Where does money come from? - The nature of money creation and financing for development

Development strategies deal extensively with the question of how to spend money in order to most effectively further economic development. A subset of these policies called Financing for Development discusses the source of this money, i.e. where it should come from rather than where it should go to. Recently a focus on taxation to increase domestic revenue mobilization has come to the fore. At the same time, where money comes from at all – that is, how money is continuously created – has been subject to economic debates particularly since the financial crisis in 2008. Formerly mainstream neoclassical economic theories have been challenged by more systemic theories of money which assert that money in modern societies is created differently and by other financial institutions than previously conceived. Bringing together these two current trends, this thesis investigates how conceptions about money and banking are embedded in the development sector and may implicitly guide its financing for development strategies. I study such perceptions from the donor perspective, using the Norwegian Agency for Development Cooperation (Norad) program Skatt for Utvikling as a case study of a Financing for Development strategy. I employ qualitative methods, mainly through eight interviews with development practitioners in the sector. As my theoretical basis I employ mainstream neoclassical economics and monetary theory contrasted with two more systemic theories: State Theory of Money and Credit Creation Theory of Money. The latter two have been increasingly accepted by academic and professional economics since the financial crisis in 2008. I argue that the development strategies and the practitioners display a thinking about money and banking that is rooted in mainstream neoclassical economics, a branch of economics that, peculiarly, has little to say about these topics. My findings indicate a blind spot when it comes to the subject of money as a systemic phenomenon, and especially regarding the aspects of creation and deletion of money. This implicit endorsement of neoclassical economics among development practitioners explains a striking pattern that emerged in my interviews: When I asked about money creation, my interviewees consistently talked about moving money. Even though the theoretical situation is changing in economics, this change seems to not yet have reached the Norwegian tax for development strategy.