Good Governance Must Be Punished

Table of Contents

How Global Financial Systems Reward Bad Policy?

This article examines a disturbing paradox in international economic systems: countries implementing beneficial governance reforms systematically face currency devaluation and financial pressure, while nations pursuing harmful policies often see their currencies strengthen. Through analysis of currency valuation methodologies, particularly Purchasing Power Parity (PPP) calculations and foreign exchange markets, we demonstrate that these systems contain inherent structural biases that punish good governance and reward economic extraction. The case study of India’s Goods and Services Tax (GST) implementation in 2017, followed by 25-30% rupee depreciation despite economic improvements, illustrates this phenomenon. We argue that these are not bugs in the system but features designed to maintain existing hierarchies in global finance.

Introduction

The conventional wisdom in international economics suggests that good governance should strengthen currencies and attract investment. Countries that reduce taxes on essential goods, improve administrative efficiency, and enhance financial inclusion should theoretically see their currencies appreciate as economic fundamentals improve. Yet empirical evidence suggests the opposite pattern: nations implementing pro-citizen policies often face immediate currency pressure, while those maintaining extractive systems see their monetary positions strengthen.

This article argues that what appears as market failure is actually market design. The global financial architecture, built around flawed currency valuation methodologies, systematically punishes developing economies for implementing beneficial reforms while rewarding dominant economies for maintaining extractive practices. This creates a perverse incentive structure where good governance becomes economically disadvantageous within the current international framework.

Want to read academic paper on PPP with technical jargon? Read it here.

The House Always Wins: Understanding Systemic Advantage

The Casino Analogy in Global Finance

In any well-designed casino, individual games may seem fair, but the mathematical structure ensures the house maintains a long-term advantage. Similarly, global financial systems present the appearance of neutral market mechanisms while containing structural biases that consistently favor certain players.

How the House Edge Works in Currency Markets:

The “house” in global finance consists of economies that benefit from existing measurement and exchange systems. Like a casino, they don’t need to win every transaction, just maintain systematic advantages that compound over time. The mathematical edge comes not from cheating individual transactions but from controlling the rules by which all transactions are measured and valued.

Key Mechanisms of the House Edge:

Methodological Control: Dominant economies influence how currency values are calculated
Data Weighting: Formal markets are over-represented relative to informal economies
Circular Logic: Measurements use outcomes as inputs, creating self-reinforcing cycles
Speculation Premium: Short-term capital flows overwhelm long-term fundamentals

The Rigged Rules

Just as casinos set odds to ensure profitability regardless of individual outcomes, global financial systems establish measurement frameworks that produce predictable patterns of winners and losers. Countries playing by these rules face the same mathematical certainty as gamblers: occasional wins, but systematic long-term losses.

The House Always Wins Because:

When developing countries improve governance → Measurement systems can still show weakness
When they maintain bad policies → They’re criticized for poor fundamentals
When they try to game the system → They’re accused of manipulation
When they accept the system → They validate their own systematic disadvantage

The Tautological Trap: How PPP Creates Circular Logic

The Fundamental Flaw

Purchasing Power Parity methodology suffers from a basic logical error: it uses the very phenomenon it’s supposed to measure (relative price levels) to determine the measurement itself. This creates an inescapable feedback loop where higher currency values justify themselves through the higher prices they create.

The Circular Process:

Currency exchange rates influence local prices for traded goods
Higher local prices get interpreted as higher “purchasing power”
Higher calculated purchasing power justifies higher currency valuations
Higher currency valuations influence local prices for traded goods

This isn’t measurement but mathematical circularity masquerading as economic analysis.

Real World Examples:

Bitcoin

The rise of Bitcoin provides compelling contemporary evidence that millions of users have actively sought alternatives precisely during the period when PPP methodology was being refined through successive ICP cycles. This timing reveals a profound disconnect between institutional confidence in sophisticated currency measurement systems and actual market behavior, where participants simultaneously rejected both market exchange rates subject to central bank manipulation and PPP calculations trapped in circular logic. Bitcoin’s algorithmic scarcity bypasses the tautological problem entirely, as its value is not determined by retail prices that reflect existing currency relationships or by speculative forces that disconnect market rates from productive capacity. The acceleration of cryptocurrency adoption during periods of currency instability demonstrates that populations already recognize currency weakness.

The India Paradox

Consider two purchases available to an Indian consumer:

₹50 thali: Represents actual purchasing power, feeding a family nutritiously
₹4,000 branded mixer: Same product available as ₹400 generic, but formal retail pricing inflated by taxation, branding, and distribution markups

PPP methodology counts the ₹4,000 mixer more heavily in calculations because it’s captured in formal retail data, while the ₹50 thali gets underweighted. The system thus systematically undervalues the currency that enables the more economically rational purchase.

This reveals PPP’s structural bias: it measures “purchased power” under constrained conditions rather than actual “purchasing power” reflecting consumer choice and economic efficiency.

The Price Level Index Deception

India’s Price Level Index of 47.6 compared to USA’s 100 doesn’t mean Indian consumers have less purchasing power. It often means they have MORE purchasing power because they can obtain equivalent goods and services at lower prices. The methodology inverts this advantage into an apparent disadvantage.

Perverse Incentives: Rewarding Bad Policy

How PPP Encourages Harmful Governance

The current system creates backwards incentives where countries can improve their currency valuations through economically destructive policies:

Taxation Rewards: Higher taxes increase retail prices → Higher PPP calculations → Stronger apparent currency value. Countries are thus incentivized to overtax their citizens to boost international currency rankings.

Inflation Encouragement: Rising prices boost PPP calculations, making inflation appear beneficial for currency strength. This completely inverts sound monetary policy where stable prices indicate economic health.

Formal Market Bias: Countries with monopolistic retail structures see their currencies valued higher than those with competitive informal markets, even when the informal markets provide better consumer outcomes.

The GST Case Study: Punishment for Improvement

India’s implementation of GST in July 2017 provides a perfect natural experiment. The reform:

Simplified a complex tax structure
Reduced tax rates on many essential goods
Improved administrative efficiency
Enhanced tax compliance and formalization

Economic Theory Prediction: These improvements should strengthen the rupee as India became a more attractive investment destination with better governance.

Actual Outcome: The rupee depreciated 25-30% from approximately ₹65 per USD to ₹88 per USD between 2017-2025, despite India’s economy growing faster than most global peers during this period.

Why This Happened: PPP calculations and forex markets interpreted India’s tax simplification as reducing “price levels” and therefore weakening currency justification, while speculation and capital flows responded to other factors entirely unrelated to governance quality.

The Inflation Trap

Countries discover they can boost their currency’s PPP rating by allowing moderate inflation, which raises local prices and makes their purchasing power appear stronger in international comparisons. This creates systematic bias toward inflationary policies, exactly opposite to sound economic management.

Meanwhile, countries maintaining price stability get penalized in PPP calculations because their stable prices are interpreted as indicating weaker currency values. Good monetary policy becomes a currency liability under this framework.

Market Exchange Rates: The Speculation Problem

Beyond Economic Fundamentals

Foreign exchange markets process approximately $7.5 trillion daily, vastly exceeding actual trade requirements. This means currency prices are driven primarily by speculation, capital flows, and sentiment rather than underlying economic performance or governance quality.

Short-term Noise Overwhelms Long-term Signal: Daily currency movements reflect trader psychology, central bank interventions, and capital flow patterns that have little relationship to whether countries are implementing beneficial policies.

Interest Rate Distortions: Countries maintaining higher interest rates often see currency appreciation not because their economies are stronger, but because higher yields attract speculative capital. This can reward economically harmful tight monetary policy while punishing countries maintaining growth-friendly rates.

Political Manipulation: The Plaza Accord Precedent

The 1985 Plaza Accord demonstrates that currency “markets” are politically managed when convenient. Coordinated central bank intervention deliberately devalued the dollar against the Deutsche Mark and Japanese Yen, proving that exchange rates reflect political decisions rather than natural economic forces when major powers find market outcomes inconvenient.

This historical precedent reveals that market exchange rates are allowed to operate “freely” only when they produce outcomes acceptable to dominant economies. When market forces threaten existing hierarchies, coordinated intervention overrides market mechanisms entirely.

The Speculation Override

Fundamental economic analysis consistently fails to predict short and medium-term currency movements because speculation dominates price discovery. Countries implementing excellent governance can see their currencies attacked by speculators, while nations with poor fundamentals maintain strong currencies through speculative support.

This separation of currency values from governance quality means that good policy implementation provides no protection against currency crises, while bad policy implementation may face no currency consequences if speculators find reasons to support those currencies.

Structural USD Bias: The Rigged Measurement System

Formal Market Advantage

PPP methodology systematically favors economies with formal retail structures over those with competitive informal markets:

USA Benefits:

Large retail chains dominate pricing data collection
Service economy weighting favors high-cost formal providers
Full tax integration captured in price calculations
Branded products over-represented in price baskets

India Disadvantaged:

50% unorganized sector underweighted in calculations
35% self-employed population inadequately captured
Generic alternatives (₹5 medicines vs ₹100 branded) marginalized
Efficient informal services undervalued

The Data Collection Bias

International pricing surveys naturally gravitate toward formal retail establishments because they’re easier to locate and survey consistently. This creates systematic bias against economies where consumers have access to more efficient informal alternatives.

A medicine costing ₹100 in formal retail but available as ₹5 generic represents superior purchasing power for Indian consumers. But PPP calculations count the ₹100 formal price more heavily, making India’s currency appear weaker when it actually enables better consumer outcomes.

Digital Formalization: India’s Alternative Data Revolution

India’s UPI system processes over 20 billion transactions monthly, creating comprehensive data about actual consumer spending patterns. This digital infrastructure captures:

Real transaction values reflecting consumer choices
Informal sector activity through digital payment adoption
Geographic and demographic spending variations
Volume-weighted pricing that reflects market preferences

This alternative data source could support sales-based pricing models that avoid PPP’s formal market bias, but current international systems ignore this information in favor of traditional survey methodologies.

The False Choice: Neither System Works

Market Rates Fail Governance Tests

Foreign exchange markets consistently fail to reward good governance or punish bad policy:

Speculative flows overwhelm fundamental analysis
Political interventions override market mechanisms when convenient
Short-term volatility bears no relationship to long-term policy quality
Capital flight can punish countries for implementing beneficial reforms

PPP Methodology Inverts Reality

Purchasing Power Parity calculations systematically misrepresent economic relationships:

Circular logic uses currency-influenced prices to justify currency values
Formal market bias undervalues competitive informal economies
Inflation and taxation get rewarded instead of punished
True purchasing power gets confused with constrained purchasing behavior

Historical Precedent: The Plaza Accord Lesson

The 1985 Plaza Accord proved that neither market rates nor PPP calculations provided reliable guidance when major economies faced “unsustainable imbalances.” Coordinated political intervention overrode both market forces and purchasing power calculations, demonstrating that currency values ultimately reflect political arrangements rather than economic measurements.

Both systems failed to prevent or predict the need for major intervention, yet both systems were maintained afterward as if they provided meaningful guidance.

Contemporary Evidence: Western Economic Collapse

The Chickens Come Home to Roost

The same extraction mechanisms that disadvantaged developing economies for decades are now consuming their creators:

United Kingdom: Faces “significant fiscal challenges” requiring potential IMF assistance, using the same language once reserved for African nations in the 1980s.

France: Confronts debt-to-GDP ratios that would have triggered “structural adjustment programs” if it were a developing economy in previous decades.

United States: Carries $37 trillion in debt that represents mathematical impossibility under normal economic logic, sustained only by currency privilege that enables unlimited money printing.

The Warning System Failed Its Creators

Currency valuation mechanisms were supposed to provide early warning of economic distress, but they completely missed the systemic weaknesses in Western economies:

PPP calculations continued showing Western currencies as strong while underlying productive capacity deteriorated
Forex markets supported dollar dominance while debt sustainability became impossible
Both systems gave false confidence to economies becoming increasingly dependent on financial manipulation rather than real wealth creation

Poetic Justice in Action

Countries that were forced to build real productive capacity while being systematically undervalued now demonstrate stronger economic fundamentals than their former extractors. India’s manufacturing growth, digital infrastructure, and financial inclusion occurred despite currency disadvantages, while Western economies became addicted to asset bubbles and debt expansion enabled by currency privilege.

The extraction systems succeeded too well, until they exhausted external targets and began consuming themselves.

India’s Strategic Response: Building Alternative Infrastructure

Not Accidental Development

India’s comprehensive digital financial infrastructure represents deliberate strategic planning to escape rigged measurement systems:

UPI Revolution: 20+ billion monthly transactions create alternative data universe bypassing Western-controlled payment systems

RuPay Independence: Domestic payment processing reduces dependence on Visa/Mastercard networks

Financial Inclusion: 50 crore new bank accounts provide comprehensive transaction data supporting alternative valuation methodologies

GST Integration: Digital tax system captures previously informal economic activity

Reading Between the Lines

Economic advisors and policy makers understood the strategic vulnerability created by Western-controlled measurement systems. Rather than openly challenging these systems (which would trigger retaliation), they built parallel infrastructure that could eventually render old systems irrelevant.

The Sophisticated Strategy:

Publicly participate in existing international frameworks
Privately build comprehensive data infrastructure supporting alternative systems
Create optionality for when current systems fail or become inconvenient
Maintain plausible deniability while systematically building escape routes

Sales-Based Pricing Alternative

India now possesses the data infrastructure to implement sales-based pricing models that could replace PPP methodology:

Method: Total sales ÷ Volume = Average price reflecting actual consumer choices rather than formal retail survey data

Advantages:

Captures real spending patterns including informal economy
Avoids circular logic by using transaction data rather than price surveys
Transparent methodology that can be independently verified
Reflects consumer preferences rather than constrained purchasing behavior

The Path Forward: Revolutionary Change Required

Why Reform Won’t Work

Attempting to reform existing currency valuation systems faces fundamental obstacles:

Institutions benefiting from current arrangements resist methodological changes
Academic economics is professionally captured by existing frameworks
International organizations depend on current systems for their authority and funding
Gradual reform gets co-opted or neutralized by vested interests

Building Parallel Systems

The solution requires developing alternative frameworks that demonstrate superior predictive power and economic outcomes:

Multi-Dimensional Valuation: Combine production costs, labor productivity ratios, energy equivalence measures, housing ratios, and food security indices

Digital Transaction Integration: Use comprehensive payment system data to capture real economic activity rather than survey-based approximations

Weighted Consumer Behavior: Distinguish between purchasing power (consumer choice capacity) and purchased power (constrained purchases under current systems)

The Network Effect Strategy

Rather than confronting existing systems directly, alternative methodologies can gain adoption through demonstrated superior performance:

Countries using better measurement systems make better policy decisions
Better policies produce better economic outcomes
Success attracts other nations to adopt similar approaches
Network effects eventually make old systems irrelevant

India’s Complete Financial Insulation: Preparing for Global Collapse

The Fortress Economy

India has achieved something remarkable: virtually complete financial insulation from the global system. While this might seem like mere policy coincidence, the comprehensive nature of this insulation suggests deeper strategic awareness.

The Digital Fortress Architecture:

UPI processes 20+ billion transactions monthly, creating self contained payment ecosystem
RuPay cards eliminate dependence on Western payment networks
50 crore bank accounts provide comprehensive financial inclusion
Rupee based digital transactions can function independently of dollar clearing systems

Global Reach Without Global Dependence: India’s rupee based UPI system is designed to work across international boundaries, meaning even if Western financial systems collapse entirely, Indian consumers and businesses could continue seamless digital transactions globally. This isn’t just domestic resilience; it’s building alternative global infrastructure.

The Collapse Question: Reading the Warning Signs

The evidence suggests we may be witnessing the final stages of the Western controlled global financial system. Consider the mathematical impossibilities now visible:

United States: $37 trillion debt with no conceivable repayment mechanism. The system survives purely on currency privilege that allows unlimited money printing, but this represents a mathematical pyramid scheme that must eventually collapse.

United Kingdom: A former global financial center now contemplating IMF assistance, using language once reserved for African nations during structural adjustment periods.

European Union: Facing the same fiscal mathematics that would trigger intervention programs if these were developing economies.

The Systematic Nature: These aren’t random national problems. They represent the logical endpoint of extraction systems that eventually exhaust their targets and consume themselves.

Is the Global System Heading Towards Collapse?

The Mathematical Certainty

When extraction systems exhaust external targets, they face mathematical collapse. The Western economies built their prosperity on:

Currency privilege enabling unlimited borrowing
Financial manipulation rather than productive capacity
Debt expansion rather than wealth creation
Asset bubbles rather than real economic foundations

None of these mechanisms can continue indefinitely. The mathematics eventually force reckoning, regardless of political will or institutional authority.

The Warning System’s Final Failure

The same currency valuation methods that failed to warn about 2008, that punished good governance while rewarding extractive policies, are now failing to warn their creators about systemic collapse. PPP calculations still show Western currencies as strong while underlying foundations crumble. Forex markets still support dollar dominance while debt sustainability becomes impossible.

This isn’t measurement failure anymore. It’s measurement systems desperately trying to maintain illusions that no longer align with economic reality.

India’s Strategic Position

While Western economies face mathematical impossibilities, India has systematically built:

Real productive capacity despite currency disadvantages
Alternative financial infrastructure independent of Western control
Comprehensive digital payment systems that could function globally
Economic foundations based on actual value creation rather than financial extraction

The Strategic Foresight: India’s leadership appears to have understood that the global system would eventually collapse under its own contradictions. Rather than trying to reform an stubborn system, they built parallel infrastructure that could function independently when collapse occurs.

The Inevitable Timeline

The collapse isn’t a question of if, but when. The mathematical contradictions have reached levels that cannot be sustained through financial manipulation alone:

Debt levels that cannot be serviced without currency debasement
Currency privilege that depends on systems losing credibility globally
Extraction mechanisms that have exhausted available targets
Asset bubbles that represent claims on wealth that doesn’t exist

The Post Collapse World

When the current system collapses, countries with alternative infrastructure will inherit economic leadership by default. India’s rupee based UPI system, designed to work globally, positions it to become the foundation of post collapse international commerce.

The countries that were systematically disadvantaged by rigged measurement systems may discover they were actually building superior economic foundations while being forced to develop real productive capacity and genuine financial infrastructure.

Conclusion: The Emperor Has No Clothes, and Winter Is Coming

The difficulty lies, not in the new ideas, but in escaping from the old ones.”

— John Maynard Keynes, 1935

The evidence leads to an uncomfortable but mathematically inevitable conclusion: the global financial system is heading toward collapse. The same extraction mechanisms that punished good governance and rewarded financial manipulation have reached their logical limits.

Current currency valuation methods represent intellectual fraud maintained through institutional capture rather than honest economic measurement. Both market exchange rates and PPP calculations systematically reward extractive policies while punishing beneficial governance, creating perverse incentives that damage global economic efficiency.

The Core Insight: These aren’t measurement systems that happen to produce biased results. They’re biased systems disguised as measurements, designed to maintain existing hierarchies regardless of actual economic performance or policy quality.

But here’s what makes this analysis ultimately hopeful rather than merely critical: countries that were forced to build real economic foundations while being systematically undervalued may be better prepared for the post collapse world than those that benefited from the rigged system.

India’s Strategic Victory: While being punished for good governance, India built comprehensive alternative infrastructure that could function independently when the current system fails. The rupee based UPI system that works globally represents not just domestic policy success, but preparation for international economic leadership in a post dollar world.

The emperor has no clothes. Neither market rates nor PPP provides reliable currency valuation. The house always won by rigging the rules, but mathematical reality eventually overrides even the most sophisticated rigging.

The question isn’t whether the global system will collapse. The mathematics guarantee it will. The question is whether alternative systems will be ready to provide stability and prosperity in the aftermath.

India’s comprehensive financial insulation suggests at least one major economy read the warning signs correctly and prepared accordingly. Good governance was punished by a dying system, but it may inherit the earth when that system completes its self destruction.