Central Banks: Printing Money Delays Domestic Structural Reforms

Countries are waging currency wars in competition over export markets, jobs and foreign investment – printing money, taking on more debt, rather than pursuing serious and needed domestic structural reforms. “Without deeper structural reforms that encourage consumption, innovation and a secure safety net ensuring certainty, the democratic governments will eventually flounder and citizens will vote leaders out of power,” writes Will Hickey, an associate professor with the Indonesian School of Government and Public Policy. Greece is the most prominent example. Financial markets could soon lose patience with other countries like Italy or the United States. Necessary reforms include streamlining recalcitrant bureaucracies, improving education to encourage innovation, increasing immigration or reducing promises on pensions and other entitlements, and reducing reliance on low-value exports like natural resources or manufacturing with low-skilled labor. China is one of the few countries that has pursued some economic reform amassing savings used for global influence. The pattern of quantitative easing tried by the US, Japan, Europe and much of ASEAN is unsustainable. – YaleGlobal

Central Banks: Printing Money Delays Domestic Structural Reforms

Amid intense competition and quantitative easing, countries that innovate and reduce bureaucracy will be more influential
Will Hickey
Tuesday, June 30, 2015

Cut to grow: To develop their economies, nations like India must trim bureaucracy (top) and follow the example of ones like Indonesia in cutting fuel subsidies

JAKARTA: The past few years have seen nations use their central banks monetary policies to mask the deep institutional structural reforms required to improve domestic productivity, efficiency, and employment.


A world of 7 billion people is increasingly in cutthroat competition over jobs due to industrial overcapacity and devalued currencies eroding real wages. Countries pump more money into their economies, taking on growing debt, to reduce the value of their currencies and make exports more attractive.

But this is a short-term fix. The status quo is not sustainable. Without deeper structural reforms that encourage consumption, innovation and a secure safety net ensuring certainty, the democratic governments will eventually flounder and citizens will vote leaders out of power.

Greece is currently the world’s poster child for unfulfilled structural reforms, yet lacks a central bank to print its way out of problems. Instead of changing pension schemes, minimum wages or labor laws, Greeks are tempted by a Grexit scenario – to return to the drachma and “print” their way out of economic malaise.

Greece is not alone. Many other countries, including the United States, must embark on painful changes to stabilize their economies for future generations.

Despite a plethora of economic woes and questionable bookkeeping, in 2000, Greece was allowed to join the eurozone. An inflow of cheap euros soon commenced in 2002 and allowed Greeks to live well beyond their means. The government failed to confront problems of productivity that reduced its ability to compete including low retirement ages, generous welfare benefits, overbearing bureaucracy and protected trade unions for all sorts of occupations from taxi drivers to dentists.

At their core, structural reforms are about changing old ways that protect vested interests, mostly labor, change that’s resisted by societies and power structures. Most countries have significant structural deficiencies in one or more of the following institutional areas:

Bloated bureaucracy: Multilayers of public officials and servants, many redundant, can lead to wasted productivity. Overlapping regulations, permissions and procedures create opportunities for rent seeking and corruption among incompetent officials in nations like India, Turkey and Indonesia. For example, Indonesia has 34 government ministries; India, if including state ministers,” has more than 70, though some ministers wear several ministerial hats. By contrast, Switzerland has seven.

Education: Education can promote innovation or mask incompetence by promoting the status quo. Though the Soviet Union was disbanded in 1991, educational institutions were left largely unchanged with many educators relying on the same methods used under Communism. Malaysia and Kazakhstan have used education to reinforce state religion and mandate the study of obscure languages, as opposed to teaching advanced skills needed for competing in the 21st century.

Entitlements: Europe is renowned for promoting a comfortable lifestyle with generous payments for education, health and pensions. The continent now serves as a magnet for illegal immigration from wartorn areas in the Middle East and sub-Saharan Africa. Social expenditures also weigh heavily on the US as well as Norway, Australia and Canada magnified with slumps in oil and mining commodity prices. Countries must take on the politically unpopular task of reforming entitlements to reflect changing economies and competitiveness due largely in part to immigration and aging demographics.

Infrastructure development: Development is hampered by ownership and land-acquisition issues particularly in India, Mexico and Indonesia. Many countries prohibit foreigners from owning land. Modern infrastructure projects cannot proceed if land ownership issues are left unchanged in centuries-old familial or cultural practices. Few want to pay for new roads, bridges, ports and railways, especially in developing countries subject to political risks. It is a chicken-and-egg scenario – governments want privatization, but investors want political certainty, namely, guarantees that their projects will be finished without later government interference.

Subsidies: Energy and agricultural payouts, like consumer subsidies for rice in Thailand, electricity in Indonesia or fuel in Iran distort competitive economic activity. Additionally, hidden producer subsidies can shield certain classes of local industry from macroeconomic competitive risks at the expense of consumers. Producer subsidies can also take many forms from tax breaks for steel production, China, to reimbursements for oil production, as in Malaysia.

Export-oriented growth: Countries increasingly rely on exporting commodities or providing cheap, uneducated labor for manufacturing low value-added export products. The tactic provides quick money and jobs for governments that resist change. Yet low-quality export activity does little to increase value-added activity internally and foster a market for domestic products such as Indonesia with coal and China with plastic extrusions. This creates the so called middle-income trap whereby a country obtains a certain income level due to its low-cost exports or cheap labor. Development stagnates.

The implications of failing to deal with reform are profound and this argument does not even consider unions which are arguably political and not institutional structures. High liquidity, too much cash in the system, causes asset bubbles in real estate, stocks, gold and other items of value as citizens lack faith in their institutions for any improvement. As time goes by, the chasm between rich and poor is exacerbated. Faux economic activity transpires whereby assets and local economies on the face seem wealthy. Beneath the veneer of success, the institutional timbers are rotting. A devaluing currency causes consumers’ real buying power to shrink, and it becomes ever more costly for central banks to maintain the status quo.

The only developing country that has successfully enacted some deep and painful structural reforms is the one-party state of China. This has paid large dividends in the form of the country modernizing its infrastucture with high-speed trains, state-of-the art airports and tollways; mandated knowhow transfer with investment and new education initiatives; a relative streamlining of bureaucracy by reducing standing seats in the Politburo from nine to seven; and limiting individual landowners in obstructing what the government deems is national progress.

Of course, the one-size-fits-all state-capitalism approach has not been pretty, and China still has a long way to go. No one appreciates having their ancestral land forcibly seized, as in the case of the Three Gorges Dam, or a nuclear reactor built next door to a housing complex. But the tradeoff is China amassing $4 trillion in foreign exchange reserves and developing global influence along the way.

Politicians, primarily to stay in power, have resorted to financial gimmickry including negative interest rates, “bail-ins,” quantitative easing, “bad banks,” and more to avoid upsetting electorates with life-altering, albeit necessary fiscal changes. Central banks are printing more and more money in the hope of promoting growth to avoid serious change. No country has yet to devalue its way to prosperity. Printing money does not change facts on the ground, it merely papers them over. The problems still exist.

Will Hickey is associate professor and managing research director for the Indonesian School of Government and Public Policy.

Copyright © 2015 YaleGlobal and the MacMillan Center

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