Financial repression
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Financial repression comprises "policies that result in savers earning returns below the rate of
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
" 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 oc ...
denominated in domestic currency. It can also lead to large expansions in debt "to levels evoking comparisons with the excesses that generated
Japan Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...
’s lost decade and the
1997 Asian financial crisis The Asian financial crisis was a period of financial crisis that gripped much of East Asia and Southeast Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion. However, the recovery in 1998–1 ...
." The term was introduced in 1973 by
Stanford Stanford University, officially Leland Stanford Junior University, is a private research university in Stanford, California. The campus occupies , among the largest in the United States, and enrolls over 17,000 students. Stanford is considere ...
economists Edward S. Shaw and
Ronald I. McKinnon Ronald Ian McKinnon (10 July 1935 – 1 October 2014) was an applied economist. His primary interests were international economics and economic development, with strong secondary interests in transitional economies and fiscal federalism. Understa ...
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 were ...
."


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 Regulation Q ( 12 CFRbr>217 is a Federal Reserve regulation which sets out capital requirements for banks in the United States. Updated as required. The version of Regulation Q current was enacted in 2013. From 1933 until 2011, an earlier version ...
). #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 ...
, or by prohibiting or disincentivising alternatives. #Government restrictions on the transfer of assets abroad through the imposition of
capital controls Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account. These measures ...
. 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 or fees. Examples of adjustments or fees # An adjustment for inflation(in contrast with ...
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 compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...
, 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. A coin is said to be debased if the quantity of gold, silver, copper or nick ...
. 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 were ...
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 (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
,
Mexico Mexico (Spanish: México), officially the United Mexican States, is a country in the southern portion of North America. It is bordered to the north by the United States; to the south and west by the Pacific Ocean; to the southeast by Guatema ...
,
Pakistan Pakistan ( ur, ), officially the Islamic Republic of Pakistan ( ur, , label=none), is a country in South Asia. It is the world's List of countries and dependencies by population, fifth-most populous country, with a population of almost 24 ...
,
Sri Lanka Sri Lanka (, ; si, ශ්‍රී ලංකා, Śrī Laṅkā, translit-std=ISO (); ta, இலங்கை, Ilaṅkai, translit-std=ISO ()), formerly known as Ceylon and officially the Democratic Socialist Republic of Sri Lanka, is an ...
, and
Zimbabwe Zimbabwe (), officially the Republic of Zimbabwe, is a landlocked country located in Southeast Africa, between the Zambezi and Limpopo Rivers, bordered by South Africa to the south, Botswana to the south-west, Zambia to the north, and Mozam ...
) 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 resou ...
. In the case of
Mexico Mexico (Spanish: México), officially the United Mexican States, is a country in the southern portion of North America. It is bordered to the north by the United States; to the south and west by the Pacific Ocean; to the southeast by Guatema ...
financial repression was 6% of GDP, or 40% of tax revenue. Financial repression is categorized as "
macroprudential regulation Macroprudential regulation is the approach to financial regulation that aims to mitigate risk to the financial system as a whole (or "systemic risk"). In the aftermath of the late-2000s financial crisis, there is a growing consensus among policymak ...
"—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 between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year). While it is a "ratio", it is technically measured i ...
s after
World War II World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
" by keeping
real Real may refer to: Currencies * Brazilian real (R$) * Central American Republic real * Mexican real * Portuguese real * Spanish real * Spanish colonial real Music Albums * ''Real'' (L'Arc-en-Ciel album) (2000) * ''Real'' (Bright album) (2010) ...
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 (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
and
World War II World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
. 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. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
's
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
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 the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...
s for
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
. 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 Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
in China than in any other major economy". However, as of December 2014, the
People’s Bank of China The People's Bank of China (officially PBC or informally PBOC; ) is the central bank of the People's Republic of China, responsible for carrying out monetary policy and regulation of financial institutions in mainland China, as determined by ...
"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 The National Bureau of Economic Research (NBER) is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic c ...
working paper,
Carmen Reinhart Carmen M. Reinhart (née Castellanos, born October 7, 1955) is a Cuban-American economist and the Minos A. Zombanakis Professor of the International Financial System at Harvard Kennedy School. Previously, she was the Dennis Weatherstone Senior Fe ...
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
financial crisis of 2007–2008 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
.Carmen M. Reinhart and M. Belen Sbrancia
"The Liquidation of Government Debt"
IMF, 2011, p. 19
"To get access to capital,
Austria Austria, , bar, Östareich officially the Republic of Austria, is a country in the southern part of Central Europe, lying in the Eastern Alps. It is a federation of nine states, one of which is the capital, Vienna, the most populous ...
has restricted capital flows to foreign
subsidiaries A subsidiary, subsidiary company or daughter company is a company owned or controlled by another company, which is called the parent company or holding company. Two or more subsidiaries that either belong to the same parent company or having a sa ...
in central and eastern Europe. Select pension funds have also been transferred to governments in
France France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
,
Portugal Portugal, officially the Portuguese Republic ( pt, República Portuguesa, links=yes ), is a country whose mainland is located on the Iberian Peninsula of Southwestern Europe, and whose territory also includes the Atlantic archipelagos of ...
,
Ireland Ireland ( ; ga, Éire ; Ulster Scots dialect, Ulster-Scots: ) is an island in the Atlantic Ocean, North Atlantic Ocean, in Northwestern Europe, north-western Europe. It is separated from Great Britain to its east by the North Channel (Grea ...
and
Hungary Hungary ( hu, Magyarország ) is a landlocked country in Central Europe. Spanning of the 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 a ...
, enabling them to re-allocate toward
sovereign bond A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments'','' and to repay the face value on the maturity dat ...
s."


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 general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
and thus the
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
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 In Western usage, the phrase post-war era (or postwar era) usually refers to the time since the end of World War II. More broadly, a post-war period (or postwar period) is the interval immediately following the end of a war. A post-war period ...
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 Gridlock is a form of traffic congestion where "continuous queues of vehicles block an entire network of intersecting streets, bringing traffic in all directions to a complete standstill". The term originates from a situation possible in a gr ...
over fiscal reform rumbles on, the greater the chance that 'repression' comes to be seen as the least of all evils".
Gillian Tett Gillian Tett (born 10 July 1967) is a British author and journalist at the ''Financial Times'', where she is chair of the editorial board and editor-at-large, US. She has written about the financial instruments that were part of the cause of the ...

"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 to attack 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 Nominal may refer to: Linguistics and grammar * Nominal (linguistics), one of the parts of speech * Nominal, the adjectival form of "noun", as in "nominal agreement" (= "noun agreement") * Nominal sentence, a sentence without a finite verb * Nou ...
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 approx ...
s (nominal rates below the inflation rate), it reduces or liquidates existing debts and becomes the equivalent of a tax—a
transfer Transfer may refer to: Arts and media * ''Transfer'' (2010 film), a German science-fiction movie directed by Damir Lukacevic and starring Zana Marjanović * ''Transfer'' (1966 film), a short film * ''Transfer'' (journal), in management studies ...
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