It is widely believed that any increase in the money supply in developing countries would lead to higher prices or the emergence of inflationary pressures. However, this is not always true. A reasonable amount of newly created money helps the development of the economy by increasing the level of investment. In developing economies, large amounts of natural and human resources are unused and underutilized and can be used for productive purposes.
If the newly created money is used to invest in projects such as small irrigation jobs, land reclamation plans, flood control and soil erosion measures, artisanal industries that produce rapid returns, the danger of inflation will not exist. . These fast-paced projects will increase the production of essential consumer goods in the short term, thus avoiding price increases.
Furthermore, if the development strategy is such as to give higher priority to agriculture and other wage goods industries, and in addition, organizational and institutional reforms are undertaken to provide all farmers with irrigation systems, fertilizers and high-yielding varieties, agricultural production can increase in the short term. In this context, it is possible to create new money to increase the level of investment without much negative effect on prices.
Monetization and economic growth:
Furthermore, as is well known, most of the underdeveloped countries have a large non-monetized sector (i.e. barter) in which production is destined exclusively for subsistence. To break the subsistence nature of economic activity and thus generate new forces for economic growth, its monetization is required. The introduction of money helps you connect with the modern industry. This contact of the subsistence sector with the modern sector will lead to the expansion of its production.
To get the products of the modern industrial sector, people who are engaged in the subsistence sector will make efforts to increase their production. In this way, a surplus of production will be generated on their own consumption which will finally break their subsistence nature.
It is supported by the past history of developing countries. During the colonial period, the monetization of the peasant sector led to the expansion of exports in exchange for imported industrial products. This has greatly accelerated their agricultural development.
Similar to the growth of production for export, the introduction of money into the subsistence agricultural sector and its contact with the modern sector would lead to an increase in the marketable surplus of cereals and other agricultural products, an important factor for economic development.
If an increase in agricultural prices occurs as a result of an increase in investments financed by the money created, as is likely to be the case, it would serve as an incentive to produce more grain and supply it to the market. The increase in agricultural income will increase the demand for industrial products and thus accelerate their growth.
Furthermore, monetizing the subsistence sector will also help increase the volume of savings. Monetization will put this industry in contact with financial institutions such as commercial and cooperative banks and insurance companies.
Opportunities to earn more income through savings interest will increase people’s saving propensity in today’s subsistence sector. If proper monetary policies are applied, then instead of consuming or accumulating all of their income, these people can deposit some of it with financial intermediaries.