 This is the second talk on MMT that I am presenting at MMT. I have done a deep study of MMT and it's not possible to present the whole year-long course on the theory and the intricacies of MMT in a short talk. So here I will cut to the chase. I will focus on purely practical policy implications of MMT and that too specifically in the context of Pakistan economy which makes the implication rather different from what they would be elsewhere. So without further ado, let me start. So the first thing is to understand that there is a monetary economy and a real economy. Now all conventional economic models are models of a barter economy where there is no money and basically they evaluate the outcome by looking at the final allocations of goods. So this is not a monetary economy. In a monetary economy, so basically Karl Marx understood this. It seems to be very sort of trivial but actually it has very radical implications. So the CMC prime model is that you start with commodities. Everybody has commodities. You sell them for money and then you use this money to buy different commodities. So basically you start with commodities and you end with commodities and the goal is commodity and this is exactly what general equilibrium is all about. There is no money. The money is just a means to exchange commodities. The goal is always commodities but in a monetary economy things work rather differently. People start out with money, especially firms and producers. They spend this money to produce goods and then they sell these goods to get more money. So the goal of the start with money and end with money and so this actually changes. The goal of the firm is to have more money in their pockets. It's not to get more goods. So full consequences of this are mind boggling. It seems like a very simple thing and it seems like people should have taken it into account but actually if you look at the conventional economic models, money is a veil. Money doesn't matter. Money cancels out of the economy. So nobody is actually considered except in the MMT models. So just think of a very, why is it mind boggling? Let's think of a very simple economy. Actually it can be an economy of any complexity but let's suppose that it is a closed economy. Nothing coming in, nothing going out. No export, no import, no government. So we have these producers. They use money to hire labor to purchase resources and then they end up producing goods. Now they must sell these goods. Who are they going to sell to? Other people in this economy. Where is the money that is going to come to buy these goods? This is the money that they spent. The laborers acquired money because they sold their laborers and the people who owned resources acquired money by sale of resources. So this is the money available to buy. So the amount of money that they can earn is exactly equal to the amount of money that they spent and therefore profits will be zero. Aggregate profits will be zero. Automatically. This is an accounting identity. So if you look at a closed economy where money is not coming in and money is not going out, then the total amounts of profits plus savings, aggregate profits plus aggregate savings must equal zero. A capitalist economy cannot work in this situation. Why aggregate profits? Well, you see if the laborers they earned money and they have this money to purchase. If they want to purchase more than what they have earned, they must use up their savings. If they add to their savings, then that is the amount of money that is reduced and that is what is available to purchase goods. So profits will be negative in that situation. So a monetary economy cannot work without money injections because otherwise, because the incentive that the firms are trying to earn money, but money cannot be earned because there is no money, money cannot be created or destroyed. So there is one way out of this drop. Basically, there is a fundamental accounting identity. The profits plus savings is equal to the injections of money into the economy. There are two sources of injections. One comes from government deficits. If government just spends money into the economy, this will be, this will convert to profits of firms and to savings of consumers. So the government must spend, must have deficit in order to run a capitalist economy. Without deficits, an economy cannot run. The other source of injections is the foreign injections. If you have export earnings, then the foreigners are spending money into your economy. As long as export earnings are greater than your import spending, money is coming into the economy and this money can then be create profits for your firms and savings for the consumer. The reason I say it's mind boggling is because aggregate profits of the firms plus aggregate savings is equal to injections. Now the firms are actually, we think that the firm profits will depend on firm activity, how much they produce, what efficiency they have, but none of this matters. It's just an arithmetic identity. The amount of money that is available to make profits, if there is none, then you will make zero profits aggregate. Yes, the efficient firm will make profits, but some other firm in the economy will make negative profits to offset. So then let's think about, this is not actually my main topic, but it is very important that what about trade surplus? So there are two sources by which you can earn money, which will allow you to run a capitalist economy. One source is government deficit. The other source is foreign trade surplus, which Pakistan doesn't have and is unlikely to acquire in the near future anyway. But it is very important theoretically to consider this source. First of all, we must understand that trade surplus is not a viable policy on a global basis because not everybody can run a trade surplus. So current monetary system is devastatingly unfair. I have an article on this called a lock-sided system in Dawn. You can read about it for details, but basically through a long and complicated history after the breakdown of Bretton Woods, dollar became equivalent to gold. And actually it was set up this way and the petrodollar oil was used to back it so as to give it value. So this means that the US can print arbitrary amounts of money without risk of inflation. This is actually an empirical finding. People were quite concerned that if America produced a lot of dollars, it would end up with inflation. But empirically it has been observed that the desire for foreign countries to hold reserves is massive and this is especially true following the East Asian crisis. So because of this, because other countries are willing to hold dollar reserves, the US can prevent print arbitrary amounts of dollars. Otherwise, if everybody was to cash their dollars by trying to purchase US goods, there would be inflation and this is what economists thought would happen. But economists have universally acknowledged that the amount of money that has been created in the US post in the new millennium is extremely large and the inflation has been virtually non-existent. So what this means is that US can print dollars and buy anything it likes from the rest of the world. The rest of the world must run export surpluses in order to acquire dollars in order to buy their imports. So this is a massively asymmetric system. This is not the natural trading system. In natural trading system, everybody would be aiming for balance but currently we don't have that. Although there would be great advantage to moving to such a system for us. So because of this, MMT has unique implications for USA which are very different from its implications for Pakistan. And MMT basically works without much change in any country which has trade surplus or dollar surplus. So for example, China and many other countries but it would have different implications for Pakistan. So one of the key MMT strategies is that you have to have floating exchange rates because basically MMT works on the idea of a sovereign currency. We can print however much we like but if your exchange rates are fixed and especially if your currency, the dollar is undervalued, then as soon as you start printing money you will create demand for imports and this will worsen the balance of payments and it will run into very severe problems for the economy. And in fact, Asif Atefmiya wrote about this that the MMT theory would cause problems for Pakistan because of this. But actually this depends on undervaluation. If we switch to overvaluation then this problem disappears. And what is overvaluation? Well, whenever the public buys $100 worth of dollars in rupees the state bank can buy five. So create excess demand for dollars. This will mean that the price of dollars will be higher than the equilibrium. And actually instead of when this happens basically this acts like a transparent tax on imports in dollars. And so now if you create excess demand for imports this will not cause a worsening of BOP. It will actually cause an improvement in balance of payments. So what are the benefits of overvaluing the dollars? Well, this is something which is expertise of Ali and in fact I learned much of this theory from him. It is a short term disaster to switch from an undervaluation regime to an overvaluation regime and this is the disaster that we have been seeing in the economy around us. There's a whole structure of industries which has grown up purely because dollars are cheap and so you can buy palm oil seeds from Brazil and create your own. And you can buy tomatoes from India and you can buy anything. Pakistan is an agricultural country. This doesn't make any sense but this will take place if the dollars are so cheap that it's cheaper to import than to produce your own. So there's whole large numbers of industries which have grown up with this assumption that imports are cheap and when you switch to an overvaluation strategy these industries will collapse. There will be joblessness. There will be any capacity under utilization because you build factories to process imports and they are no longer of any use because the imports are too expensive. So the long term is very, very valuable. It's actually the only way to go because the first step to industrialization always import substitution and import substitution cannot take place when imports are cheap. It's only when imports are expensive that you will be able to grow your import substituting industry because then they don't have to compete with cheap imports. So basically what this has to do with MMT is that if you manage the exchange rate properly then you can gain control of your money supply. Otherwise if you don't manage your exchange rate properly then you are not in control of your money supply. And today fortunately the vast percentage of our government debt is in Pak Rupees and very small percentage in US dollars. Very few people know this or realize this which means that we are in good shape. Otherwise if you had high proportion of liabilities in dollars this would be a serious problem for applications of MMT. How's that? One third. That's higher than I had thought about. Now what about the high interest rates? It's often thought that high interest rates inhibit growth. This is not really true. High interest rates are a source of transfers to the financial sector and this has its own problems and it creates a problem of productivity because it returns in the finance sector at high, returns in the real sector at low. But it is not a budgetary problem according to the MMT theory. So now the role of deficits is that they create inject money. The standard picture of the economy which we have is that the government gathers taxes and raises revenue in order to spend. MMT says that this is the opposite is true. Government spending creates money is one of the sources. The other source is the private sector. The banks create money when they create loans. This money that they spend creates business profits. It creates consumers' savings and it creates the money that is required to pay taxes. This is exactly the opposite of the standard picture. So in Pakistan, because we don't have export surplus, the government must run fairly large deficits to create prosperity. It has to overcome the gap in the export import balances and also print additional money on top of that to provide savings and to provide money which can be used for profits and savings. So the question is whether or not we should run deficits. It's how to run deficits productively. So there we have problems that government spending done wisely and create massive benefits. But done unfulishly, it can ruin the economy. And if you spend money unwisely, then you can cause hyperinflation and many other problems which people keep mentioning when they talk about anti-MMT. So what does it mean to spend wisely? This is the key. So today I'm going to talk about feasible policy options for Pakistan today, which means that the government really cannot expand too much in the way of deficits. But there are ways we can get around this problem. What we need to do, we have an IMF straight jacket. It doesn't allow us to create more money. So the theoretical basis for the recommendations is that there are self-financing projects. There are projects like investing in education, which will bring huge benefits in the long run. Now for various reasons, the private sector does not invest in socially optimal projects. It invests in financially optimal projects with high private returns, but not in socially beneficial. So there are many ways in which the government can encourage what you can do in IMF is the government can spend. But if that's not possible, what the government can do is create incentives for the private sector to spend in the right directions which are socially optimal. So there is this book by World Bank, Where is the Wealth of Nations? And they find that the maximum amount of wealth is in human capital. So the wisest investment for Pakistan is to educate Pakistan. There are massive gains from skilled workforce. This cannot be done by the government partly because of IMF constraints, but also because of other structural reasons. But it is possible for the government to encourage the private sector to make investments. In the USA, the financial picture was radically changed by the 30-year mortgage, which was not a viable thing for the US private sector. They could not afford to take such long run risk. So what the government did was it came in and guaranteed these mortgages. It brought this Fannie Mae organization which would look at the standards of the mortgage and say, okay, you go ahead. So the private sector does not like to make 30-year loans. Exactly the same kind of principle is applicable here. If the government backs spending in the investments in the human capital, the private sector can do it and they have been doing it in the USA on a commercial model. The private sector has invested trillions of dollars and the student population is in debt to a trillion dollar. That's a highly exploitative model and we don't want to replicate that. But what I want to say is that this shows the financial viability of the scheme. But we have to make sure that the students don't end up with being slaves of the financial sector. The government can regulate lending so as to ensure that this does not happen. So basically what we'd like to do is that the government should offer guarantees for investment in human capital. But the return for this guarantee should be a principle behavior, not exploitative A. And B, the thing that is missing from government projects, and this is generally true, is monitoring and evaluation. This never takes place and without good monitoring and evaluation, the best projects go astray because every project has some flaws. Now if you monitor it and you find this has a flaw and you fix it, then you can improve. But what happens in a political environment like ours is that if a project has a flaw, you just scrap it and you start over. And the new project has ten times as many flaws as the old one, but nothing ever gets fixed. So how can we do that? Well, when we ask the private sector to come in, we can ask them to set up monitoring and evaluation in return for the sovereign guarantee. Also we need to engage communities which have ownership. There are mechanisms for that in the books on the development, but they are never utilized. So if we use these mechanisms, we have all the theory, but no practice. So three-way partnership is required. The government for the regulations, the financial sector to create the money to invest, and communities to make sure that there is ownership. One of the key elements of the MMT is the job guarantee program. And the basic idea of this is to give people productive job, our most least utilized resources as people. If we give them jobs, then we will massively increase the capacity of the economy to produce goods. Now the general theory is that if you start giving jobs, you will create runaway inflation. But this doesn't take into account the fact that you are supposed to give productive jobs. So although a large amount of extra money will be created, also a large amount of extra goods will be created. So you don't have necessarily inflation. There is a potential drawback that if we start giving politically favorable jobs, then people will get money but will not produce. And this is a serious risk to the job guarantee program. MMT leads to fiscal irresponsibility. This is the standard complaint against MMT. And this is a real threat. If we allow governments to produce money and we say that you can do so, arbitrarily money is sovereign and it is true. Then this can actually ruin the economy because if money is produced, but the good capacity, the productive capacity of the economy does not change. Then there is no doubt that inflation will result. So basically the issue is to create money wisely to increase the productive capacity. So to do this wisely requires a multi-part solution. You have to enhance, recognize and reward integrity, not just punish corruption. This is more important than that. You have to have good monitoring and evaluation system to make sure that people are coming into work and producing. You have to have institutional structures which allow for this to happen and you have to have community engagement. So there are multiple requirements. I will list some of them for a successful job guarantee. One of the things is that jobs must be productive. They must add to total product and create value greater than the money being spent. The second is that the job guarantee takes people from the bottom of the labor pool. If you think of a labor pool as people divided from the least employable to the attractive employees, then the job market in the market is taking people from the top of the pool and the job guarantee should take from the bottom of the pool so that there is no conflict. Also the job guarantee wage should be slightly lower than the bottom market living wage. It should not be lower than the market exploitative wage as a technical detail. But the issue is can we create productive jobs? Well, there is empirical evidence that there is a lot of productive jobs that are available. There are many, many templates available for how we can provide productive jobs. There is community services, basic literacy programs, planting trees, green projects of large numbers which have come up, preservation of front rain forests, this kind of mangroves which are very important. And there are many other building roads. So now this is the first step but we need to think several steps ahead in order to do a successful job guarantee. The second step is to say, alright, I'm going to create a million jobs and so a billion rupees will be out there in the market chasing goods. And how am I going to make sure that this doesn't have inflation? Well, I have to anticipate what will happen. I have the highest data, household income expenditure service. I can say that million people in poverty class have one billion rupees to spend. What will they do? Our highest gives the pattern of spending for the poor. So we can say, okay, this is where they're going to spend. So we have to make sure that the jobs that we provide produce the extra food and education and health services that will be demanded by this extra money. So as to not create unbalanced inflation. But remember that some inflation will take place and this is welcome because the price inflation is a signal. If the food price goes up, that is the signal to create more food. If demand for health goes up, that's the signal to produce more doctors. So we want to have this, but it is true that the structure of the economy will change. It will create winners and losers. The winners will be the weak unemployed poor and the losers will be the big seats and producers who are hiring cheap labor. They will not be able to do so cheaply and exploit them so much anymore. And therefore the volume of protests that will happen will be very large. And this is generally the biggest problem with implementing an MMT program. So basically you have to balance the output created by the job guarantee. In addition to this, there are mega projects that become possible once you realize that money is not the crucial constraint. So roads are massively productive and can be done. Lots of countries have done this where unskilled labor is needed to build roads or you can give them training on the job. There are public works programs, but there are even more ambitious things. You can build eco cities. China has 250 of these cities on the table and we can create new cities like we had a program called Aik Hunar Aik Nagar. The entire coastline from Karachi to Ghadar is available for development. We can create a palm oil city. We can create a fishing industry city targeted for a specialized. And the thing is that this will be self-financing. If you say that I'm going to create a city, this is a desert land which is worth very cheap. And once this becomes developed in the city, just like Guadar, the prices will skyrocket. So people will invest money in this. It's not like, you know, give charity to build a dam. This is actually, you buy a city and there will be a huge amount of investment that is possible. Especially, so the key to the development, this is the next to last slide. The key to development is to invest in the future of the nation. The high private return projects are not the highest in social benefits. In fact, what happens is that when especially in a high interest rate environment like this, the best private investments are in finance, in real estate, in insurance. And these are much more attractive than real investment. And this is the real damage. So this is one of the things that State Bank can do is to change the incentives. We can have directed lending. We can align the incentives by using the nudge principles. We can align the incentives so that the private sector invests in the future of the nation. For example, by guaranteeing loans for education and regulating them strictly to make sure that exploitation doesn't occur. So this is a guaranteed payoff. You invest in a child and he will definitely pay back whatever you invest in them. And these numbers have been calculated. I'm not presenting them. But the thing is, there are many reasons why this kind of investment you don't see in the private sector. But if the government takes care of this, then the investment will take place. Okay, so this is the last slide. I think the primary lesson of MMT is that money is never the constraint in investing in the future of the nation. The conventional mindset is that first we must raise taxes. Then we can invest in projects. This is completely false. And this is the biggest obstacle to development. The MMT alternatives, if the development project is itself viable, then we can borrow from the future revenues and invest the money today. And basically it's a time transfer and the government is in a principle to do it in a position to do it. But to do this requires skill. As I've discussed, there are a number of things that you can do wrong, which will upset the apple cart and cause problems. But if you plan correctly, you can create large amounts of money without the fear of inflation. Also, one of the things that we must manage is the foreign exchange liabilities and that I've already discussed. But we must also manage domestic demand to make sure that the extra money that you inject does not create harmful types of aggregate demand. And the demand that is created is satisfied by the extra productivity that you create by investing. And there are nudge policies available, which would require a long discussion exactly how to structure them. Thank you.