Understanding International Finance

Dr. Asad Zaman, VC PIDE –Monday, 14th May 2018 National Institute of Management, Peshawar — Training for Government Servants on International Finance. This lecture provides a shortened and simplified version of the information in two more detailed lectures on Global Financial Architecture: Rise and Fall of  Gold Standard I, and Gold Standard II. This lecture is addressed to Civil Servants and therefore covers some practical aspects related to policy, and other relevant materials not covered in above lectures. The 50m Video Lecture on YouTube is linked below, followed by an audio file of the question and answer session, and  a 2300 word outline

Question and Answer session after talk was recorded, and audio file is available from:


The slides for the talk can be downloaded from:


An outline of the lecture, based on the slides, is given below:


In this lecture, we will learn about the role of International Finance in Pakistan’s Economy, while discussing the following topics in an indirect manner:

  • Donor Assistance and Pakistan’s Economic Development
  • Pakistan’s Internal Dynamics and International Monetary Fund
  • Balance of payments, fiscal and structural reforms as well as sustainable growth
  • and the impact of Chinese development assistance under CPEC


The Dominant Approach is to accept the International Financial Architecture as it is, which strives to fix the problems it creates and needs LESS knowledge

The Required Approach is to rethink the system from scratch and create an ALTERNATIVE one, for which it is important to first UNDERSTAND that the system is artificial, and then ask ourselves the following questions; How was it created? How does it work?


The origins of Capitalism began with possibility of massive surplus production that led TO changes in all dimensions of human existence – political, economic, social, ways of thinking, acting, and being in the world.


European countries used this surplus to indulge into inter-European that led military evolution, and then search for the markets. In the long nineteenth century, came the inter-European peace together with the global conquest, where 85% of the globe was colonized. All the functional, self-sufficient communities were destroyed and all resources like human or natural were converted into inputs for the purpose of producing European wealth.


For traditional societies, self-sufficiency was a virtue and simple standards of living were prioritized. Excess wealth, luxury, wasteful and ostentatious cons were considered unacceptable. Although not all parts of the community were equal, but they worked together for the common purpose and exercised social responsibility.

Property was a trust, people knew that it belonged to them temporarily and had to be used wisely. The concept of social obligation over-rode individualism and there was a higher purpose in life other than consumption.

But, all of these values got over-turned by surplus production as the concept of Market Society dominated, which led to exploitation of laborers and disintegration of communities. For a more detailed explanation, see: Summary of Polanyi’s Greate Transformation


The purpose of colonization was to make slaves to love their chains. They used free trade as a weapon for de-industrialization of India and introduced the concept of ‘Comparative Advantage. Where the colonies were meant to specialize in raw materials while Colonizers specialized in Industrialization. Hence causing wealth and market development ‘imbalance’. In the Eurocentric History, all good things were produced by Europe making it a type of Benign Colonization. These historical events can be read in detail in Stavrianos famous book Global Rift: Third World Comes of Age.


We need to learn, the importance of learning can be highlighted by the famous Joan Robinson quote “Learn Economics to avoid being deceived by Economists” which could definitely have been a response to John Perkins ‘Confessions of an economic hitman’ where he used economic analysis to deceive nations into taking loans.

The book ‘East Asian Miracle’ which was published by The World Bank, elaborated on 10 strategies that were implemented by miracle countries in strengthen their economy. Just after two years, WTO came into being with the mere purpose of banning signed countries from implementing the same 10 strategies into their economy and thus preventing further East Asia Miracles. This gives us another major reason to learn and dig deeper into the truth.

Not only that, but Austerity measures enforced by IMF are biased and harmful for the borrowing economy. Neither are the current economic theories genuine but portray a rather deceptive and fraudulent system as money creation is hidden by them.


Before World War, initial trade was mostly within the colonial system and there was little inter-European trade.  A center/periphery system was adopted where sterling (hard currency) was used for international trade and soft currencies for trade in colonies. By the end of the nineteenth century, globalization increased massively which led to the dilemma for monetary policy. Two options were available (1) either they could focus on the stability of exchange rates or (2) deal with domestic economic concerns. The tension between the two became one of the major causes of WW1.


The history of Europe was a continuous warfare since there were no more colonial expansion possibilities left. Consequent to that were massive military alliances between all European powers. Two alliances were formed which had Triple Entente on one side and the Central Powers on another, breaking the mechanism of balance of power.

With the conclusion of World War 1, the expansion era as well as the Colonial economics ceased.


We need to understand what money is. For this very purpose, it is important to know that money doesn’t have a value of its own; rather it exists by law also known as Sovereign FIAT.

When we talk about international trade, our domestic laws do not extend out of the boundaries of the country, creating a requirement for an artificial mechanism. This creation of an artificial system takes the consensus of all participating countries into account. One of the simplest mechanism is the use of Gold to which currencies have fixed values to. Facilitating this is Fractional Reserve Banking system which allows control of domestic money supply and covers up minor trade imbalances.


Reflecting that are some of John Maynard Keynes famous quotes:

“The difficulty lies not so much in developing new ideas as in escaping from old ones”

“Economists are unmoved by lack of correspondence between their ideas and reality”

“Economists are like Euclidean Geometers in a non-Euclidean world. They keep rebuking the lines for not keeping straight”


According to the Keynesian Insight, money is required for an economy to function but the amount of money supply in the economy should be balanced. Lack of money may lead to recession, output cannot reach to its full potential and unemployment of resources including labor. While excess of money beyond maximum possible output leads to inflation, and other consequences. Therefore, money needs to be in the right hands. For more detailed explanations, see: Understanding Macro I, Understanding Macro II, and Understanding Macro III


Amount of money is of central importance as it must be maintained at exactly the right level. In contrast to that, it is taught that money is neutral, and a veil which is of no importance; this is also the first illusion of Macroeconomics.

Health of the domestic economy is crucially dependent on having the CORRECT quantity of money in circulation and also that the money must be in correct hands.


It is said that, to fix evils of the financial system, we should go back to gold which is not possible. The amount of gold is fixed and cannot adjust flexibly to the needs of the economy.

Other proposed solution is to adjust prices to make gold enough – which may be theoretically possible but practically impossible. Then the Fractional Reserve Banking was proposed which does work, but has many defects.


In Fractional Reserve Banking, Government and Banks issue credit, promissory notes and only a fraction of notes need to be backed by gold. While within a country no backing is necessary, trade across countries requires a system, one of which was Gold and became dominant for about two decades before World War1.


Increasing globalization leads to conflicting goals for monetary policy (under free capital movements) While maintaining stable exchange rates may require tight monetary policy, stimulating domestic economy requires loose/expansionary policy. The question arises; which should we prefer?


Capitalist economies are volatile. They never run smoothly and to understand why, we have to understand Keynesian economics.

The Keynesian policy suggests that in order to prevent inflation during boom, money should be restrained while in recession, money supply should be increased to stimulate the economy. This is called a counter-cyclical monetary policy in which business cycles and economies move in the opposite directions; which is also the current economic policy.

The system, however, does exact the opposite,  when the economy is in boom, banks create money and the government run an expansionary budget (pro-cyclical) In contrast to that, when a country is hit with recession, government tightens the budget and the private sector  reduces its the money supply that leads to deep and prolonged recessions. This is also what the major problem with Fractional Reserve Banking is.


“Of all the many ways of organizing banking, the worst is the one we have today. Change is, I believe, inevitable. The question is only whether we can think our way through to a better outcome before the next generation is damaged by a future and bigger crisis. This crisis has already left a legacy of debt to the next generation. We must not leave them the legacy of a fragile banking system too.”


We have to understand that money is an advanced human invention and is created by the Government. It is a way of quantifying debt which converts social obligation to financial obligation. A book by David Graeber known as “Debt: The first 5000 years” may help the reader in understanding deeper facts and truth about money.


As trading increased, Fractional Reserve Banking and the International Trade System couldn’t work together because of trade imbalances and not having enough gold to back their currencies up; which was one of the many causes of war. In domestic trading, being backed up by gold wasn’t as important as that in International trade but the unavailability of gold internationally as well let to the breakdown of The Gold Standard. As a result Bretton Bretton-Woods agreement (1944) came into being and created a new system for international trade – The Gold Exchange Standard which did not use gold itself but currencies which were denominated in gold.

As a result of that, the world went on a de-facto dollar standard (Nixon Shock in 1971). Which came to its end after USA printed large amount of dollars to finance the Vietnam War (which was against the Bretton-Wood’s agreement) leading the world to adapt the Floating Currency Exchange Rate system instead.


Capitalism is about harnessing and exploitation of all resources, human or natural, for the production of private wealth. It is further divided into:

(1) Industrial capitalism: concerns with creation or control of products

(2) Financial capitalism: control of MONEY (Gold or Currency).


During this era millions of pounds of revenue were transferred from colonies to UK. Hence the colonies became improvised as there were repeated famines, no investment, and no industrialization. Taking the post war era into account, development was directly proportional to the level of sovereignty of countries (not being ruled by colonial countries) to the point where they were able to conduct independent policies. This is the reason why East Asia Miracle happened as well. East Asian countries were able to craft independent economic policies because the Cold War between Russia and the USA prevented complete dominance of either side, and left them some freedom.

During this growth process, the coconut class played an important role. These people allied with the foreign exploiters for personal benefits or helped to exploit/govern the local people preventing the development of a community as a whole. If the government doesn’t act similar to the way colonizers did in India (focus on wealth maximization rather than economic development) it may very well lead to the development of the country.


At present, we must do our best to form a class who may be interpreters between us and the millions whom we govern, –a class of persons Indian in blood and color, but English in tastes, in opinions, in morals and in intellect.

Macaulay’s Children are STILL ruling Pakistan.


Financial capitalism works by printing dollars to buy everything including oil, political leaders, armies, weapon and soldiers as their lives are measured in terms of their monetary value.


Large Foreign loans/aids by donors are used by the authorities to pursue their own agendas; which includes creating planned social changes i.e. maximizing resources for production of wealth and minimizing ideological obstacles to wealth.

The system works by buying up the 9% to enforce the agenda of the 1% on the 90%– the intermediaries who exploit their own nation on behalf of colonizers. Loans are Salaries, Taxes are revenues to collect and pay.


Either we feed our family, send children to Beaconhouse, O/A level schools, buy them good healthcare and participate in governing the country or rebel against the system – be a SERVANT of the people.

Where Shaitan scares you of poverty, Allah T’aala offers great rewards.

THE ETERNAL CHOICE: To collaborate with the colonizer, or to sacrifice for the people

Selected Verses from: Nisar Main Teri Galiyon pe Aye Watan

For English translation, see: My Life, a living sacrifice to your pathways, o my Nation

Yuhin hamesha ulajhati rahi hai zulm se khalq  –  Na unki rasm nai hai, na apni reet nai

Ever, the people have battled against cruelty – both sides continue their eternal battle

Yuhin hamesha khilaye hain humne aag mein phool – Na unki haar nai hai na apni jeet nai

As always, we have turned the fire into flowers — their loss is written, just as our victory is written.

Isi sabab se falak ka gilaa nahin karate – Tere firaq mein hum dil bura nahin karate

Because of this, we do not complain to the skies; We do not let the pain of detachment and loss affect our hearts badly.

Gar aaj tujhse juda hain to kal baham hongey  Yeh raat bhar ki judai to koi baat nahin

Though we are separated today, tomorrow we will be together — this night of separation means nothing.

Gar aaj auj peh hai taal-e-raqib to kya -Yeh chaar din ki khudai to koi baat nahin

Today the forces of evil reign, but their short-lived victory means nothing

Jo tujhse ahad-o-wafa ustuvaar rakhate hain Ilaaj-e-gardishe lailo-nihaar rakhate hain.

Those who stay faithful to you (vision of victory over evils, and triumph of love) have grasped the remedy for tragedies of night and day — (daily living).

Serving the people, out of love of Allah, is its own reward

This entry was posted in Historical Context of Economics by Asad Zaman. Bookmark the permalink.

About Asad Zaman

BS Math MIT (1974), Ph.D. Econ Stanford (1978)] has taught at leading universities like Columbia, U. Penn., Johns Hopkins and Cal. Tech. Currently he is Vice Chancellor of Pakistan Institute of Development Economics. His textbook Statistical Foundations of Econometric Techniques (Academic Press, NY, 1996) is widely used in advanced graduate courses. His research on Islamic economics is widely cited, and has been highly influential in shaping the field. His publications in top ranked journals like Annals of Statistics, Journal of Econometrics, Econometric Theory, Journal of Labor Economics, etc. have more than a thousand citations as per Google Scholar.

2 thoughts on “Understanding International Finance

  1. Pingback: Once more, unto the IMF? | An Islamic WorldView

  2. Pingback: A Lopsided Monetary System | An Islamic WorldView

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