Monday, August 24, 2009

Print Money, Build Infrastructure

Haroni Doli H. Ritonga , Medan | Fri, 06/20/2008 10:34 AM | Opinion

Countries such as the United States and Germany have in the past published greenbacks or treasury paper (today known as dollars and marks) as a payment currency for the work of their citizens when the two countries faced severe economic difficulties.

Commonly, what is written in macroeconomic textbooks is that Germany experienced economic collapse between 1919 and 1933.

During 1935, Germany's government decided to issue Labor Treasury Certificates, which functioned as debt-and-interest-free payment instruments. This so-called money was unaffected by gold and debt but supported by something that had real value, essentially work done and materials produced for the government.

Certificates were paid for the work carried out by millions of people, including flood control, restoration of public buildings and private homes, and construction of new buildings, roads, bridges, canals and port facilities.

The country suffered from a budget deficit, but unemployment problems were resolved within two years. The fear of high inflation caused by printing money was overcome by escorting the production of goods and services. And hyperinflation could be stopped. According to the economist John Maynard Keynes, adding new money to the economy will not drive up inflation so long as the money goes to produce new goods and services.

These days, Iran appears to have adopted the same policy. It has injected huge amounts of cash into the community by printing money to fund local infrastructure projects and to provide low-interest loans.

China for a long time has practiced a similar concept. Chinese companies can continuously produce low priced products thanks to the large amount of circulating money.

Funding public investment for infrastructure development is not conducted through privatization, as campaigned by free-market supporters. The printing of the "new" money issued by the government can keep profit seekers away and avoid privatization in infrastructure projects.

Privatization forces users to pay higher prices since investors expect maximum profit. But paying more does not necessarily mean service quality is improved.

Indonesia experienced hyperinflation during the peak of the economic crisis in 1998, reaching 77.63 percent with economic growth of minus 13 percent. Demand (money) increased faster than supply (goods and services), resulting in uncontrolled inflation at the time of the monetary crisis.

From the beginning of the monetary crisis, the increasing amount of money in circulation was triggered by the declining value of the rupiah, from Rp 2,909 to Rp 10,014 per US dollar. The amount of money in circulation increased from Rp 44.61 trillion in March 1997 to Rp 98.27 trillion in the same month a year later, an increase of 54.6 percent.

Most of the added money was used to bail out bankrupt banks through the central bank's liquidity support (BLBI) funds. The policy failed because it was carried out without enough preparation and a lack of discipline in upholding the law.

This year, Indonesia may have similar problems because of the increasing prices of oil and food.

In response to this, the government should consider similar actions to 1998, with a bit of modification to follow the German experience of printing money to develop infrastructure. The Indonesian government may continue to involve banking by means of publishing a current treasury certificate for payment instruments in public investment projects, to develop the country's infrastructure, for example the building of highways.

Developing highways has three simultaneous positive effects on the economy. It provides employment to address the critical problem of unemployment (9.5 percent), it expedites the flow of economic resources and it increases output or economic growth.

In addition, the projects also can be financed through the Islamic profit-sharing banking system, through sukuk, or government bonds. Despite the economic gloomy picture, Indonesia must continue the construction of infrastructure because the sector has hampered the growth of foreign and domestic investment.

The experience of countries such as Germany, the United States, China and Iran in injecting money to finance development projects should serve as a lesson for Indonesian economic policy-makers.

The writer is a lecturer at the School of Economics, North Sumatra University, Medan. He can be reached at

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