It’s part of the ruling ethos in Bangladesh that if things can be produced at home then they should be, rather than imported. This is not the correct manner of thinking about things as any trade economist will tell us all at great length.
We should only be trying to make at home those things that we can do better or cheaper than we can get them from the foreigners. A useful example of this being the recent report that China makes certain Bangladeshi banknotes. If we’re willing to get our very money from elsewhere then what else should we also be gaining in that manner?
As to the making of money itself yes, it has to be done. Old notes do wear out and we’ve got to replace them. Over and above that, a growing economy needs to have more money. We could liken it to an engine running faster needing more lubrication. Or my own favourite, a restaurant that moves from serving 50 lunches a day to 100 will need more plates and more cutlery to do so with. If we’re getting more economic activity going on, then we need more of that money that we pass around in economic activity.
We need to be careful that we don’t have too much new money, that brings inflation as in Venezuela. But a growing economy does need more money.
So, should we go out and buy more printing presses to have to make our money? That depends. Maybe that would be the cheaper option. But what if it isn’t?
Which is where China comes in. As we all know, that country’s economy has been growing very strongly for several decades now. They have, in the past, invested in all those printing presses to make all that money they need. But now they’ve got spare capacity in those printing plants.
Here, we’ve got to understand the difference between a cyclical change and a structural one. It’s very common indeed in economics that people get confused between the two. Yes, China’s economy is still growing. So, they still need more money -- that cyclical change. But the type of money they need has changed, as they have had a structural change as well.
They’re using a lot more electronic money and less of the paper sort that has to be printed.
So, the Chinese
banknote printing industry has excess capacity. And they’re selling the use of it nice and cheap, too. One estimate has it that they’re half the price of anyone else out there. Which gives us a choice. We can use hard currency to go and buy more printing presses and print our own, or we can use hard currency to buy the notes themselves.
Which is better depends upon their relative prices and only their relative prices. At the moment, buying from China is cheaper, so we do that.
It is, of course, possible for us to do what we do with so many other items. We can make the notes at home, so we should. Just like we say we can make the rice at home, so don’t import any, or we can make jute bags so don’t import plastic ones. Fortunately for my argument, this is exactly what India did do recently with banknotes.
As we all know, they decided to kill off black money by replacing all notes. The old ones had to be handed into the banks, the new ones would be available over time. At first, there was considerable confusion about how long “over time” was until one calculation was made. The Indian government would not allow anyone else, certainly not any foreigner, to print rupee notes.
So, count up how many notes the current government-owned plants can print in any day, count up how many new notes are needed, and a simple division will tell us how many days before all the new money is ready. About six months was the answer. And so it also turned out to be.
The actual decision to de- or re-monetize I entirely sympathize with. It taking six months, I don’t. That just extended the chaos and uncertainty, hitting India’s economic performance. It would have been much better if they had used some of that foreign capacity to produce those new Rs1,000 and Rs2,000 notes. But politics, “Made in India” and plain flat-out nationalism meant that politically, they couldn’t. Or at least, didn’t.
But the value of having banknotes is that we have banknotes. Where they are produced is very much a subsidiary question or interest. That we don’t have enough banknotes for months and months is a much greater damage than allowing foreigners to do some of the work for us.
This argument extends to absolutely everything. OK, perhaps we might have some exceptions for national security matters, but other than those, yes, to everything. If we can get our rice cheaper from somewhere else, then it makes us better off if we do.
If our electronics industry is more expensive than China’s then we should be buying from China. Just as it makes no sense at all for people in England to be trying to make t-shirts when they’re better made and cheaper in Bangladesh.
This is the entire point of trade too, that we gain access to those things which the foreigners make better or cheaper than we do. Our exports are just the hard work we’ve got to do to afford the imports.
India insisted on making its own notes and didn’t have enough for many months as a result. Bangladesh bought some cheap from China. It’s Bangladesh which did the right thing here, not India.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.
