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Frontmatter
- Antonia Settle, University of Melbourne
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- Risk and the Rupee in Pakistan's New Economy
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6 - Unstable Money and Risk Mitigation in the New Economy
- Antonia Settle, University of Melbourne
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- Risk and the Rupee in Pakistan's New Economy
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- 31 March 2020
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- 29 October 2020, pp 149-175
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Summary
As Chapter 3 shows, the liberalisation process has shifted the pricing regime on money and on key commodities from set pricing and comprehensive intervention towards a market float. This process has by no means been absolute. The rupee itself, together with the key prices of wheat and electricity, continues to be subjected to intervention that seeks to smooth volatility. The wheat price is influenced by the continuing but much pared-down programme of state procurement. Electricity is still priced in accordance with tariffs set by the state, although these have moved much closer to global prices, both in terms of the rupee price and in terms of much more frequent tariff revision. Regardless of these vestiges of the pre-liberalisation era, however, transformation in the economy has been significant and this transformation extends to the monetary environment – the governance of money and of the prices that give everyday meaning to the usefulness of money.
Applying the analytical framework developed in Chapter 2, this chapter contends that the new economy is characterised by complex and persistent instability. This instability reaches into the everyday transactions entailed in maintaining the consumer basket and thereby imposes very real implications for money. Building on the description of the transformation of the rupee relayed in Chapter 3 with a description of attendant transformation in alternative monetary forms, which were raised in Chapter 5, the chapter presents a conception of frontier money as entailing multiple money forms, each with its own profile of risk and liquidity, that include the transformed open economy rupee as well as an array of alternative money forms.
This analysis is premised on the changing risk profile of the rupee in the postliberalisation environment of the new economy. If state money is not the ‘stable pole’, then it carries risk of volatility in its value relative to subsistence goods, as well as the risk of long-term depreciation. In these conditions, the risk-free status of state money is undermined as the monetary environment becomes more complicated. In these circumstances, state money's distinction from other liquid assets becomes less pronounced: the once clear line is increasingly blurred between state money – as an embodiment of key monetary attributes and thus a unique money instrument – and ordinary commodities and assets which may carry similar profiles of risk and liquidity.
1 - The Changing Nature of Money in a Changing International Monetary System
- Antonia Settle, University of Melbourne
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- Risk and the Rupee in Pakistan's New Economy
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- 29 October 2020, pp 23-41
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Summary
The extraordinary events associated with the global financial crisis of 2007–08 reflect rapid changes in money, banking and finance. Exotic financial instruments, ‘too big to fail’ banks and hasty deregulation feature heavily in debates ensuing from the crisis. Yet behind these somewhat spectacular concerns lie persistent but increasingly visible challenges to how we understand money and the central banking frameworks that attempt to govern money. This chapter introduces the global markets that are the backdrop of shifting currents in domestic money, by exploring the changing relationship between the state and money at the heights of global finance. In this, we find the transformation of money as burgeoning financial markets push at the bounds of central bank control over money, undermining the theoretical structures through which money and finance are understood and governed. Here we see money less in terms of its philosophical connotations and more in its application in financial markets; a perspective which is carried throughout the book's analysis. This exploration of money at the heights of global markets thereby sets the stage for later analysis by exploring the global context in which frontier money is borne through a perspective on money which is both grounded in finance theory and which addresses the increasingly strained relationship between the state and money.
The chapter opens by identifying the crucial role that state money plays in the financial architecture, as a benchmark for risk and liquidity. These benchmarking functions are intimately linked to notions of money as they are expressed in monetary and finance theory – for example, in asset pricing theory, endogenous and exogenous theories of money creation, and theories of monetary policy transmission – and (as we will see in later chapters) are implicit in central bank discourse and development policy. These depictions of state money demonstrate the uniqueness of money in conventional thinking, a uniqueness that, as Keynes explores in his description of money in the General Theory (1936), is tied to the state's sponsorship and control over money in the economy.
Framed in financial terms of risk and liquidity and cast against Keynes’ 1930s description of money, the chapter considers how the forces of globalisation have impacted this uniqueness of state money. This analysis explores money as increasingly fluid and ambiguous, and introduces the new challenges to policy and to theory that this predicament generates.
References
- Antonia Settle, University of Melbourne
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- Risk and the Rupee in Pakistan's New Economy
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- 29 October 2020, pp 226-246
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List of Figures
- Antonia Settle, University of Melbourne
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- 29 October 2020, pp vii-viii
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2 - Money at the Frontier
- Antonia Settle, University of Melbourne
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- 29 October 2020, pp 42-64
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Summary
Emerging economies in Asia have seen capital flows boom. Between the early 1980s and the mid-2000s, capital flows to emerging economies like Thailand and Malaysia grew by a multiple of 10. Yet as the regulatory environment and the financial architecture that it constructs have opened up to the global economy, frontier markets have also seen huge growth in flows. In Pakistan, for example, capital inflows have shot up by a multiple of 20 over those same years. However, this huge growth in flows has been accompanied by an increasing instability in those same flows. Starting to rise after 1988, capital flows to Pakistan became extremely volatile after 2000. Shifting rapidly from negative territory to spikes of US$8 and US$10 billion, capital flows have cut a figure of sharp peaks and troughs in the new millennium. This is typical of capital flows to frontier economies, which after 2010 not only exceeded those to emerging economies in GDP terms but were also accompanied by a marked rise in volatility (Rodrik 2015). These sorts of data are indicative of a dramatic ‘opening up’ of developing and frontier economies to a global financial economy, as well as of a distinct instability accompanying those flows.
Key to this predicament is the mode of monetary governance in the frontier context. By definition open to global markets and constituted by less ‘mature’ institutions than their emerging cousins, formal monetary management in frontier economies tends to track the inflation targeting norm set by the advanced economies with a regulatory regime sometimes called ‘inflation targeting lite’. Frontier markets have thus moved away – as reflected in their ‘investability’ – from previously dominant norms of the protected markets and direct monetary policy tools of earlier decades (such as setting exchange rates and prices), towards open markets and the indirect tools of market-driven monetary policy (that is, attempting to control inflation by setting the short-term interest rate). Yet the replication of advanced economy monetary policy is challenged by the complexity of the institutional context, both formal and informal, which is implied by the ‘frontier’ label.
Acknowledgements
- Antonia Settle, University of Melbourne
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8 - Conclusion: Central Bank Challenges - Financial Inclusion with Frontier Money
- Antonia Settle, University of Melbourne
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- 29 October 2020, pp 206-224
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Summary
The sharp deterioration in monetary indicators in 2008 posed significant challenges for the SBP's management of the rupee. The SBP was forced to draw down reserves as the exchange rate depreciated sharply, fed by deterioration in the current account, sharp reversals in the capital account, and formidable speculative activity in foreign exchange markets. The high commodity prices that exacerbated the current account gap also pushed up inflation, which spiked at 25 per cent in August. These conditions characterised what has been termed Pakistan's own home-grown crisis of 2008 (ul Haque 2010).
These conditions were, however, far from monetarily catastrophic. Inflation did not come close to the classic definition of hyperinflation, which is defined as rises in prices of over 50 per cent per month (Cagan 1956). In fact, with ‘safe’ levels of inflation estimated at around a 10 or 12 per cent threshold for developing economies (in contrast to 2 or 3 per cent for advanced economies), double digit inflation in Pakistan is not in itself necessarily an economic problem. By early 2014, predictions of a firm recovery were materialising with stabilisation in the external payments position, appreciation in the rupee and considerable growth in reserves.
Yet this study identifies monetary practices amongst ordinary people that are characteristic of hyperinflation. The drop in deposits, the shift into ‘in kind’ stores of value and the expanded use of non-rupee units of account present monetary strategies that are fiercely discordant with the picture painted by monetary statistics. This opens up a set of questions about both the rupee’s governability under open markets and about the scope of the rupee's contestation amongst the local population. Taking these points together poses the possibility that in Pakistan's new economy, financial inclusion is being rejected by ordinary, generally poor households at the same time as its potential benefits for monetary governability are being increasingly recognised at the central bank. Might the push for financial inclusion in Pakistan be playing out more as a project to shore up the rupee than an attempt to bring poor households out of poverty?
New Money Practices in Pakistan
The discussion in Chapters 5 and 6 suggests that a series of money practices which counter risk attached to the liberalised rupee have become popular in the postliberalisation years.
Appendix
- Antonia Settle, University of Melbourne
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Summary
Key stakeholder interviews included those with Ali Choudhary, Director of Research at the State Bank of Pakistan (SBP), Karachi; Mushtaq Khan, former Chief Economist at the SBP; Hanif Akhai, formerly seconded to the SBP on kerb market regulation; as well as Ishraat Husain and Shahed Hafeez Kardar, both former Governors of the SBP. Also Professor Abdul Salam, former head of the Agricultural Prices Commission, Government of Pakistan; Steve Davies at the International Food Policy Research Institute in Islamabad; Mubarak Ali at the Planning Commission, Government of Pakistan; and Mushtaq Gaadi at Quaid-i-Azam University, Islamabad.
Index
- Antonia Settle, University of Melbourne
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- Risk and the Rupee in Pakistan's New Economy
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- 29 October 2020, pp 247-254
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Introduction
- Antonia Settle, University of Melbourne
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- Risk and the Rupee in Pakistan's New Economy
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- 29 October 2020, pp 1-22
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Summary
The financial inclusion agenda calls for the redress of limited access to financial services, notably amongst the poor. From its humble origins in experimental microcredit in Bangladesh, financial inclusion has become a core component of the development work of governments and non-governmental organisations (NGOs) across the developing world. Driven by key philanthropic and private sector interests alongside the United Nations (UN), the International Monetary Fund (IMF) and the World Bank, the financial inclusion agenda now encapsulates not only microcredit, but also access to microdeposit and microinsurance facilities. This suite of financial tools is designed not only to mitigate the kinds of new risks that have been generated in developing economies as a result of economic and financial liberalisation since the 1980s, but to ‘enable’ and ‘empower’ the world's three billion poor. Celebrated as the ‘key to ending global poverty’ and a ‘revolution for the unbanked’, financial inclusion has become the darling of international development policy.
Financial inclusion's potential as a poverty alleviation tool is premised on its capacities to empower poor households to harness risk. Where the state has wound down welfare policies, and deregulated money and prices through its repeal of subsidies, import tariffs, fixed exchange rates, and fixed interest rates, financial inclusion promises to insulate households against shocks and open up new opportunities for household investment in human capital and entrepreneurship. By enhancing household risk tolerance through access to credit and savings facilities, financial inclusion seeks to spark bottom-up growth at the same time as it offers a safety net. Financial inclusion thus answers to the needs of both social policy and economic policy, marking out money – the basic unit of credit and savings – as the panacea for the new risks faced by households in globalised markets. Yet by engaging access to credit and savings as the tool with which households can attain financial stability amidst the instabilities that are characteristic of open markets, the financial inclusion agenda makes implicit assumptions about the money that constitutes those savings and credit facilities.
In fact, money is not uncontroversial. Rather, the Keynesian tradition, along with the sociological thought on which it draws, marks out money as contested terrain. Indeed, the viability of fiat money demands an unthinking trust in money – a trust long nurtured by central banks in order to ensure the economywide acceptability of money at a stable price.
7 - Money in Theory and Money in Pakistan
- Antonia Settle, University of Melbourne
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- Risk and the Rupee in Pakistan's New Economy
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- 29 October 2020, pp 176-205
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Summary
The analysis developed over the preceding six chapters offers a reading of radical monetary change in the wake of the liberalisation of money and markets. In Pakistan's new economy, the rupee and the everyday prices that express its usefulness are characterised by instability. Certainly, this is not the extreme instability of hyperinflation. But it is an instability substantive enough to prompt a series of hedging practices, which effectively contest the primacy of the rupee by dispersing money functions across an array of alternative assets. By using nonstate money instruments for money functions, households seek to protect themselves from new rupee-related risk in an economic environment that is characterised by uncertainty.
This story of the loss of trust in money amidst the instability and uncertainty generated by open markets finds a natural home within Post-Keynesian thinking. After all, these issues express key Post-Keynesian themes, such as the contingency of money on social trust and the fundamental uncertainty that drives the imperative of stabilisation policies. Yet this reading of monetary change in Pakistan's new economy runs counter to certain key Post-Keynesian contributions to economic thinking. Specifically, the theoretical lineage of Post-Keynesian monetary thinking sets out a dichotomy between money and commodities that does not easily account for the kind of monetary change that has been observed in Pakistan.
At issue is the state theory of money that underlies much thinking about money. From a state theory perspective, money cannot be an ordinary market commodity because it is a social construction that is indelibly linked to the state. Be it the ‘bank money’ that is issued by the state-supervised banking system or the notes, coins and central bank balances issued directly by the state, conventional thinking about money posits money by definition as a ‘creature of the state’ (Lerner, 1947). From a state theory perspective, the uniqueness of money amidst other assets lies herein: its defining characteristics are ascribed to the authority of the state under which it is issued.
To the contrary, this study has shown how the cornerstone role of the rupee as safe and stable can be compromised, and how certain uses of some commodities (primarily but not exclusively grain and cattle), can in fact be conceived of as commodity money.
4 - Exploring Monetary Change amongst Households
- Antonia Settle, University of Melbourne
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- Risk and the Rupee in Pakistan's New Economy
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- 29 October 2020, pp 109-123
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Chapters 1, 2 and 3 explored increasing complication in the monetary environment. In Chapters 1 and 2, monetary change was depicted in terms of how traditional norms and theories by which state money is understood as money – its conditions of creation, its reliability, its pliability and plausibility as a policy object, its role amidst the myriad of financial instruments and its capacity to fulfil the traditional functions of money more generally – is being challenged by globalised markets. In Chapter 2, this was accompanied by a mapping of the monetary environment in the specific context of a frontier economy. Emphasising the importance of perceptions of stability, this mapping delineated economywide foundations on which trust in money stands and in which monetary contestation may conceivably arise. This framework served to inform the history of the rupee recounted in Chapter 3, which emphasised growing uncertainty within the monetary environment by drawing out instability, informality and increasingly visible anchoring issues as the post-liberalisation period progressed. These chapters have thus set out a macroeconomic context in which state money is revealed as suffering a deficit in the stability and reliability that credible money demands. This predicament suggests a potential reallocation of state money from its classic Keynesian function of the risk-free asset, to a subject of risk management, a reading that is consistent with Pakistan's ‘enigma’ of slow progress in financial inclusion (Rasmussen 2018).
Drawing the focus down to the level of microanalysis, the next two chapters shift the focus onto ordinary people and their utilisation of money in the everyday economy. This chapter lays out the terms in which household money use is explored in the study and Chapter 5 applies these terms through a household survey. At issue is the identification of changing money use patterns that might reflect the shifting status of the rupee from risk-free asset to subject-of-risk, and thus point towards everyday acts of monetary contestation that might reveal the kind of distrust in money that is so central to sociological theories of money. If changes in daily economic transactions – amongst households and in bazaars – can be identified in connection with financial conditions that have undergone change with the liberalisation of money and markets, then substantive meaning attached to the liberalisation of money on the ground, amongst ordinary Pakistanis, can be pinpointed.
3 - The Transformation of Monetary Governance in Pakistan
- Antonia Settle, University of Melbourne
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- 29 October 2020, pp 65-108
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Summary
Money and monetary governance in Pakistan have radically transformed since partition. Through four distinct periods – the pre-liberalisation era that lasted up to the late 1980s, the years of liberalisation through the 1990s, the boom years of the early to mid-2000s, and the post-liberalisation period from 2008 onwards – the economy has shifted from a developmental state into an economy open to global markets. This radical restructuring of the economy has redefined the rupee.
Guided by the analytical framework outlined in Chapter 2, this chapter undertakes a brief history of the rupee that emphasises the development of instabilities and opacities under the liberalisation of money and markets. The chapter tracks the twists and turns of SBP policy to show how the hostile conditions surrounding the rupee in the 1990s – including the new inflationary dynamics of liberalised markets and the seemingly unmanageable threat to rupee stability in the lead-up and aftermath of its float in 2000 – were only relieved when the War on Terror prompted a repositioning of the economy in global markets. With abundant inflows and stable commodity prices in global markets, the SBP was able to accommodate the new patterns of payments that arose with liberalisation while protecting the rupee's value.
Yet beneath the benign macroeconomic conditions, two key issues remained unaddressed. One was informality, which was growing across the economy, and its monetary transactions, presenting an increasingly menacing threat to the capacity of the state to implement policy. The other was the liberalisation of key commodity prices, a process which the state appeared ultimately unwilling to carry out in respect of certain key prices. This led to a series of last-minute policy U-turns on the state's commitments to multilateral donors to let prices float.
Building on the analysis proffered in Chapter 2, this chapter presents these issues as issues of money and monetary management. Not only is informality a hindrance to monetary policy forecasting and transmission, but key commodity prices, such as those for wheat and electricity, are crucial to the stability of the monetary environment because they function as anchor prices. While never clearly spelled out as problems of economic governance, let alone as monetary issues, this chapter shows how the actions of the state with regard to both informality and commodity prices reveal their importance in maintaining stability in money and the economy at large.
5 - Fieldwork Findings
- Antonia Settle, University of Melbourne
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As discussed in Chapter 4, finance theory informs the approach taken by this study to households by identifying volatility as a cost burden of risk and identifying potential risk management strategies through portfolio allocation. In applying this micro-level analysis to households in Pakistan, evidence of monetary volatility as a substantive concern for ordinary people is sought out. Where found, such findings help to substantiate the argument that the liberalisation of money and markets and consequent exposure of money to global liquidity has generated meaningful change in money and the monetary environment.
This chapter discusses how, by drawing on field interviews, the study seeks out evidence of the substantive experience of risk attached to the liberalised rupee amongst households and in local bazaars. The chapter opens with a review of existing methodologies for interrogating household finances before setting out the methods utilised in field interviews for this study. The second part of the chapter systematically lays out the findings from field interviews in raw form. Worked in with the macro analysis from chapters prior, secondary fieldwork and newspaper articles, these findings are analysed in Chapter 6 to produce the conclusions of the final two chapters.
The field interviews thus inform the analysis of the monetary environment in Pakistan yet the interviews do not seek to unambiguously prove certain findings. The intention is not to fully scope the dimensions of alternative ‘currencies’, but to identify the ways in which the conventional understanding of the pre-eminence of state money as means of exchange, store of value and unit of account is being challenged in often ad hoc but quite comprehensive ways. Hence, the field interviews do not seek to establish a schema of risk management strategies through proportional sampling and a rigorous quantitative survey. Neither do they seek to develop an ethnographic description of the subjective and culturally mediated experience of financial risk. Rather, the field interviews seek to open up the question of money and globalisation to further analysis by exploring disruptions to mainstream assumptions about money and its governance in the field.
Contents
- Antonia Settle, University of Melbourne
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Risk and the Rupee in Pakistan's New Economy
- Financial Inclusion and Monetary Change in a Frontier Market
- Antonia Settle
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In a world of open markets and global trade, development thinking seeks stability and prosperity for the world's poor by expanding access to financial products. This book challenges the development sector's embrace of 'financial inclusion' by exploring how the new risks and instabilities that accompany the pivot towards the global economy undermining the functioning of money itself. Cast against fundamental change in the monetary environment accompanying the globalisation of markets, the book examines the rapid liberalisation of money and markets in Pakistan. It argues that liberalisation has generated substantive problems not only for the central bank as guardian of national currency, but for ordinary households. By pinpointing how globalisation generates new risks for households in the everyday economy, the book reveals jarring contradictions between free markets and financial inclusion whilst challenging money theory by positing substantive and empirically-grounded monetary contestation that demonstrates a burden of risk imposed on ordinary people, that is only exacerbated by financial inclusion.