This week, we take a little break from the theme, “it takes a minister”, that we have been developing through fortnightly articles to inform governance perspectives. So that we can provide some general background on the relationship between the economy, money, and development. A recent encounter got me seriously thinking about this.

It was last week. We had left home early, ahead of the usual morning traffic, to school and then to work. The question from my 8 years old daughter that morning was, why is money not in all numbers? This was typical of her curiosity. For this question, I didn’t have an appropriate answer, at least immediately. It was raining quite heavily and the roads were busy, which was the opportunity I needed to delay providing answers until we had arrived at her school. I really didn’t know where it would lead to. She usually does not stop at one question.

As she continued to listen to planet songs on YouTube as we drove, I kept thinking and wondering. She enjoys talking about science especially the sun, planets and climate change. Just as we arrived at her school and sat at the breakfast club, she reminded me of the question. Why is money in 1p, 2p, 5p, 10p, 20p, 50p, £1, £5, £10, £20, etc. and not in all numbers? Well, after a thoughtful pause, I told her that the Bank of England decides and that you can add the different denominations to arrive at other numbers. Of course, she asked other follow on questions such as why do we need money to buy things? Why do some people not have money to buy things? We have subsequently had this conversation about money and how money has become so important to the way we live.

What is the role of money?

We need money to buy goods and services. Without money, it would be difficult to exchange the goods and services that we produce and sell or that we buy and consume or use. As societies have become more sophisticated and our population has increased, so has the different goods and services that we consume and their volumes grown. Transferring goods and services between different people, large populations and across geographical locations would at the very least be inefficient if not impossible without money.

Over many years, commodities perceived by people as precious and valuable such as gold was used as money and later currencies were backed by the stock of gold. Nowadays, currencies are created by fiat (i.e. fiat money) and not backed by gold (there won’t be enough gold supply). The value and worth of fiat money are determined by demand and supply, and the confidence that people have in it. If the economy is producing enough and selling the goods and services that a growing population of people around the world value and want, the economy is growing and is strong. Faith, in the currency of the economy, will also be strong and it can buy much relative to other currencies.

Central Banks and the supply of money

Indeed, money is a human creation. The Central Bank influences and manipulates its supply to achieve set economic objectives and goals. So, if in principle the Central Bank thought that conditions (in-country and global) were right to stimulate the economy to grow, it could increase the money supply. It could create (print) money to buy government financial instruments. It could reduce the interest rate on money to commercial banks so that businesses and individuals can access low-interest rate loans to increase production and expenditure.

The Central Bank can also decide based on conditions to reduce the supply of money to achieve some objectives and goals such as inflation. To achieve this, it can conversely sell government financial instruments and it can increase the interest rate. The Central Bank cannot print money all-the-way because the money would be valueless. The tools at its disposal are limited by structural and fiscal policy issues to increase the level of production of goods and services (that people want) in an economy, improve efficiency, and competitiveness (the place for technology, innovation, transparency, and accountability).

Can a country run out of money?

YES, money that people have confidence in regarding its worth or what they want that they can buy with it. This becomes very important if the country is not producing the goods and services that its people need and want. The latter has cultural significance beyond utility to perceptive value in an increasingly global community led by big corporations influencing buying behaviour. So, the Central Banks of economies that depend largely on imports to meet the needs and wants of its people will consider balancing the supply of local currencies with the supply of foreign exchange e.g. US$ in their economy. This is because as demand for imported goods and services increases, so would foreign exchange demand increase, and so would the exchange rate between the local currency and e.g. US$ increase.

NO, a country that is producing the goods and services that its people and other people need through efficient processes, cannot run out of money. The Central Bank in that economy will create money as the economy expands and grows, using tools at its disposal such as lowering interest rates, buying government financial instruments, etc. Not only would such a country not depend on imported goods and services for most of the needs and wants of its people, but it would export more and more goods and services to businesses and people in other countries and earn foreign exchange e.g. US$ (the currency in which most international trade is settled).

The vision of the founders of our country and the policy choices that circumscribe boundaries, define our values and drive our objectives will determine whether we run out of [good] money that has value or has enough of it for all of our people to buy the goods and services that they need to support a better standard of living.

The economy of a country — what is it?

It is all the production and consumption of a country and its money valuation. It is also all the value and supply chains that connect the different activities regarding the production of goods and services and their consumption and usage. It is about the productive and consumptive activities and needs of individuals, businesses, and government.

To keep pace with economic growth resulting from technology such as e-commerce, money would have to evolve. Big data, quantum computing, and 5G Internet technology would unleash the potential of artificial intelligence, transform production, increase our digital footprint, connect people and activities and increase transactions within and across national borders.

How these developments would impact the economy of countries would depend on investments in human capital development, technology innovative, natural resource endowments. Our history, culture, and ambition should inspire us to build the right political structure and conduct the right kind of politics.

But the economy is also about the relationship with other economies regarding the supply and demand for goods and services across geographies. As the world becomes increasingly multipolar and trade is linked to foreign policy, geopolitics must be an important consideration in economic planning. How can countries invest in their people to produce most of the goods and services that they demand in local currencies that have value while being pragmatic in trade and foreign policy? This must be an economy that combines some characteristics of market-orientation, command, and sustainability, given the right level of regulations and social investments.

Development should be the objective and goal

The role of money and economic growth should be about development. They should be intrinsically linked. An economy that pursues progressive policies would invest in the whole population to achieve individual potential interconnected. An economy that pursues equal opportunities, equity and that reduces income and wealth inequalities. As we explore and exploit natural resources and convert into culturally acceptable and perceptible resources for improved standards of living, this must not be at the cost of destroying our environment and planet. We must not support wasteful consumption just for the purpose of economic growth that increases the number of billionaires at the expense of society.

Building a strong society

Our goal should be a build a society that is resilient and able to respond together to emerging challenges and opportunities. To achieve this, we need to change our current economic and development models into a model that strengthens human systems. This will require thinking in mini-ecosystems and the whole system. By using data to improve our understanding of the relationships between constituent parts of a mini-ecosystem, we can influence positive outcomes and strengthen the mini-ecosystem. We can then connect and integrate mini-ecosystems into the whole system while ensuring safeguards to prevent the spread of contagion.

When we take planned, intentioned and deliberate governance actions to build an economy for development, we will strengthen and integrate among others:

•Health systems

•Education systems

•Financial systems

•Housing systems

•Environmental systems

•Energy and Electric power systems

•Water systems

•Food and agriculture systems

•Transportation systems

By thinking and acting in systems we can reduce risks, unlock value and supply chains, reduce insecurity, create jobs and grow inclusive economies. We can right now stop thinking only of ourselves, families and groups. Let us start thinking more about how we build a developed country.

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