Printing money can be a hidden form of taxation in developing countries

blogs.lse.ac.uk
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fairly difficult
Printing new money tends to create inflation unless excess money is removed from circulation by higher taxes. Muneeb Sikander writes that governments in emerging economies usually lack the ability …
Printing new money tends to create inflation unless excess money is removed from circulation by higher taxes. Muneeb Sikander writes that governments in emerging economies usually lack the ability to collect higher taxes, especially from the wealthy, and might choose to print money as opposed to taking more financially prudent mechanisms such as raising taxes or carrying out necessary fiscal reforms.

Since the COVID crisis began, developing countries have been struggling to boost their national output at desired levels as a result of the slowdown in foreign direct investment. Local private sector investment has not been enough to compensate for the gap. The global narrative today is, therefore, increasingly focused on the twin crisis that developing countries are confronted with: a balance of payments and debt crisis that may upend development progress, and a development crisis that could erupt into a debt crisis as the state of their economies deteriorate (Brookings Institute, 2021).

To counter these negative effects, it is widely argued by academics and experts that governments ought to spend more by borrowing. However, many such narratives have failed to account for the risk that could arise from a higher rate of inflation. Given that economics is the study of trade-offs, it is vital to understand how the rate of inflation ought to factor in towards the decisions of governments in any developing countries that wish to finance higher levels of expenditures by taking on more debt. As the American economist Thomas Sowell once remarked: "There are no solutions. There are only trade-offs."

The mechanics of hidden taxation via inflation

Government expenditures need to be financed and, since taxes are usually insufficient, a significant amount of…
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