HOME

TheInfoList



OR:

Financial repression comprises "policies that result in savers earning returns below the rate of
inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...
" to allow banks to "provide cheap loans to companies and governments, reducing the burden of repayments." It can be particularly effective at liquidating
government debt A country's gross government debt (also called public debt or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit occu ...
denominated in domestic currency. It can also lead to large expansions in debt "to levels evoking comparisons with the excesses that generated
Japan Japan is an island country in East Asia. Located in the Pacific Ocean off the northeast coast of the Asia, Asian mainland, it is bordered on the west by the Sea of Japan and extends from the Sea of Okhotsk in the north to the East China Sea ...
’s lost decade and the
1997 Asian financial crisis The 1997 Asian financial crisis gripped much of East Asia, East and Southeast Asia during the late 1990s. The crisis began in Thailand in July 1997 before spreading to several other countries with a ripple effect, raising fears of a worldwide eco ...
." The term was introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon to "disparage growth-inhibiting policies in
emerging markets An emerging market (or an emerging country or an emerging economy) is a market that has some characteristics of a developed market, but does not fully meet its standards. This includes markets that may become developed markets in the future or we ...
."


Mechanism

Financial repression may consist of any of the following, alone or in combination.: #Explicit or indirect capping of interest rates, such as on government debt and deposit rates (e.g., Regulation Q). #Government ownership or control of domestic banks and financial institutions with barriers that limit other institutions from entering the market. #High reserve requirements. #Creation or maintenance of a captive domestic market for government debt, achieved by requiring banks to hold government debt via
capital requirements A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital a ...
, or by prohibiting or disincentivising alternatives. #Government restrictions on the transfer of assets abroad through the imposition of capital controls. These measures allow governments to issue debt at lower interest rates. A low
nominal interest rate In finance and economics, the nominal interest rate or nominal rate of interest is the rate of interest stated on a loan or investment, without any adjustments for inflation. Examples of adjustments or fees # An adjustment for inflation (in contr ...
can reduce debt servicing costs, while negative real interest rates erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by inflation and can be considered a form of
taxation A tax is a mandatory financial charge or levy imposed on an individual or legal person, legal entity by a governmental organization to support government spending and public expenditures collectively or to Pigouvian tax, regulate and reduce nega ...
, or alternatively a form of
debasement A debasement of coinage is the practice of lowering the intrinsic value of coins, especially when used in connection with commodity money, such as gold or silver coins, while continuing to circulate it at face value. A coin is said to be debased ...
. The size of the financial repression tax was computed for 24
emerging market An emerging market (or an emerging country or an emerging economy) is a market that has some characteristics of a developed market, but does not fully meet its standards. This includes markets that may become developed markets in the future or we ...
s from 1974 to 1987. The results showed that financial repression exceeded 2% of GDP for seven countries, and greater than 3% for five countries. For five countries (
India India, officially the Republic of India, is a country in South Asia. It is the List of countries and dependencies by area, seventh-largest country by area; the List of countries by population (United Nations), most populous country since ...
,
Mexico Mexico, officially the United Mexican States, is a country in North America. It is the northernmost country in Latin America, and borders the United States to the north, and Guatemala and Belize to the southeast; while having maritime boundar ...
,
Pakistan Pakistan, officially the Islamic Republic of Pakistan, is a country in South Asia. It is the List of countries and dependencies by population, fifth-most populous country, with a population of over 241.5 million, having the Islam by country# ...
,
Sri Lanka Sri Lanka, officially the Democratic Socialist Republic of Sri Lanka, also known historically as Ceylon, is an island country in South Asia. It lies in the Indian Ocean, southwest of the Bay of Bengal, separated from the Indian subcontinent, ...
, and
Zimbabwe file:Zimbabwe, relief map.jpg, upright=1.22, Zimbabwe, relief map Zimbabwe, officially the Republic of Zimbabwe, is a landlocked country in Southeast Africa, between the Zambezi and Limpopo Rivers, bordered by South Africa to the south, Bots ...
) it represented approximately 20% of
tax revenue Tax revenue is the income that is collected by governments through taxation. Taxation is the primary source of government revenue. Revenue may be extracted from sources such as individuals, public enterprises, trade, royalties on natural reso ...
. In the case of
Mexico Mexico, officially the United Mexican States, is a country in North America. It is the northernmost country in Latin America, and borders the United States to the north, and Guatemala and Belize to the southeast; while having maritime boundar ...
financial repression was 6% of GDP, or 40% of tax revenue. Financial repression is categorized as " macroprudential regulation"—i.e., government efforts to "ensure the health of an entire financial system.Carmen M. Reinhart, Jacob F. Kirkegaard, and M. Belen Sbrancia
"Financial Repression Redux"
IMF Finance and Development, June 2011, p. 22-26


Examples


After World War II

Financial repression "played an important role in reducing
debt-to-GDP ratio In economics, the debt-to-GDP ratio is the ratio of a country's accumulation of government debt (measured in units of currency) to its gross domestic product (GDP) (measured in units of currency per year). A low debt-to-GDP ratio indicates that an ...
s after
World War II World War II or the Second World War (1 September 1939 – 2 September 1945) was a World war, global conflict between two coalitions: the Allies of World War II, Allies and the Axis powers. World War II by country, Nearly all of the wo ...
" by keeping real interest rates for government debt below 1% for two-thirds of the time between 1945 and 1980, the United States was able to "inflate away" the large debt (122% of GDP) left over from the
Great Depression The Great Depression was a severe global economic downturn from 1929 to 1939. The period was characterized by high rates of unemployment and poverty, drastic reductions in industrial production and international trade, and widespread bank and ...
and
World War II World War II or the Second World War (1 September 1939 – 2 September 1945) was a World war, global conflict between two coalitions: the Allies of World War II, Allies and the Axis powers. World War II by country, Nearly all of the wo ...
. In the UK, government debt declined from 216% of GDP in 1945 to 138% ten years later in 1955.


China

China China, officially the People's Republic of China (PRC), is a country in East Asia. With population of China, a population exceeding 1.4 billion, it is the list of countries by population (United Nations), second-most populous country after ...
's
economic growth In economics, economic growth is an increase in the quantity and quality of the economic goods and Service (economics), services that a society Production (economics), produces. It can be measured as the increase in the inflation-adjusted Outp ...
has been attributed to financial repression thanks to "low returns on savings and the cheap loans that it makes possible". This has allowed China to rely on savings-financed
investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
s for
economic growth In economics, economic growth is an increase in the quantity and quality of the economic goods and Service (economics), services that a society Production (economics), produces. It can be measured as the increase in the inflation-adjusted Outp ...
. However, because low returns also dampens
consumer spending Consumer spending is the total money spent on final goods and services by individuals and households. There are two components of consumer spending: induced consumption (which is affected by the level of income) and autonomous consumption (which ...
, household expenditures account for "a smaller share of GDP in China than in any other major economy". However, as of December 2014, the People’s Bank of China "started to undo decades of financial repression" and the government now allows Chinese savers to collect up to a 3.3% return on one-year deposits. At China's 1.6% inflation rate, this is a "high real-interest rate compared to other major economies".


After the 2008 economic recession

In a 2011 NBER working paper, Carmen Reinhart and Maria Belen Sbrancia speculate on a possible return by governments to this form of debt reduction in order to deal with high debt levels following the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
.Carmen M. Reinhart and M. Belen Sbrancia
"The Liquidation of Government Debt"
IMF, 2011, p. 19
"To get access to capital,
Austria Austria, formally the Republic of Austria, is a landlocked country in Central Europe, lying in the Eastern Alps. It is a federation of nine Federal states of Austria, states, of which the capital Vienna is the List of largest cities in Aust ...
has restricted capital flows to foreign
subsidiaries A subsidiary, subsidiary company, or daughter company is a company completely or partially owned or controlled by another company, called the parent company or holding company, which has legal and financial control over the subsidiary company. Unl ...
in central and eastern Europe. Select
pension fund A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides pension, retirement income. The U.S. Government's Social Security Trust Fund, which oversees $2.57 trillion in assets, is the ...
s have also been transferred to governments in
France France, officially the French Republic, is a country located primarily in Western Europe. Overseas France, Its overseas regions and territories include French Guiana in South America, Saint Pierre and Miquelon in the Atlantic Ocean#North Atlan ...
,
Portugal Portugal, officially the Portuguese Republic, is a country on the Iberian Peninsula in Southwestern Europe. Featuring Cabo da Roca, the westernmost point in continental Europe, Portugal borders Spain to its north and east, with which it share ...
,
Ireland Ireland (, ; ; Ulster Scots dialect, Ulster-Scots: ) is an island in the North Atlantic Ocean, in Northwestern Europe. Geopolitically, the island is divided between the Republic of Ireland (officially Names of the Irish state, named Irelan ...
and
Hungary Hungary is a landlocked country in Central Europe. Spanning much of the Pannonian Basin, Carpathian Basin, it is bordered by Slovakia to the north, Ukraine to the northeast, Romania to the east and southeast, Serbia to the south, Croatia and ...
, enabling them to re-allocate toward sovereign bonds."


Criticism

Financial repression has been criticized as a theory, by those who think it does not do a good job of explaining real world variables, and also criticized as a policy, by those who think it does exist but is inadvisable. Critics argue that if this view was true, borrowers (i.e., capital-seeking parties) would be inclined to demand capital in large quantities and would be buying capital goods from this capital. This high demand for capital goods would certainly lead to
inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...
and thus the
central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...
s would be forced to raise interest rates again. As a boom pepped by low interest rates fails to appear in the time period from 2008 until 2020 in industrialized countries, this is a sign that the low interest rates seemed to be necessary to ensure an equilibrium on the capital market, thus to balance capital-supply—i.e., savers—on one side and capital-demand—i.e., investors and the government—on the other. This view argues that interest rates would be even lower if it were not for the high government debt ratio (i.e., capital demand from the government).
Free-market In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ot ...
economists argue that financial repression crowds out private-sector investment, thus undermining growth. On the other hand, "
postwar A post-war or postwar period is the interval immediately following the end of a war. The term usually refers to a varying period of time after World War II, which ended in 1945. A post-war period can become an interwar period or interbellum, ...
politicians clearly decided this was a price worth paying to cut debt and avoid outright default or draconian spending cuts. And the longer the gridlock over fiscal reform rumbles on, the greater the chance that 'repression' comes to be seen as the least of all evils". Gillian Tett
"Policymakers learn a new and alarming catchphrase"
''Financial Times'', May 9, 2011
Also, financial repression has been called a "
stealth tax A stealth tax is a tax levied in a way that is largely unnoticed, or not recognized as a traditional tax. The phrase was generally used in the United Kingdom by Conservatives against the New Labour government's behaviour and has been used in Bri ...
" that "rewards debtors and punishes savers—especially
retirees A pensioner is a person who receives a pension, most commonly because of retirement from the workforce. This is a term typically used in the United Kingdom (along with OAP, initialism of old-age pensioner), Ireland and Australia where someone of p ...
" because their investments will no longer generate the expected return, which is income for retirees. "One of the main goals of financial repression is to keep nominal interest rates lower than they would be in more competitive markets. Other things equal, this reduces the government’s interest expenses for a given stock of debt and contributes to deficit reduction. However, when financial repression produces negative
real interest rate The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is appro ...
s (nominal rates below the inflation rate), it reduces or liquidates existing debts and becomes the equivalent of a tax—a transfer from creditors (savers) to borrowers, including the government."


See also


References

{{DEFAULTSORT:Financial Repression Inflation Government debt Monetary economics Fiscal policy Regulatory compliance Financial regulation Development economics 1973 neologisms Economics neologisms