exploitation of subordinated classes.

We call financial statecraft these emerging forms of state power, and we distinguish between two forms: defensive financial statecraft groups political interventions which aim to regovern finance, limit the macro-economic destabilizing effects of exposure to financial risk and subordinate the process of finance-based accumulation to domestic political imperatives. By contrast, offensive financial statecraft describes policy interventions to govern society through finance by strategically deepening financialization: centralized executive control over credit conditions, interest rates and the social allocation of credit enables incumbents to establish rentier social contracts between state and society to stabilize their political regimes. Since the 1997 Asian financial crisis, many (semi-) peripheral economies have engineered both defensive and offensive forms of financial statecraft to regovern finance and govern society through finance.

Our two cases, Hungary and Turkey, represent a particular form of semi-peripheral financial statecraft we call statist authoritarian financialization (AF). Under AF, the executive directly shapes monetary and macro-financial policy by imposing its prefered interest rates and macroprudential regulations to Central Banks. Simultaneously, the executive also uses moral suasion, or simply nationalizes private banks to monetize government debt, and force banks to lend at preferential rates to discrete groups of households and firms. Under AF, the executive develops a 鈥渇inancial vertical鈥� which blends formal and informal instruments in an attempt to politically control the entire domestic circuit of credit from the Central Bank down to retail banks.

However, without provisions for democratic accountability and under the conditions of capitalist accumulation and exploitation, such an expansion of governmental control doesn鈥檛 democratize money as a public good: Similarly to natural resource rents, unaccountable, centralized political control over money merely cements a political economy of rent-based (in this case subsidized credit-based) social contracts between incumbents and discrete, politically salient social groups to stabilize anti-democratic, authoritarian regimes.

We draw on the works of Poulantzas, Offe and a tradition of non-reductionist Marxist state theorists to analyze the contradictions of a statist authoritarian mode of managing IFS and SF: instead of stabilizing a national economy, the expansion of executive political control over the management and social allocation of money in regimes which simultaneously deepen credit-based accumulation only internalizes ideological and class conflicts within the state apparatus. These tensions are masked when global liquidity is cheap, but when it contracts, painful trade-offs appear between the fiscal solvency of the state and political pacification maintained with subsidized lending. These tensions materialize within the state as political conflicts between the Central Bank and the executive, torn between the objectives of price stability and fiscal solvency on the one hand, and the financialization of households and firms favored by incumbents  on the other. The simultaneous management of public and private debt with the same policy instruments pose zero-sum distributive conflicts given that sovereign debt also forms a key collateral for private credit.

We detail the consolidation and limits of financial statecraft and authoritarian financialization in Hungary and Turkey over the past two decades, analyzing how changing global liquidity conditions between the early 2000s and the 2020-22 Polycrisis have affected the state鈥檚 management of money.

In both countries, financial crises in the early 2000s incentivized public interventions which momentarily consolidated a centralized system of political control over money managed by the executive from the mid- to late 2010s onwards. Soon, 鈥渄efensive鈥� forms of financial statecraft were revamped into 鈥渙ffensive鈥� tools, allowing the executive to ride the wave of cheap global capital liquidity by deepening credit-based accumulation, which enhanced GDP growth and co-opted large social constituencies via subsidized lending.

The semblance of an economic miracle broke down in both cases as soon as global credit conditions worsened: the hitherto expanded and centralized executive control over money proved unable to simultaneously manage public debt and the financialization of the private sector.

Faced with this dilemma, Hungary and Turkey first followed different strategies: In the context of peak global inflation, and the resulting interest rate hikes in Core Central Banks in 2022, a disinflationary power bloc prevailed in Hungary between the executive, non-tradable domestic capital factions, and  households hurt by inflation. For Viktor Orban, this meant sacrificing large-scale subsizied lending programs for households and SMEs which had previously played a crucial role in stabilizing the Fidesz regime.

In Turkey, a narrow power bloc between Erdogan鈥檚 hyper-presidential regime, export-oriented SMEs, and the construction sector maintained a loose monetary policy against the resistance of the Central Bank and the interests of wage-earning households hurt by inflation. In the second half of 2023, Erdogan sidestepped this strategy as the costs on the sustainability of public debt proved overwhelming, and even exporting firms were hurt by rising intermediary import costs due to hyperinflation and collapsing exchange rate: thereafter, Turkey signalled a similar approach to Hungary鈥檚 conversion to an orthodox crisis-management strategy but at the time of writing, .

In fair weather, a dramatically expanded political and institutional apparatus empowered the Hungarian and Turkish executives to centralize control over the domestic circuit of money, giving the illusion that semi-peripheral financial statecraft had managed to simulatenously contain the destabilizing effects of global financial mobility, while harnessing credit-based accumulation for cultivating patron-client relations to help the political stabilization of these regimes. The dramatic shift in global credit conditions in 2022 lifted the veil over this illusion: no matter the expansion of executive control over the domestic management and allocation of money, a global liquidity contraction forced these regimes to prioritize fiscal solvency and the exchange rate by opting for austerity and aggressive interest rate hikes, which undermined their capacity for pacifying wide cross-sections of society via subsizied credit.

The Hungarian and Turkish pathways contain multiple lessons which resonate in the wider Global South.

A first lesson is that without radically new political institutions and policies ensuring democratic accountability, an expansion of centralized state control over money ensures no progressive alternative to neoliberal forms of credit-based accumulation and only deepens finance-based accumulation strategies elaborated under neoliberal capitalism. Instead of using money for socially and environmentally progressive causes, incumbents in the Global South may find the developmentally regressive logic of using subsidized credit for boosting a finance-insurance-real estate-construction nexus difficult to resist given the promises of short-term economic and political dividends.

A second significant lesson lies with the limits of strictly national strategies to manage the constraints of the global currency hierarchy and the risks of global capital mobility in the Global South. Hungary and Turkey illustrate that no matter the expansion of direct executive control over the domestic management of money, the financial statecraft of (semi-) peripheral economies remains structurally incapable of mitigating the effects of global financial cycles driven by Core Central Banks such as the FED. Without international collaboration and new international institutions, the constraints posed by the current dollar-based global currency hierarchy and global capital mobility will continue to restrict fiscal space in the Global South, and instead of opening financial means to invest in essential public goods, will incentivize developmentally regressive finance-based accumulation strategies.

A radical alternative to in the Global South would be to derisk public finance instead: letting states invest in essential social and environmental public goods under a novel progressive paradigm that firmly departs from prioritising profit-maximisation. In Europe, the COVID19 crisis showed that Core Central Banks have the : it is a purely (geo)political decision if this dormant capacity is not leveraged to build a more just international financial architecture.

David Karas is a postdoctoral researcher in political economy at CEU Democracy Institute, Budapest. His current research focuses on changing forms of the capitalist state in the age of financialization and green industrial policies in the Global North and Global South”. See his . He tweets at @.听

Photo by .

The surge of right-wing populism in East-Central Europe is often portrayed as an unforeseen shift from the earlier post-1989 liberalization path. The 鈥渋lliberal transformation鈥� narrative underlines stark differences between the policy arsenals that informed democratization and marketization reforms in the early 1990s and those fueling current 鈥�.鈥� Yet this framing conceals the analytical maneuver of disconnecting the political sphere from its socioeconomic counterpart, thereby limiting democracy to the former and defining democratic participation based on electoral competition.

It was precisely this separation, which at the dawn of post-communist transformation, tended to align democratization not with leveling erstwhile power and wealth disparities, but with by the lingering elements of Soviet bureaucracy. Conceived in this way, democratization was deemed to be an engine of market reforms. Insofar as much of the 鈥渢ransitology鈥� scholarship operated with a parochial 鈥渄emocracy鈥� versus 鈥渁uthoritarianism鈥� dichotomy, it repeatedly obscured authoritarian tendencies in consolidating democratic systems.

In the recently published article , I argue that the corpus on 鈥渁uthoritarian neoliberalism鈥� is well-positioned to instigate a much-needed departure from this externalization of 鈥減olitical鈥� and 鈥渟ocioeconomic鈥� spheres when revisiting the intricacies of post-communist transformation in general and monetary reforms in the Baltic states in particular.

Bents of Authoritarianism and Baltic Exchange-Rate Regimes

As is well known, the unearths the manifestations of authoritarianism in the processes related to the reconfiguration of state and institutional power to insulate certain policies and institutional practices from social and political dissent. This focus on the technocratic forms of authoritarianism 鈥� where the presence of democratic institutions in part camouflages the practices associated with the removal of key decision-making areas from popular control 鈥� has helped scholars dissect .

While the propensity to substitute the forms of elusive compromise between capital and labor for an outright exclusion and marginalization of the latter has been particularly evident since the onset of the 2007-2008 global economic and financial crisis, the displays of authoritarian bents in the practices of neoliberal governance are, of course, not a recent phenomenon. Yet, this acknowledgement does not warrant the dismissal of the notion as such. On the contrary, if deployed as an 鈥渋nvestigative prism鈥�, authoritarian neoliberalism can be productively used to study earlier periods of restructuring that reveal a variety of disciplinary strategies to promote state interventions geared at 鈥渆mancipating鈥� the market.

One such case study is the construction of monetary orders in Estonia, Latvia, and Lithuania following the disintegration of the Soviet Union. Institutionalized during the Baltic states鈥� departures from the Rouble zone, those monetary orders were predicated on currency board arrangements (CBAs) and aimed to combat inflation through a foreign exchange anchor that subordinated economic policies to the priority of exchange rate stability and a steady inflow of capital. In the article, I argue that the scaffolding of CBA-based monetary regimes amounted to the political project based on the necessities to safeguard the implementation of currency and monetary reforms from public contestation and input, delegate policymaking to technocratic preferences and invoke moralization about capitalism as a legitimizing device.

Focused on curbing inflation and eliminating fiscal deficits, the post-communist 鈥渟tabilization reforms鈥� were an integral component in the Shock therapy framework. The state had to introduce mechanisms allowing prices to reach their equilibrium values, impose a hard budget constraint, promote private ownership, establish a steady exchange rate and efficient monetary authority, initiate banking sector reforms, and dismantle intra-Soviet trade by securing European Community free trade agreements. In the Baltic states, these tasks had to be accomplished amid widespread disruptions in trade and finances, loss of export markets, and dysfunctional payment systems due to their intent to exit the Rouble zone and introduce their own national currency units.

Originating in the British colonial trade policies in , currency boards denote an extreme version of a pegged exchange rate regime. They establish a fixed peg to a foreign anchor currency and mandate an unlimited and unconditional conversion of national currency into foreign 鈥渞eserve currency鈥�. This arrangement is underpinned by the requirement that the central bank鈥檚 holdings of foreign-exchange reserves be equivalent to the domestic components of a respective state鈥檚 monetary base. Suchlike fixed exchange rate regimes were a rarity in the post-communist orbit, with CBAs introduced only in and .

On a general plane, Baltic CBAs attested to the basic prerequisites for a neoliberal modality of regulating capitalist social relations of production and exchange. In the eyes of state managers, 鈥減olitical consensus鈥� amounted to a form of 鈥渢imid democratization鈥� and the launch of reforms had to coincide with the Schmittian 鈥減eriod of extraordinary politics鈥�. Democracy was thus enveloped in a euphemism for sophisticated forms of authoritarianism.

Trajectories of Monetary Restructuring in Estonia and Latvia

The article identifies the authoritarian bents in state-driven monetary restructuring in the mandates for planning, executing, and concluding 鈥渟tabilization reforms鈥� given to Estonia鈥檚 Monetary Reform Committee (MRC), Lithuania鈥檚 Litas Committee (LC), and Latvia鈥檚 Currency Reform Committee (CRC) in March 1991, November 1991, and May 1992, respectively. These state entities were comprised of three individuals (typically including the Prime Minister, the Governor of the Central Bank, and an 鈥渋ndependent鈥� advisor) and worked to prevent the Baltic Supreme Councils (parliaments) from overseeing reform trajectories.

In Estonia and Latvia, the three-member conclaves had the power to issue decrees, considered to have the same status as parliamentary decisions regarding any reform-related issue. They could determine the time of monetary reform and policies related to taxes, debt, securities, pensions, wages, and foreign trade. For example, even if the law on the CRC鈥檚 establishment obligated the latter to report to Latvia鈥檚 Supreme Council, Committee鈥檚 resolutions were legally binding. There was even a mechanism to overturn the legislative acts in place.

Insulated from parliamentary control, the MRC in Estonia and the CRC in Latvia could present inflation targeting as a panacea of restructuring and a value-free policy objective. The moralizing rhetoric about the necessity of reform was deployed to conceal its social costs. For the governor of the BoE, Kallas, 鈥渙rdinary people鈥檚 discontent and disappointment鈥� were the barriers in 鈥淓stonia鈥檚 struggle for democracy and independence鈥�. Thus, the success of monetary reform necessitated a 鈥渂reak with the socialist values鈥� of distribution and equalization to be achieved through a hard-fought 鈥渘ational struggle鈥�.

The opposition to the reform course was eradicated in part through the adoption of , passed in February 1992 and July 1994. These laws rendered a significant portion of Estonia and Latvia鈥檚 populations stateless overnight, barring certain individuals from property ownership, voting, or standing in national elections. The legislation silenced popular resistance from non-ethnic Estonian working-class groups. Latvia鈥檚 similar nationality law, though passed months after monetary reform, left a quarter of the country鈥檚 population stateless.

The concentration of power within the state bureaucracy and the central bank, alongside the quashing of opposition through constitutional means, combined with significant financial aid from the IMF, contributed to the relatively unchallenged nature of Latvia鈥檚 reform. After the CRC鈥檚 decisions in May 1992, the transitional currency (Latvian Rouble) was introduced, coexisting with the national unit 鈥� the Lats 鈥� starting from March 1993. By March 1994, the Lats was pegged to the IMF鈥檚 Special Drawing Rights鈥� (SDRs) basket of currencies. The Bank of Latvia (BoLv) retained conventional central bank functions (setting rates and serving as lender of last resort). However, due to minimal exchange rate fluctuations against the SDRs and substantial reserves, the monetary system effectively operated as a de facto CBA.

Estonia鈥檚 route to monetary restructuring was less direct. In 1991, discussions arose about tackling the issue of monetary overhang 鈥� sizable Rouble deposits from entities and individuals. The dilemma was whether to swiftly adopt an independent currency or phase it in via vouchers. This produced a clash between the Forest Committee, representing export-focused manufacturing, and the MRC and BoE, favoring rentiers and foreign investors. To gain clout, the latter group invited Jeffrey Sachs to Estonia. Sachs endorsed the Argentinian CBA in meetings with BoE officials, the government, and the IMF mission. This arrangement was deemed transparent and trustworthy. It proposed to bypass the absence of monetary expertise and address credit demands by making them unfeasible. The CBA required an exchange rate to be supported by foreign exchange reserves. Currency issuance depended on obtaining foreign reserves through export surpluses or foreign loans. Backed by the IMF mission, the Sachs-Hansson Plan was executed in June 1992. The Kroon replaced the Rouble and its exchange rate was fixed to the Deutschmark. With the domestic money supply backed by gold and foreign reserves, the BoE lost the authority to set interest rates and provide credit to the government, commercial banks, or enterprises.

Alternative Route: Lithuania

The Lithuanian case departs from conspicuous authoritarian statecraft in the Baltic north. This idiosyncrasy stems from the balance of social forces in the country where the breeding ground for monetary reform (and CBA) was located in a local think tank, the Lithuanian Free Market Institute (LFMI), rather than directly inside the state apparatus (LC) or the central bank. Further differences include the LC鈥檚 limited mandate (focused on issuance dates of the national unit, the Rouble鈥檚 withdrawal, and setting the Rouble-Litas exchange rate), the parliament鈥檚 power to dissolve the committee, and ongoing political disagreements within the LC. On the one hand, these unique institutional aspects explain why Lithuania鈥檚 monetary reform took twice as long to implement. On the other, the Lithuanian case demonstrates that reform outcomes need not rely on authoritarian neoliberal practices by default.

Bereft of direct control over state apparatus, the group backing the currency board for Lithuania had to rely on contingencies to push through the preferred exchange rate arrangement. Conditions for a frontal attack were generated when following the withdrawal of interim currency (talonas) and the introduction of a new national unit (the Litas) under a managed float, the BoLt chose not to replicate exchange-rate-based stabilization programs underway in Estonia and Latvia. Instead of relying on a nominal exchange-rate fixity as an instrument for reducing inflation, the Bank sought to reduce the monetary base by restraining credit for the government鈥檚 budget deficit and keeping control over the exchange rate.

However, as the Litas appreciated in the second half of 1993, the Lithuanian Federation of Industrialists accused the BoLt of engendering an 鈥渦nstable and unpredictable environment鈥�, urging for a lowered and fixed exchange rate. Export-oriented national manufacturers鈥� preference for a weak currency reflected the election pledge of the Democratic Labor Party to stimulate production and output but placed the government in sharp conflict with the BoLt 鈥� seeking to consolidate its mandate over the conduct of independent monetary policy.

The clash between the government and the central bank accelerated the drive to reinvigorate the CBA campaign. Despite collaborative endeavors by the LFMI, the IMF, and a select group of economists, strong opposition emerged on the verge of the parliamentary vote on the 鈥淟aw on the Credibility of Litas.鈥� This opposition united economists from the Bank, ministries of Finance, Economy, and Foreign Affairs, Vilnius University鈥檚 Faculty of Economics, nationalist MPs, and the Association of Commercial Banks. Parliament鈥檚 approval of the law in March 1994 hinged on Lithuania鈥檚 Prime Minister鈥檚 ability to threaten the President with government resignation if the law was rejected. After establishing the US dollar as the anchor currency, Lithuania initiated CBA operations, ensuring full support of legal tender through foreign reserves, and diminishing the central bank鈥檚 role in monetary policy.

Legacies of Baltic Currency Boards

Born into varying institutional contexts and diverse national social dynamics, Baltic CBAs laid the foundation for externally oriented capital accumulation regimes. Notwithstanding mixed opinions within the neoliberal consensus on fixed exchange rates, CBAs earned 鈥渃redibility鈥� due to their commitment to peg maintenance, clear tasks, and low risks. However, claims that these policy arrangements served Baltic 鈥渘ational interests鈥� by placing decision-making in an independent monetary authority鈥檚 hands are . As shown in the article, the introduction of CBAs favored forces profiting from rent, interest, dividends, and foreign investments. International financial institutions and rating agencies also praised CBAs, which complemented fiscal restraint, privatization through foreign direct investment (FDI), and openness to capital inflows.

The CBAs were particularly lauded for their role in mitigating policy uncertainty and currency devaluation concerns that led to substantial FDI inflows. From 1989 to 1998, per capita FDI was notably higher in the Baltic trio compared to other transition states. After joining the European Union (EU) in 2004, private investments boosted Baltic economies, driving annual growth rates around 8% of GDP. However, much investment went into the non-tradeable sector (real estate, construction), leading to external trade deficits that did not enhance export sector competitiveness. Exchange rate arrangements from the 1990s prevented typical market responses to current account deficits, contributing to an when the 2008 credit crunch hit.

In conclusion, the article praises the effectiveness of “authoritarian neoliberalism” as an analytical prism, while also stressing the need to uncover its historical manifestations in East-Central Europe. By showcasing a broad spectrum of governance methods used to achieve similar reform results, I advise caution against potentially stretching the concept too far. This ensures that its explanatory power, which is applicable in two out of the three studied cases, remains intact.

Jokubas Salyga is Assistant Professor in the Department of Political Science at the University of Texas Rio Grande Valley. He tweets at .

Photo by .

In his , Zimbabwe鈥檚 Finance and Economic Development Minister, Hon. Prof. Mthuli Ncube identified rising inflation and currency depreciation as the major challenges requiring 鈥渢he support of all stakeholders and citizens鈥�.  Zimbabwe is failing to ward off persistent inflation. According to Ncube鈥檚 mid-term budget report, headline inflation increased from 60.7% in January to 191.6% in June 2022.

In this post, I will argue that whilst price and the exchange rate have some importance, preoccupation with them can constrain economic development. I start off by giving a brief background of inflation in Zimbabwe as well as inflation targeting policies, before arguing that sheepishly pursuing currency and price stability equates to commodity fetishism. I then look at the real beneficiaries of price and currency stabilisation policies. Finally, I attempt to demystify value and price in Zimbabwe鈥檚 context.

Zimbabwe and inflation targeting

Almost a decade ago, Zimbabwe issued a 100 trillion dollar note 鈥� the first of its kind in the history of money. Because of this record, it is unsurprising that analysis, rhetoric, and policies on Zimbabwe鈥檚 economic development have tended to focus on inflation and currency stability. Echoes of hyperinflation have contributed to the fetishization of currency and price stability. For instance, in a 2021   the Monetary Policy Committee of the central bank  expressed 鈥渟atisfaction鈥� with the previous monetary policy 鈥渄ecisions鈥� because they had helped to 鈥渟tabilise the exchange rate and domestic prices鈥�. Evidently, prices and the exchange rate are of utmost importance to Zimbabwe鈥檚 central bank. But Oscar Wilde once said, a cynic is 鈥渁 man who knows the price of everything and the value of nothing鈥�.

Since the 1970s, governments the world over seem to have tacitly agreed to focus on price. For example, the bank of England has set an %. However, this target is coming under increasing scrutiny as the UK faces a devastating . It must be borne in mind that under the current neoliberal order, price and currency stability are key elements of class struggle. More critically, they have developed a life of their own as policy objectives that must be pursued almost blindly often with the support of international financial institutions like the IMF and the World Bank.

To an ordinary citizen price and exchange rate stability are noble policy goals not the least because has been associated with stagnating wages. Therefore, it makes sense that prices remain constant otherwise the corollary is a fall in living standards. For politicians, focusing on price and currency stability offers a simple but powerful campaign message primarily because it avoids the more uncomfortable question of class 鈥� the marketplace sees no colour or creed. Many Zimbabweans are probably familiar with the meme 鈥�Tsvangirai akauya ne dollar for two鈥� loosely translated as Tsvangirai brought the pricing model of $1 for two commodities. This was in praise of the late opposition leader Morgan Tsvangirai for supposedly bringing price stability during his era in the 鈥榠nclusive鈥� Government of National Unity (GNU). The late Tsvangirai served in the GNU between 2009 and 2012.

Price and currency stability as commodity fetishism

Although a stable currency and prices might give the appearance of stability, this is a deception! Things are not always the way they appear. Of course, a certain level of price and currency stability is essential for economic development, however, social scientists don鈥檛 necessarily agree on what the rate of inflation should be as well as . Thus, although necessary, price and currency stability are insufficient for economic development. In fact, the dogmatic pursuance of price and currency stability is what Marxists would refer to as .

A simplified definition of commodity fetishism was provided by Ben Fine and Alfredo Saad-Filho in their book Marx鈥檚 Capital. According to them, commodity fetishism is the idea that although under capitalism workers and owners of the means of production confront each other in definite social relationships, the exchange of goods and services appears as a relationship between things independent of the way they are produced. This results in an appearance of profit, interest, and rent as the products of machines, money, and or land whereas they are the outcome of the way in which society is organised. Thus, although money and prices may appear as if they are the products of nature, they cannot be divorced from societal relations of production. Consequently, inflation and currencies must be viewed through this lens.

Since gaining independence in 1980, Zimbabwe has not only grappled with currency and price instability but also high levels of unemployment. Because of this, most Zimbabweans tend to have a short-term relationship with money. Seventy per cent of Zimbabwe鈥檚 population resides in rural areas where there is limited social reproduction through the market. What is more, Zimbabwe鈥檚 labour regime is of a and largely conforms to Issa Shivji鈥檚 concept of 鈥榳orking people鈥�. This basically means that to reproduce their lives, Zimbabweans engage in farming, wage-work, artisanal mining, and petty commodity trading. There is therefore no working class that is comparable to that in the advanced capitalist countries. Because of these reasons, prices are of relatively little importance.

Who benefits from the fixation on price and currency stability?

So, who benefits from policies that seek to overemphasize price and currency stability? In Zimbabwe, the strength and domination of Multinational Corporations (MNC鈥檚) in production may lead us to some important clues. The dominance of MNCs in Zimbabwe cannot be overstated given their involvement in the most productive sectors of the economy. Despite the global attention that it has received including being sanctioned by the EU and the US, Zimbabwe is dependent on a limited range of primary commodities. According to an , tobacco, minerals, and metals are central to Zimbabwe鈥檚 export basket constituting over 70% of the country鈥檚 export earnings. Control of the export-orientated sectors is firmly in the hands of MNCs. For example, the mining sector is controlled by three MNCs (Zimplats, Anglo-American, and Mimosa). Similarly, all the country鈥檚 tobacco is processed by three MNCs (Tobacco Processors Zimbabwe, Mashonaland Tobacco, and Zimbabwe Leaf Tobacco).

Christian Palloix the famous Marxist economist demonstrated that as expressed through the emergence of MNCs was a hindrance to independent economic policy. Palloix argued that the internationalisation of capital compelled nation states to constantly adjust to international conditions through monetary policy. In Zimbabwe, the internationalisation of capital is observable by the shift in state power from production orientated ministries to finance ministries. Unsurprisingly, industrialisation plans are now of less appeal compared to budget speeches. At independence, Zimbabwe had a Ministry of Finance, Economic Planning and Development but today we have a Ministry of Finance and Economic Development. Economic planning has clearly been displaced by the anarchy of the market because of the growing importance of finance. Understanding these dynamics contextualises Zimbabwe鈥檚 price and currency regime.

Demystifying value and price in Zimbabwe鈥檚 context

During my 2021 fieldwork trip to Harare many people expressed their dislike of the Zimbabwe dollar mainly because of its association with the 2008 hyperinflation. People in the managerial class and some trade union leaders argued that government policies were responsible for price and currency instability. Looked at superficially these arguments seem plausible. But are prices and currency strength really the subject of the confidence of citizens or government policies? The answer must be in the negative for an affirmation would be to mystify them.

And here I must make two points. Firstly, there are fundamental differences between . Secondly, the prevailing price and currency system in Zimbabwe is a product of the structure of its economy, the domination of MNCs in production and the internationalisation of capital. Whilst it cannot be denied that how an economy is managed affects both inflation and currency stability, it is neoliberal nonsense to simply attribute currency stability and inflation to good governance. I touched briefly on the second point in the previous section. Let me proceed to dealing with the first in greater detail.

Value and prices

The notion of value was historically at the centre of political economy. However, debates about value have been squeezed out of the discipline with the success of the marginalist revolution in economics in the last century (). As the award-winning economist Mariana Mazzucato once put it, until the mid-nineteenth century, it was widely held that: 鈥渢o understand the prices of goods and services it was first necessary to have an objective theory of value”. This meant taking a multi-dimensional approach to understanding price formation by looking at things like conditions of production, technological advancement, and the quality of labour employed in the production of goods and services. Today, once again to paraphrase Mazzucato, value is in the eye of the beholder. Perhaps she should have said value is in the eye of the beer holder given mainstream

Value can be understood in many ways, but the most compelling theorical framework of value was given by Marx. From a Marxist perspective, value theory based on capitalist social relations is only relevant in the context of commodity production and irrelevant in product creation. The distinction between products and commodities is of utmost importance. As Marx emphasized, production for own use and consumption . In developing countries many sectors of the economy do not necessarily produce commodities. Moreover, developing countries especially former colonial subjects are characterised by advanced commodity production in the export-oriented sectors and product creation in the domestic sectors. Because of this, inflation and the rate of exchange are often mediated by global conditions. Thus, as I argued earlier, Zimbabwe鈥檚 high levels of inflation and volatile currency must be understood in the context of its underlying economic structure that is dominated by few commodities produced by MNCs.

At a global level, Zimbabwe exchanges a quantum of its national products (gold, metals, and tobacco), in which a certain amount of its national labour is crystallised for the produce of other countries in which a quantum of their labour is crystallised. Marx showed that : 鈥�on an average, commodities are sold at their real values, and that profits are derived from selling them at their values, that is, in proportion to the quantity of labour realized in them鈥�. Therefore, the value of the Zimbabwe dollar mainly depends on this relationship and not on government policies or effective economic management as bourgeoisie economists would have us believe.  

To sum up, price and currency stability tell us nothing about the complex relations between those who own the means of production and the labouring masses in society. However, by exhorting all of society to concentrate on the superficial external appearance that is price, the ruling classes successfully manage to divert attention from the mass exploitation that is the order of the day in mineral and tobacco production the commanding heights of the economy of Zimbabwe. Therefore, one of the first steps towards understanding and perhaps transforming Zimbabwe鈥檚 economic development involves rejecting the centrality of prices and currency as the core units of analysis. Progressive Zimbabweans must avoid the cynicism of knowing the price of everything and the value of nothing!

Francis Garikayi is a PhD researcher in economics at the Open University.听His research interests are in the areas of political economy, money and finance聽in sub-Saharan Africa, industrialisation,聽input-output analysis, and structural change. He tweets at .

Photo of a  by , used under a Creative Commons License.

A stylised fact that characterises modern economies is that part of the installed productive capacity is persistently idle. By productive capacity I mean the productive equipment (mostly fixed capital goods) in existence, together with that part of the workforce which is required to operate it. As we can see in Figure 1, in countries as diverse as Belgium, Finland or Lithuania, the effective utilisation of installed capacity often gravitates below 100%, and around 80% on average worldwide.

Figure 1. Installed capacity utilisation by country (1998Q1-2017Q4).

Source: see Appendix I.

The academic consensus is that there are large margins of idle capacity planned by entrepreneurs. The reasons why entrepreneurs plan to operate with idle capacity vary according to the school of thought considered. At the risk of making a drastic simplification, we can say that while some authors think that entrepreneurs do so in order not to lose market share in the face of changes in demand, others tend to think that there is a rate of utilisation of installed capacity that does not accelerate inflation (Non-accelerating inflation rate of capacity utilisation, NAICU).

For some authors, large margins of idle capacity is the way in which the presence of persistently unused resources manifests itself (Ramey, 2020). When making an investment, entrepreneurs plan the size and intensity of future use of the capital stock over several business cycles – determined precisely by the duration of the stock. This level of utilisation, the expected average level, which the entrepreneur calculates during the investment process, is known as the normal level of utilisation of installed capacity (Ciccone, 1986; 1987).  This level of idle capacity is usually planned taking into account economic fluctuations, mainly in order not to lose market share, among other factors (Lanzillotti, 1958, 1959).

As normal utilisation of installed capacity is a variable that is not usually measured by national statistical institutes, no time series are available. However, it is possible to obtain time series of effective capacity utilisation. In this post, we will use time series of the US economy to explore what mechanisms could explain the tendency towards normal capacity utilisation. 

The tendency towards normal capacity utilisation: the case of the US economy

Although effective utilisation of installed capacity (U) has been on a declining secular trend in the US since the 1950s (Pierce and Wisniewski, 2018), it has remained relatively stable at around 79.5% on average, in line with the global level. In addition, the level of activity – represented here by the level of manufacturing production (MP) – has shown a clear positive trend until stagnating in the late 2000s, as can be seen in Figure 2.

Figure 2. Installed capacity utilisation (dotted line) and production level (2017=100, solid line) in the United States (1948Q1-2021Q1).

Source: see Appendix I.

An interesting question to ask is what happens to the level of capacity utilisation when the level of activity increases in an economy like the US. In this post we carry out two exercises to try to uncover some answers to this question. Firstly, we take the level of manufacturing output (MP) and see what happens to the utilisation of installed capacity (U). As we can see in Figure 3, looking at a 30-quarter period, a persistent increase in the level of activity (MP) – which remains above the initial level, even until the last period – has a transitory impact on the level of utilisation (U). There is a peak in the latter in the second quarter, and the effect slowly diminishes until utilisation returns, around the tenth quarter, to the pre-shock level.

Figure 3. Impact of an increase in the level of production (MP) on the level of output (left) and installed capacity utilisation (U, right) in the United States (1948Q1-2021Q1).

Response of MP to MP shock                                                          Response of U to MP shock

Source: see Appendix I.

Given that the effect of the level of activity on capacity utilisation is transitory, the question is: what is the adjustment variable? If we allow ourselves a great simplification, we can find two main answers in the literature. On the one hand, there are those authors who think that the adjustment occurs on the quantity side (first, private investment and, as a consequence, an increase in the level of productive capacity); on the other hand, there are those who argue that the adjustment operates through an increase in the level of inflation – an acceleration of inflation.

In the first case, when demand for goods increases persistently, entrepreneurs first respond by increasing capacity utilisation and then increase productive capacity. In this case, investment, which is fully induced by the level of production, is a “defensive” response by entrepreneurs in order not to lose markets to their competitors. The adjustment is then through an increase in the share of private investment in output. In the second case, entrepreneurs increase the utilisation of installed capacity, but also persistently change the level of inflation (Corrado and Mattey, 1997).

Secondly, we try to lay the groundwork to begin to understand what the adjustment variable actually is. Using the same methodology mentioned previously, we take the level of production (MP), the level of prices (P) and the level of productive capacity (K). As can be seen in Figure 4, a persistent increase in the level of production (MP) has a positive and persistent impact on the level of prices (P) and also permanently on the level of productive capacity (K).

Figure 4. Impact of an increase in the level of production (MP) on the level of output (left), the level of prices (centre) and the level of productive capacity (right) in the United States (1948Q1-2021Q1).

      Response of MP to MP shock        Response of P to MP shock    Response of K to MP shock

Source: see Appendix I.

Now, what about inflation? Repeating the same exercise, but looking at the level of inflation (instead of the price level), we find that the effect is transitory. In Figure 5, we can observe this result. Although slightly longer lasting than the effect on capacity utilisation – about 5 quarters longer – we confirm a transitory increase in the level of inflation.

Figure 5. Impact of an increase in the level of output on the level of output (left), the level of inflation (centre) and the level of productive capacity (right) in the United States (1948Q1-2021Q1).

Response of MP to MP shock     Response of INFLATION to MP shock     Response of K to MP shock

Source: see Appendix I.

Conclusions

To summarise, the exercises seem to suggest that changes in the level of activity generate transitory effects on capacity utilisation. As for the adjustment variables, the price level rises, but so does the level of productive capacity. Finally, the effect on the level of inflation is transitory. Although this exercise is inherently very limited, and as with any empirical exercise the results should be taken with caution, we will try to provide some tentative explanations.

We can therefore conclude that it is a stylised fact that modern economies operate with margins of idle capacity. In the literature we find that this idle capacity is planned by entrepreneurs. On the basis of the econometric exercises conducted, we can further conclude that:

• When the level of activity rises persistently, the price level also rises. This would be in line with the adjustment through “prices”. This remains to be analysed in depth, but again, being reductionist, we can find two explanations. One possible explanation is that there may be supply constraints that do not allow demand to be satisfied in the short run. From an alternative point of view, given that an increase in activity levels generally brings with it an increase in the level of employment, in the bargaining power of workers and, hence, in wages, the rise in the price level could be explained as a reaction of employers to this process.

• The level of activity also turns into an increase in the level of productive capacity. This would be in line with the idea of adjustment through “quantities”. When entrepreneurs find that the level of demand increases persistently, they increase utilisation in the short run, in order not to lose market share, and adjust their productive capacity in the long run. In this case, investment would be fully induced by the level of output.

• Finally, the impact of an increase in the level of activity on inflation is transitory.

If the economy is demand-driven, any increase in the autonomous components of aggregate demand will affect the level of productive capacity and the price level in the case of the United States. Since the effect on inflation is transitory, these results support the view that the US government should try to pursue full employment policies, as the risks of inflationary episodes are negligible.

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Paternesi Meloni, W., Romaniello, D., & Stirati, A. (2021). On the Non-Inflationary effects of Long-Term Unemployment Reductions. Institute for New Economic Thinking Working Paper Series, (156).

Pierce, J. R., & Wisniewski, E. (2018). Some characteristics of the decline in manufacturing capacity utilization (No. 2018-03-01-2). Board of Governors of the Federal Reserve System (US).

Ramey, V. A. (2020). The macroeconomic consequences of infrastructure investment (No. w27625). National Bureau of Economic Research.

Appendix I. Data.

Capacity utilisation by country (1998Q1-2017Q4). Source: OECD; Business Tendency Surveys; . Quarterly data (1998Q1 鈥� 2017Q4).

Capacity utilisation in the United States (1948Q1 鈥� 2021Q1). Source: Board of Governors of the Federal Reserve System (US), Capacity Utilization: Manufacturing (SIC) [CUMFNS], retrieved from FRED, Federal Reserve Bank of St. Louis; , July 15, 2021. Quarterly data (1948Q1 鈥� 2021Q1).

Manufacturing production index in the United States (1948Q1 鈥� 2021Q1). Source: Board of Governors of the Federal Reserve System (US), Industrial Production: Manufacturing (SIC) [IPMANSICS], retrieved from FRED, Federal Reserve Bank of St. Louis; , July 15, 2021. Quarterly data (1948Q1 鈥� 2021Q1).

Manufacturing productive capacity index in the United States (1948Q1 鈥� 2021Q1). Source: Board of Governors of the Federal Reserve System (US), Industrial Capacity: Manufacturing (SIC) [CAPB00004SQ], retrieved from FRED, Federal Reserve Bank of St. Louis; , July 15, 2021. Quarterly data (1948Q1 鈥� 2021Q1).

Consumer price index in the United States (1948Q1 鈥� 2021Q1). Source: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCSL], retrieved from FRED, Federal Reserve Bank of St. Louis; , July 15, 2021. Quarterly data (1948Q1 鈥� 2021Q1).

Santiago J. Gahn is a Postdoctoral Research Fellow at Universit脿 Cattolica Sacro Cuore di Milano (CRANEC). He tweets at .听聽

A similar version of this post was originally published in “Central de Ideas”, the official blog of the Banco Central de la Rep煤blica Argentina (BCRA). The author would like to thank Ramiro E. 脕lvarez, Ariel Dvoskin and Riccardo Pariboni for their comments, which helped to substantially improve this post.

Simply speaking, development macroeconomics can be summarized as the challenge of improving productivity and production capacity in poor countries. This involves the conditions that need to be fulfilled for a development process to start as well as the policy framework and instruments that support it. Heterodox approaches consider the state鈥檚 role in steering productivity growth as essential (Cardim de Carvalho, 1997). Markets may be able to exploit price signals and adjust resource allocation correspondingly. However, they guarantee neither sufficient profitability of key sectors nor the demand for the goods produced. Both the profit rate and effective demand are conditions for investment to take place (Oberholzer, 2020). It is thus up to the government to make public investment in priority sectors and to apply instruments such as taxes and subsidies in ways that simultaneously allow for economies of scale, higher productivity large-scale employment and demand. This is what is generally referred to as industrial policy (see for example Chang, 2006; Oqubay, 2018).

But this is not everything. Policymakers have to pursue such a development strategy in face of an (often permanent) shortage of foreign currency. While domestic currency can be generated via the domestic banking system including public development banks, the availability of foreign currency is limited unless a country is able to increase exports or restrict imports. Since larger export capacity and a higher degree of import substitution are long-term goals, the current account is determined by domestic and foreign economic growth. This insight has come to be known as the balance-of-payments-constrained model or Thirlwall鈥檚 law, respectively (Thirlwall, 1979, 2013): it is reasonable to assume that demand for a country鈥檚 exports grows in income in the rest of the world while imports increase with domestic economic growth because a part of increasing incomes is reliably spent on imported goods. Therefore, stability in the balance of payments requires that imports do not grow faster than foreign exchange earnings via exports allow. A limit to the growth of imports implies a limit to the country鈥檚 economic growth, hence the balance-of-payments-constrained growth rate.

These two essential problems of development macroeconomics can be denoted as the internal and the external constraint. Industrial policy has to remove the internal constraint by developing production capacity. However, overcoming the internal constraint does not necessarily overcome the external constraint of foreign exchange shortage. In other words, even the best industrial policy might become rather modest because it is subject to the shortage of foreign currency, that is, the external constraint.

Unless a country runs a continuous structural current account surplus, a strategy that is logically not feasible for all developing countries simultaneously (Blecker & Razmi, 2008), it almost inevitably features phases of (potentially large) deficits during certain stages of its development strategy. Such deficits may be due to the urgency to relieve the most extreme poverty as fast as possible and also the need to import capital goods that are necessary for technological catch-up. However, as explained by Thirlwall鈥檚 law the balance-of-payments constraint does not allow for deficits because they involve accumulation of foreign debt and often also boom-bust cycles of capital flows eventually giving way to exchange rate depreciation and currency crisis. The external constraint becomes even tighter when ambitious economic policies, which entail public investment, income redistribution and other measures that might be perceived to threaten private profits trigger capital flight, hence an additional loss of foreign currency.

There is a solution to the external constraint, which is rarely discussed in the literature even though it contains many elements of Keynes鈥檚 proposal of an international clearing union suggested in the Bretton Woods negotiations after World War II (Keynes, 1942/1980). Adding insights by E.F. Schumacher (1943) and, notably, Bernard Schmitt (2014), we get to a policy proposal that can be implemented individually by a single country. To briefly explain it, imagine what happens when a resident of a country pays for imports that are not matched by exports of an equal amount: the resident pays in domestic currency while the foreign payee receives a payment in international currency, that is, usually US Dollars. The country thus has to go in debt in order to get access to the Dollars required. At the same time, the payment in domestic currency is lost to the economy because it is just crossed out of the double-entry bookkeeping system (indeed, nobody currently receives these domestic monetary units as a payment). The loss in domestic currency is tantamount to a loss in domestic effective demand and, eventually, a loss in output. Combined with the accumulation of foreign debt this means, in fact, that an international payment is made twice. Deficit countries thus continuously lose economic resources whereas. In a sound system, by contrast, they should have the chance to build up economic resources in order to prevent the accumulation of external debt.

A country may decide to reform its international payment system as follows (Schmitt, 2014; Oberholzer, 2020): first, it sets up a new institution, which may be either independent or linked to the government or the central bank. This institution is responsible for the settlement of all international payments. When an importer gives her bank the payment order, the payment in domestic currency is received by the new institution, which completes the transaction by accessing a foreign loan and paying the foreign exporter in Dollars. We see that the monetary units in domestic currency are not lost anymore. Instead, and this is the second step, the institution can make use of them and spend them for productive investment in the domestic economy, which creates both demand and production capacity. Now, the institution鈥檚 foreign loan is backed by a real asset. It can issue bonds and sell them abroad in order to repay the foreign loan. This implies that neither the institution nor the country is a net debtor anymore. There is no pressure on the exchange rate and the country is able to enlarge the pool of its economic resources to strengthen export capacity and import substitution. It can sustain 鈥榗urrent account deficits鈥� on its growth trajectory without running into currency crisis.

In addition to this blueprint, a unilateral reform of international payments must take into account many institutional and macroeconomic aspects, which are described in more detail in Oberholzer (2020). Moreover, many technical details would certainly arise once a country implements it. Yet, it seems clear that such a reform is a key element of a successful macroeconomic strategy for developing countries. By strongly relaxing, if not removing, the external constraint, it enables industrial policy to be ambitious again such that the internal constraint can be overcome.

References

Blecker, R.A. & Razmi, A. (2010). Export-Led Growth, Real Exchange Rates and the Fallacy of Composition. In M. Setterfield (ed.), Handbook of Alternative Theories of Economic Growth, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing (pp. 379鈥�396).

Cardim de Carvalho, F.J. (1997). Economic Policies for Monetary Economies: Keynes鈥檚 Economic Policy Proposals for an Unemployment-Free Economy. Revista de Economia Pol铆tica, 17(4), 31鈥�51.

Chang, H.-J. (2006). The East Asian Development Experience: The Miracle, the Crisis and the Future. London, UK; New York, USA; Penang,Malaysia: Zed Books and Third World Network.

Keynes, J.M. (1942/1980) The Collected Writings of John Maynard Keynes, Vol. XXV: Activities 1940鈥�1944. Shaping the Post-War World: The Clearing Union, London and Basingstoke: Macmillan.

Oberholzer, B. (2020). Development Macroeconomics: Alternative Strategies for Growth. Cheltenham and Northampton: Edward Elgar.

Oqubay, A. (2018). Industrial Policy and Late Industrialization in Ethiopia. In F. Cheru, C. Cramer and A. Oqubay (eds.), The Oxford Handbook of the Ethiopian Economy, Oxford University Press, (pp. 605鈥�629).

Schmitt, B. (2014). The Formation of Sovereign Debt: Diagnosis and Remedy. Available at 13679.

Schumacher, E.F. (1943). Multilateral clearing. Economica, 10(38), 150鈥�165.

Thirlwall, A.P. (1979). The Balance of Payments Constraint as an Explanation of International Growth Rates Differences. Banca Nazionale del Lavoro Quarterly Review, 32(128), 45鈥�53.

Thirlwall, A.P. (2013). Economic Growth in an Open Developing Economy: The Role of Structure and Demand, Cheltenham, UK and Northampton,MA, USA: Edward Elgar Publishing.

Basil Oberholzer is a macroeconomist working in the field of development macroeconomics, ecological economics and sustainable development who received his PhD at the University of Fribourg (Switzerland). He tweets at .

Photo by聽听辞苍听.

By and Nicol谩s Aguila

During the last two decades, Modern Monetary Theory (henceforth MMT) has won wide academic recognition and public influence. Its most prominent achievements include shifting the public debate on the conduct of economic policy and reviving interest in the theory of money. The former tends to attract most of the attention of both advocates and critics of MMT, but this is unjustified. MMT policy conclusions result from its underlying understanding of money, as some of the more illuminating MMT thinkers make abundantly clear (Bell, 2001; Tcherneva, 2006; Wray, 2010, 2014). A far richer assessment of MMT economic policy proposals would result by first considering the foundations of its theory of money, that is, neo-Chartalism.

In a , we contrasted MMT with the Marxist theory of money. We showed that there were four important points of disagreement between these two schools of thought, namely on: (i) the ontology of money, (ii) the state and money, (iii) state economic policy, and (iv) world money and monetary sovereignty. We supported our argument with historical examples that we omit here for reasons of space.

Theories of money

Regarding the ontology of money, for neo-Chartalists, money is a unit of account legally determined by public authorities to measure mutual debt obligations within a community (Tcherneva, 2016). Following Keynes鈥� famous remark, MMT understands 鈥渕odern money鈥� as essentially the same 鈥溾�or some four thousand years at least.鈥� (Keynes 1930:4, quoted in Wray, 2014:15). For us, this approach erases the historical specificity of money, and therefore of capitalism.

In contrast, Marxists consider that the full development of money occurs only under capitalist conditions. Marx (1976) certainly acknowledged the fact that money emerged in pre-capitalist societies. But money did so at the point of mercantile contact between societies, as an external imposition and not as an internal result of the social relationships proper to those societies. Unlike capitalism, these internal relations were organized on the basis of direct personal dependence bonds (Marx, 1986). The products of labor did not take the form of commodities systematically and regularly, while social reproduction did not depend on generalized mercantile exchange, and thus on money.

Conceptualizing the mutual obligations that existed in these societies (including 鈥渘on-economic鈥� ones such as wergild, dowry, bride-price, and blood money) as forms of credit requires imposing upon them a mercantile character that they did not originally possess. To be sure, these societies required some sort of unit account and even some recording device for obligations (a tally, for example) but that cannot be properly considered as money.

The specificity of capitalism is crucial to understanding money. Capitalism is an economic formation in which general social relations are no longer direct but are mediated by the products of work that take the form of commodities. Even the ability to work becomes a commodity in the labor market. Thus, capitalism requires the emergence and constant presence of money as the universal equivalent allowing commodities to express their values and exchange with one another (Lapavitsas, 2005). Money is a commodity that emerges spontaneously and proceeds to act as the organizer of the total social labor, when production is dominated by private, autonomous, and independent units. For Marxist theory, money is not the creation of the state or any other authority external to markets. On the contrary, money is endogenously and constantly created through the characteristic interactions of capitalist markets. Capitalism extrudes money from every pore.

What is the role of the state?

Regarding the role of the state in the functioning of money, MMT argues that the unit of account is arbitrarily imposed by the state. In particular, modern nation-states impose a liability in the form of a tax obligation and name the 鈥渢hing鈥� they will accept in payment (Tcherneva, 2006). Since agents must possess it to pay taxes, the 鈥渢hing鈥� becomes the general means of exchange and payment, and thus money. From this standpoint, money is an institutionalized social relationship based on state authority, which has the monopoly to issue and can choose anything to be money irrespective of material (Wray, 2010). The state can also define money鈥檚 value by unilaterally determining the terms on which it is offered, for example through a Job Guarantee (Tcherneva, 2016).

For Marxist political economy, similarly to MMT, the state is able to determine the unit of account and the central bank can issue money that functions as legal tender (Lapavitsas, 2017). However, the state operates within parameters set by the endogenous creation of money and money鈥檚 character as the universal equivalent. The functioning of the unit of account is part of the broader functioning of money as measure of value, which is certainly not within the power of the state. Money is a creature of commodities and not of the state.

When it comes to state economic policy, MMT follows the approach of Functional Finance, including the idea that the state can issue money to command resources up to the limit given by the inflationary constraint (Lerner, 1943). The true limit to state power is not a financial constraint on the public budget, but rather the availability of real resources. In this way, the state can seemingly alter the distribution of income without taking income from anyone: it has the power to simply create money to buy output from some people to give to others. It could, for example, provide a job guarantee at a living wage for everyone who wants to work and direct those jobs toward socially useful activities, such as the green transition or providing care (Wray et al., 2018).

How does Marxist policy analysis differ?

While the goals of full employment, green transition, and the universal provision of care are shared by Marxists, the conception of how to achieve them is significantly different, and the theory of money is an important part of it. Marxist economic theory postulates the unity of social relations of production and distribution. Printing money, while operationally feasible, is a small part of tackling inequality, the climate and care crisis, and the other evils of contemporary capitalism. There is no real hope of achieving these aims without a radical shift in the economic formation of society that involves income and wealth redistribution.

For Marxists, taxation and income transfers are a legitimate part of government policy even when real resources are lying underutilized. Moreover, a systemic response to the social problems created by capitalism would require a profound transformation going far beyond monetary policy, or a Job Guarantee. It would involve property rights, above all, expropriating capitalists and rentiers and creating a democratically planned society with radically different ways of producing and distributing. Socialism is necessary, not just a version of capitalism with better distribution and employment.

Monetary sovereignty and World Money

Finally, on the issue of monetary sovereignty, MMT advocates generally treat the lack or limitation of such sovereignty as a self-imposed ordinance by several nation-states (Tcherneva, 2016; Tymoigne, 2020). According to Wray (2019), monetary sovereignty comprises of: i) the national government choosing a unit of account; ii) the national government imposing obligations denominated in that unit of account; iii) the national government issuing currency in that unit of account and accepting it in payment; iv) the national government issuing other obligations denominated and payable in national currency; and v) a flexible exchange rate.

For Marxist political economy, monetary sovereignty depends on the relationship between capitalist accumulation in a nation-state and the ability to acquire world money, which in turn reflects a country鈥檚 place in the world market. The need for world money becomes clear once we consider capitalism as a global system, as it is needed for commodity transactions, the transfer of value, and the settlement of obligations among different parts of the world. The passage from the national to the international realm is a major problem for neo-Chartalist theory as there is no supranational state choosing units of account or having the power to tax at the international level.

The capacity to acquire world money necessary for participation in the world market differs dramatically among nation-states, and thus the global monetary system is hierarchically structured. In contemporary capitalism, one country, the U.S.A., issues quasi-world money, subject to competition by others. The lack of monetary sovereignty for other countries, far from being a policy choice, results from their subordinated position in the international hierarchy. This is particularly relevant for analysing economic policy in developing countries, where MMT prescriptions lose much of their appeal (Bonizzi et al., 2019; Prates, 2020; Vernengo & Caldentey, 2019).

Recapping and despite making several critical points, we would like to stress that MMT has made important contributions to the critique of mainstream Economics, while offering penetrating insights into the mechanics of spending, taxing, and borrowing. But there are limits to what MMT can contribute to the radical critique of capitalism, which derive ultimately from its problematic conceptualization of money. These limits have significant consequences for left politics. Marxism remains an indispensable guide in this respect.

References

Bell, S. (2001). The role of the state and the hierarchy of money. Cambridge Journal of Economics, 25(2), 149鈥�163.

Bonizzi, B., Kaltenbrunner, A., & Michell, J. (2019). Monetary sovereignty is a spectrum: modern monetary theory and developing countries. Real-World Economics Review, 89, 46鈥�61.

Lapavitsas, C. (2005). The Emergence of Money in Commodity Exchange, or Money as Monopolist of the Ability to Buy. Review of Political Economy, 17(4), 549鈥�569.

Lapavitsas, C. (2017). The Theory of Credit Money: A Structural Analysis. In Marxist Monetary Theory. Collected Papers of Costas Lapavitsas (pp. 23鈥�50). Brill.

Lerner, A. (1943). Functional finance and the federal debt. Social Research, 10(1), 38鈥�51.

Marx, K. (1976). Capital. A critique of political economy. Volume I. Penguin.

Marx, K. (1986). Collected Works. Volume 28. International Publishers.

Prates, D. (2020). Beyond Modern Money Theory: a Post-Keynesian approach to the currency hierarchy, monetary sovereignty, and policy space. Review of Keynesian Economics, 8(4), 494鈥�511.

Tcherneva, P. (2006). Chartalism and the tax-driven approach to money. In P. Arestis (Ed.), A Handbook of Alternative Monetary Economics (pp. 69鈥�86).

Tcherneva, P. (2016). Money, Power, and Monetary Regimes. The Levy Economics Institute Working Paper, 861.

Tymoigne, E. (2020). Monetary Sovereignty: Nature, Implementation, and Implications. Public Budgeting and Finance, 40(3), 49鈥�71.

Vernengo, M., & Caldentey, E. P. (2019). Modern Money Theory (MMT) in the Tropics: Functional Finance in Developing Countries. Challenge, 0(495), 1鈥�17.

Wray, R. (2010). Alternative Approaches to Money. Theoretical Inquiries in Law, 11(1), 29鈥�49.

Wray, R. (2014). From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy. The Levy Economics Institute Working Paper, 792.

Wray, R. (2019). Alternative paths to modern money theory. Real-World Economics Review, 89, 5鈥�22.

Wray, R., Dantas, F., Fullwiler, S., Tcherneva, P., & Kelton, S. (2018). Public Service Employment: a Path To Full Employment. The Levy Economics Institute Policy Note, 2.

is a professor of economics at the School of Oriental and African Studies, University of London. He tweets at .

Nicol谩s Aguila is a researcher at Centro Interdisciplinario para el Estudio de Pol铆ticas P煤blicas (CIEPP). He tweets at .

Photo by /.

With modern money theory (MMT) receiving impressive attention, the implications this theory has for developing countries have also been discussed more intensely. Emphasizing both its strengths and gaps provides a great chance to further develop macroeconomic strategies for poverty reduction and environmental sustainability.

In brief, the starts from the statement that money is issued by the government and brought into circulation via its expenditures. The government does not rely on taxes to fund expenditures when it is itself the source of money. Therefore, money can be created upon demand, is not limited, and can be used by the government to finance all expenditures it considers necessary to achieve policy goals such as full employment or a . The reason why agents in the economy accepts this money only consisting of numbers without any intrinsic value is the obligation to pay taxes. Since the state has the power to impose taxes, individuals need to get hold of money as this is the only way to meet their obligations; this is how the currency is accepted as a means of payments. The government thus has the power to run unlimited deficits because the fact that money is needed to pay taxes guarantees its acceptance even if those taxes do not cover expenditures. In fact, the government should run deficits because it creates the demand required for full employment while a balanced budget constrains it. The government cannot go bankrupt because there is no lack of currency it issues itself. The conditions identified by MMT for the system to work are the following: 1) the country must be sovereign of its own currency and 2) inflation needs to be kept under control. Once the latter starts accelerating due to increased nominal demand stemming from government expenditures, taxes can be increased in order to withdraw money from circulation. However, as long as full employment is not achieved, prices are argued to remain stable.

Criticism of MMT has come from both mainstream economics as well as other heterodox strands. While the former tries to dismiss the theory in order to maintain the claim that , the latter take a more sophisticated stance because apart from the disagreements, MMT is itself also rooted in heterodox economics.

It has been argued, mainly by the post-Keynesian school, that many of the central claims of modern money theory are not really modern because they are not new. True, the insight that and as such is the product of loan issuance was developed decades ago. Moreover, opposition to balanced budgets and harmful austerity has also been shared by many theoretical approaches for a long time. Therefore, heterodox approaches may know why they did not end up with the proposals now made by MMT. Yet, these critical points are not proof of MMT being mistaken.

There are further objections regarding a lack of clarity of what is part of MMT and what is not. For instance, there is on whether public sector employment programs is supposed to keep wages down and help curb inflation or whether it is an essential tool to drive up the wage share.

More serious obstacles are issues like the difficulty to fine-tune an economy such that full employment can be guaranteed via demand created by government expenditures while the private sector is just complemented instead of being compromised (). It is hard to imagine such fine-tuning in a developing country鈥檚 weak institutional setting. Moreover, MMT acts on the assumption that the where the treasury can get what it needs from the central bank. This, if wishful, may not be an insurmountable barrier but so far, the reality of developing countries鈥� public institutions is usually different.

A definitely fundamental issue to be debated is the impact of unlimited government spending on inflation. It is fair to argue that unemployment and spare capacity counter inflationary pressure. However, the question is . While in post-Keynesian theory endogenous money is associated with the production process, the and hence with output, the same is not true when the government tries to drive demand by deficit spending. To the extent of the budget deficit, there will be money left in circulation that will drive up prices. Higher inflation may be acceptable when it comes with the pursue of other macroeconomic goals. However, it has to happen within limits. Emission of government bonds and debt management may extend this constraint a bit. According to MMT, inflation can be curbed by raising taxes and lower the amount of money in the economy. However, the sooner inflation becomes an issue, the higher taxes have to be raised and the more the demand stimulus of government expenditures is eliminated.

Not only post-Keynesian scholars but also Marxian thinking finds issues of concern in the theory. What if a demand stimulus is insufficient to achieve full employment because there is a lack of profitability in the economy? Higher demand will not trigger additional investment if that . In that case, the result is not more output but inflation. To the extent that a fall in the profit rate explains long-term stagnation, government expenditures may be powerless. The same applies to developing countries where most likely not only demand is missing but also profitability, which is why the many calls for private sector engagement have shown poor results so far. With supply constraints being tighter in poor countries, inflation is even more an issue than in advanced economies.

After all, the most important criticism raised against MMT with regard to developing countries concerns the issue of . Which countries are sovereign of their currency? There is the US which enjoy the privilege of issuing the global reserve currency. Apart from other regional key currencies, almost all countries, and notably developing countries, face the balance of payments constraint. This means that they rely on foreign currency to pay for imports. The higher national income, the more imports grow and the greater the need for foreign currency. The resulting current account deficits involve exchange rate depreciations, imported inflation and foreign debt accumulation all of which can result in banking and currency crises. Following , a developing country鈥檚 sustainable growth rate is limited by the growth rate, which is in line with a balanced current account.

MMT has an answer to several of these critical arguments: the government acts as an by providing a job guarantee program. Hence, it eliminates unemployment by itself hiring people whose job consists, for example, in implementing the Green New Deal (for instance the installation of solar panels). Indeed, this is a very valuable proposition. To create employment, exerting additional demand is most likely not enough so spending is more effective if it does not merely go into consumption but into productive investment and production. Unlike the private sector, a public job guarantee program does also not rely on profitability. In line with demand, it is able to enlarge supply capacity and helps to keep inflation in check. To the extent that economic growth induced by a job guarantee still involves a current account deficit, the problem might be solved by directing investment in sectors, which either 1) , 2) are able to replace imports, or 3) promote exports to compensate the increase in imports.

The challenge a job guarantee program faces is definitely not a lack of money. It would, however, be wrong to believe that thanks to MMT, a job guarantee can be easily implemented. The administrative and institutional challenge is non-monetary but nonetheless very significant. This means that once we arrive at the core of the issue, we are back to development macroeconomics, which deals with the struggles of technology transfer, establishment of value chains, realization of productivity gains, import substitution and export promotion, and many more. Endogenous money is an important and useful vehicle to this purpose, but it is not a solution in itself.

Many of these institutional and technical steps tend to get in conflict with the balance of payments constraint. For example, establishing new industries requires the import of capital goods and hence a period of current account deficits. Is there a way to ensure macroeconomic stability despite external imbalance? To get a step ahead, we should think about the and reform them in a way that provides a stable current account. It is an ambitious endeavor but a necessary one to relieve economic policies within countries from a tight constraint. It is only in such a stabilized environment that the issues of low productivity, profitability and demand can be tackled by public sector investment and employment can be fully exploited in the interest of poverty reduction and ecological transformation.

Basil Oberholzer is a macroeconomist working in the field of environmental economics and sustainable development who received his PhD at the University of Fribourg (Switzerland). He is also the author of . He tweets at .

For several decades, countries of the periphery have been deeply in the grip of debt. The Covid-19-induced crisis has and thus increased financial vulnerability. Recent policy measures by peripheral governments and central banks have brought momentary relief, but ultimately represent a manifestation of the interests of finance capital to get the most out of peripheral economies as long as it is still possible. 

Because of the dependence of their currencies on international capital flows, due to the possible effects of political decisions on the movement of such flows. The enormous power of financial markets over monetary policy in the periphery is again becoming evident during the current crisis. The crisis in the global periphery is generally much more severe than in the central countries, not only because of often inadequate health systems that have been abandoned under three decades of neoliberal policy. As peripheral assets do not serve as a store of value, within three months, constituting a historically unprecedented capital flight. Factors such as the deflation of prices of primary resources, the fall in external demand for manufactured products, and the fall in cash flows due to decreasing remittances and tourism mean that financial pressure has increased even more. Consequently, peripheral currencies significantly depreciated with the beginning of the crisis, in some cases by as much as 20-30%, as in the cases of Brazil and Mexico.

Central banks in the periphery have been frantically trying to stop further currency devaluations and capital outflows, which could set in motion a spiral of hyperinflation and insolvencies as seen in past financial crisis of the 1980s and 1990s. Significant depreciations of their currencies against the US-Dollar would be devastating as their import dependency has sharply increased in the context of economic liberalization and deindustrialization since the 1980s. Moreover, the domestic corporate and banking sectors have accumulated massive amounts of Dollar-denominated debt, especially as a consequence of carry trade (i.e. borrowing foreign exchange and lending domestic currency, gaining from the interest rate spread). 

With the water up to their neck, peripheral countries have drawn on a series of measures. Among the conventional ones are resorting to . Moreover, many in March and April 2020 in order to support their currencies (they do so by buying them on the international forex market). However, in addition to these more 鈥渢raditional鈥� emergency measures, there are two more unconventional approaches that central banks have used to defend their currencies. 

First, in order to obtain US-Dollars for providing liquidity to large banks and companies, and stabilize the exchange rate without using reserves, some central banks, like those of Brazil (BCB) and Mexico (Banxico), have made use of the swap lines offered by the Federal Reserve. This means that they exchange their own currency at a fixed exchange rate against Dollars with the FED, and then auction these Dollars to the domestic private sector in the form of non-deliverable forwards. However, while the instrument is praised as one that permits stabilizing the exchange rate without draining reserves, it is . When the coverage period with the FED ends, BCB and Banxico have to return the same amount in Dollars to the latter. If the exchange rate against the Dollar depreciated, the central banks pay the domestic buyers of the forwards the difference between the exchange rate of that day and the price at which the coverage was agreed. Hence, effectively the operation works as an for private actors in their countries. The cost for the central bank could be offset through the increasing value of foreign exchange reserves, which are usually held in the form of US government bonds, Should the exchange rate appreciate in favour of the Brazilian Real and the Mexican Peso, the governments may have to . Ultimately, the cost of the operation lies with the Brazilian and Mexican state.

Second, several peripheral central banks, for instance those of Chile, Colombia, Indonesia, Mexico, the Philippines and Turkey, recently began to inject liquidity in the domestic financial system through purchases of public and / or private sector bonds and also legal reductions in the monetary regulation deposit (minimum reserves that banks have to have with the central bank). This seems like a copy of the Quantitative Easing (QE) measures that central banks in the centers of the world economy have been implementing since the 2008 financial crisis. However, in the periphery the story is a different one. FED and ECB have been able to 鈥減rint money鈥� in massive quantities by purchasing treasury and corporate bonds on financial markets without their currencies losing value. To the contrary, such measures imply a considerable risk for financial stability in the periphery, whose currencies depend on the continuous demand for these by financial markets. This is reflected in threatening comments by investment banks and the financial press regarding these actions, such as , , . Therefore, such liquidity injections in the periphery must be sterilized (that is, offset through the issuing of new debt bonds) if they are not to expand the monetary base. It is unclear whether all countries that have implemented 鈥淨E鈥� have done so (it seems to be the case for and ), or rather financed their programmes with selling international reserves (as claimed by ). After all, in order to (temporarily) stabilize the exchange rate through 鈥渁cting as a buyer of last resort鈥� and not achieve the opposite effect, peripheral states must either incur new debt on financial markets, or accept a drain on their international reserves.  

For the moment, these measures seem to have stabilized exchange rates, . In fact, , finance capital welcomes the opportunity to further profit from lending to the periphery, as stated by an investment banker according to whom  

The question is, however, for how long the financial bubble can continue to grow. The international reserves of many countries will not be enough to pay the mounting piles of debt, if (or when) abrupt capital flight causes high currency depreciations. Therefore, it is likely that will occur sooner or later. The investment bank JP Morgan still , while financial analysts forecast a . At the end of the day, the ones who are going to pay the bill of investment banks are the working classes of the global periphery.

Nadine Reis聽is a research professor at the Center for Demographic, Urban and Environmental Studies (CEDUA) at El Colegio de M茅xico. Her current research focuses on financialization and urbanization in Latin America, especially Mexico. She tweets at 鈥�.

Photo: IMF. By .