development Archives

New Thinking in the News

These are the latest reflections from new thinkers around the on what should have been done already, what must be done next, and what the near future may look like:

1 | New Study Reveals Stark Picture of Bay Area Poverty Leading up to Covid-19 Pandemic, in Tipping Point Community, by john a. powell.

“Known for its progressive politics and rich diversity, the San Francisco Bay Area is no exception to patterns of systemic racial and economic inequality found across the nation,” said john a. powell, Director of the Othering & Belonging Institute at UC Berkeley. “In fact, the Bay Area’s hot housing market and booming economy may exacerbate these trends, making it harder for low-skilled workers to find affordable housing and pay their bills. This study, drawing upon an original survey of Bay Area residents and census data, gives us a vivid portrait of poverty and inequality, and what we should do about it, even before the COVID-19 pandemic occurred. Now this research is more urgent than ever.”

2 |30 million Americans are unemployed. Here’s how to employ them in Vox, by Pavlina Tcherneva

“But the program will actually stabilize these fluctuations. There are reasons unemployment feeds on itself. If you have this kind of preventative program, where people trickle into other employment rather than unemployment, their spending patterns are stabilized, so you have smaller fluctuations in the private sector. We see this in countries that have active labor-market policies, that do a lot more public employment than we do.”

3 | Messages from “Fiscal Space” in Project Syndicate by Jayati Ghosh

“Well before the pandemic arrived, it was evident that the financialization of the global economy was fueling massive levels of inequality and unnecessary economic volatility. In this unprecedented crisis, the need to rein it in has literally become a matter of life or death.”

4 | The ‘frugal four’ should save the European project in Social Europe by Peter Bofinger

“It is therefore crucial that the frugal four [Austria, Denmark, Sweden and the Netherlands] abandon their opposition to a joint financing facility at EU level. Only in this way will the European project be able to survive and Europe respond to this terrible crisis in a manner as effective as in the United States. For, as the US economist Paul Krugman has put it, paraphrasing Franklin Roosevelt, ‘The only fiscal thing to fear is deficit fear itself.’”

5 | Making the Best of a Post-Pandemic World, in Project Syndicate, by Dani Rodrik

“It is possible to envisage a more sensible, less intrusive model of economic globalization that focuses on areas where international cooperation truly pays off, including global public health, international environmental agreements, global tax havens, and other areas susceptible to beggar-thy-neighbor policies. Insofar as the world economy was already on a fragile, unsustainable path, COVID-19 clarifies the challenges we face and the decisions we must make. In each of these areas, policymakers have choices. Better and worse outcomes are possible. The fate of the world economy hinges not on what the virus does, but on how we choose to respond.”

6 | Two Rounds of Stimulus Were Supposed to Protect Jobs — Instead We Have Record Unemployment with Tom Ferguson in the Institute for Public Accuracy

“We all know that the U.S. response to COVID-19 has lagged far behind other countries. But now a real trap is closing. The public premise of the government stimulus programs was that they would be needed only for a short period and channeling aid to businesses would enable them to retain workers on their payrolls. So vast sums were handed out while the Federal Reserve intervened massively in financial markets. But now unemployment is soaring, in a country whose health insurance system is keyed to the workplace. Small businesses are collapsing and plainly never got much aid. Workers are also dropping out of the workforce in enormous numbers while a major health and safety crisis rages. Government policy has got to address these issues before it’s too late. It can’t simply grant blanket immunity to businesses for the sake of a hasty, premature reopening. A major re-calibration of policy is in order.”

Every week, we share a few noteworthy articles that showcase the work of new economic thinkers around the world. Subscribe to receive these shortlists directly to your email inbox.

Not such a Great Equalizer after all

Because it has no regard for borders, the coronavirus has been referred to as the Great Equalizer. But its impact is not equal by any stretch of the imagination. While China, Europe, and Northern America may recover relatively fast, emerging market economies are less resilient. The combined health, economic, and financial tolls they now endure may cause them to face the greatest recession in decades.

By Jack Gao | When COVID-19 hit, China’s strong state and centralized public administration allowed it to suppress the domestic spread. In Europe, welfare systems and appropriate policy responses made sure workers have less to worry about when economies reopen. The United States (despite Trump’s handling leaving much to be desired) enjoys a unique status of its own. The American economy and “exorbitant privilege” of the US dollar mean that policy responses can be put forth in short order, and with relatively few negative repercussions. For most emerging market economies, however, none of this can be taken for granted. The coronavirus is shaping up to be the “perfect storm” that many feared. It could sink the developing world into a deep economic recession.

No Doctors and No Food

Let’s start with public health. While the increase of new deaths in the epicenters—US, UK, Italy, Spain—appears to be slowing, the virus rages on in major developing nations. Russia, India, Mexico, and Brazil continue to report well above a thousand new daily deaths, and many of them are still on an upward trajectory. In India, a brief relaxation of the lockdown was met with a jump in deaths, underscoring that the fight to contain the virus will be an uphill battle.

Although health systems are being tested everywhere, the ones in developing countries were already under strain before COVID-19 reared its head. For example, the average number of health workers per 1000 people in OCED countries is 12.3. In the African region, this ratio is only 1.4.

As if the health crisis is not crushing enough, the United Nations warns of a “hunger pandemic” as an additional 130 million people could be pushed to the brink of starvation this year, with the vast majority of them in developing countries. The coronavirus may cross borders easily, but the suffering it causes is not equal across countries.

Locked Down and Out of Work

If the human toll of the pandemic is appalling, the economic damages to countries are unprecedented as well, as countries implement lockdown and “social distancing” to combat the virus. In the latest World Economic Outlook growth projections by the IMF, emerging market economies as a whole are expected to contract 1% this year, for the first time since the Great Depression. Literally all developing countries may be in economic decline as a result of COVID-19, with India and China eking out paltry growth. Still, these headline numbers mask the true extent of economic hardship.

Take working from home, for example. Economists have documented a clear relationship between the share of jobs that can be done at home and the national income level. In a developed country like the United States, some 37 percent of jobs can be performed at home—education, finance and IT being at the top of the scale. In some developing economies, less than 10 percent of jobs can be done remotely.

On top of all this, global remittances are collapsing. The amount of money transferred to migrants’ home countries may fall by 20 percent as workers see dwindling employment. This is terrible news for countries like Lesotho, where remittances are as much as 16% of GDP.

Where’d the money go?

The global financial system exacerbates these struggles with its core and periphery topology. During good times, foreign capital flows into emerging markets, looking for higher yields. But in bad times, when that capital is needed most, it swiftly disappears. This dynamic is now on full display. As investors started to realize the true scale of the pandemic and major central banks initiated new rounds of monetary easing, emerging economies saw capital flight as investors rushed to safer assets. An estimated 100 billion portfolio dollars fled emerging markets in the first quarter alone.

In the face of such severe dollar shortages and liquidity crunch in developing countries, the Federal Reserve had to expand central bank liquidity swaps and launch a new lending facility to come to the rescue. The impact of such international measures is still an open question. But with currency depreciation, higher borrowing costs, declining official reserves, and falling commodity prices, it appears that the financial stress emerging economies are under may be difficult to reverse.

The Triple Whammy

This way, developing countries face a health-blow, and economic-blow, and a financial-blow, all at once. An emerging market economy faced with just one of those would have resulted in a crisis. But amid COVID-19, all emerging economies were are confronted with all three crises at the same time. The damage done by this “triple whammy” could plague the developing world for years to come.

Jack Gao is a Program Economist at the Institute for New Economic Thinking. He is interested in international economics and finance, energy policy, economic development, and the Chinese economy. He previously worked in financial product and data departments in Bloomberg Singapore, and reported on Asian financial markets in Bloomberg News from Shanghai. Jack holds a MPA in International Development from Harvard Kennedy School, and a B.S. in Economics from Singapore Management University. He has published articles on China Policy Review and Harvard Kennedy School Review.

Can Trade in Services Deliver for Developing Nations?

Industrialization was long considered the path to economic development. But as the global south stands to lose its competitive edge to increasing levels of automation in the global north, this trajectory is no longer obvious. Some developing countries have leveraged the digital age to offer low-cost services, rather than manufacturing. Is that a promising strategy?

By Jack Gao | For the vast majority of countries, growing rich meant learning to make things. In the 19th century, Britain produced half of the world’s cotton cloth; manufacturing sector in America was a quarter of its gross domestic product 50 years ago; Japan’s post-war economic miracle ushered in a generation of powerful keiretsu from Mitsui to Mitsubishi; China, currently the largest manufacturer in the world, perfected the tactic by moving hundreds of millions from farmland into factories. In short, development equaled industrialization.

And for good reasons. The manufacturing sector boasts unique properties—scale, trade-ability, existing technology, and employment intensity—that makes it stand out as the coveted national development strategy for low-income countries. India, Vietnam and much of Africa have all tried to emulate the rise of Chinese industrialization and hop on the escalator to achieve economic development, with varying degrees of success.

When the latest digital revolution brought in automation and industrial robots, many feared that the path to prosperity for developing countries might be short-circuited. Machines that produce goods more cheaply and efficiently in rich economies might make trading with poorer countries unnecessary. McKinsey Global Institute sees the forces of automation particularly impacting lower-income countries; Harvard economist Dani Rodrik uses the term “premature deindustrialization” to describe ever earlier and lower peaks of industrial output and employment shares already observed in many countries. As automation erodes the cost-advantage of developing economies, the prospect to grow one’s way out of poverty through industrialization has become bleak.

Some scholars, however, don’t think things will turn out so badly for the developing world. In a new paper, Richard Baldwin from the Graduate Institute in Geneva and Rikard Forslid from Stockholm University argue that trade in services presents ample opportunities for poor countries to catch up even if manufacturing were to become jobless. The dramatic fall in the trade costs for services brought forth by the latest technologies, coupled with vast wage differences between rich and poor countries, will make a wide range of previously localized services tradable across national borders and could turn out to work to the advantage of low-income countries. Think call centers, data analysis, and medical billing.

The authors back their sanguine prediction by the experiences of two large developing counties—India and the Philippines. After modest success in the attempt to modernize its manufacturing industry, India embarked on the service route partly through the liberalization of investment restrictions in the 1980s. Research and development departments of multinational companies, call centers, as well as other business administration services flooded into India to take advantage of the low-cost but skilled labor force. Kaushik Basu’s explanation that India’s overproduction of engineers throughout the decades matched Silicon Valley’s demand for tech workers is an illustration of how services were exchanged between India and the US. The Philippines has developed a similarly booming service sector since 2000, becoming a preferred destination for IT-based business process outsourcing from global banks and tech companies. Experience from both countries highlighted the rise of trade in services made possible by computerization and the internet, while an educated workforce with specialized skills, including English-language communication, captured the opportunity where services became geographically unbundled.

The prediction made by the authors, if true, is certainly good news for low-income countries facing the dual challenges of a digital revolution and a reduced appetite for global trade in goods. Technological advancement is only poised to continue and render more services potentially tradable, given trends in “telemigration” (online service workers employed by foreign-based companies) and “telecommuting” (the use of collaborative online platforms for business meetings).

However, there’re reasons to be skeptical. The current share of global trade in services is still far smaller than that of trade in goods, and developing countries as a whole remain net importers of services from developed countries. Perhaps more importantly, while countries such as the Philippines, India, and Bangladesh have participated in global trade in services, it is not clear that other developing economies are as well-positioned to partake in this trend, especially given the woefully low level of human capital widely observed today.

Economic development has always been a challenging task and the challenge evolves as circumstances change. Countries will do well by focusing on improving binding constraints at home while keeping an open eye on new opportunities presented by a changing global economy, but many questions remain.

The CFA Franc Zones: Neocolonialism and Dependency

French geopolitics in Africa is interested in natural resources. Initially, the franc zone was set as a colonial monetary system by issuing currency in the colonies because France wanted to avoid transporting cash. After these countries gained their independence, the monetary system continued its operation and went on to include two other countries that were not former French colonies. At present, the CFA franc zones are made up of 14 countries. The fact that even today the currency of these regions is pegged to the euro (formerly French franc) and that reserves are deposited in France shows the subtle neocolonialism France has been pursuing unchecked. It is a currency union where France is the center and has veto power. This is supported by African governing elites who rely on the economic, political, technical, and sometimes military support provided by France. It is no wonder then that these former colonies are not growing to their full potential because they have exchanged development through sovereignty for dependency on France. This article investigates the set up of the CFA franc zones, its ties to French neocolonialism and its ability to further breed dependency in the former colonies of West and Central Africa.

The CFA Franc Zones

The first franc zone was set up in 1939 as a monetary region with a the French franc as its main currency. In 1945, the Franc des Colonies Francaises d’Afrique (CFA franc) and the Franc des Colonies Francaises du Pacifique (CFP franc) were created. After independence, Morocco, Tunisia, Algeria, and Guinea left. The Central African Economic and Monetary Union (CEMAC) and the West African Economic and Monetary Community (WAEMU) are known as the two CFA franc zones. WAEMU has eight members: Benin, Burkina Faso, Cote D’Ivoire, Guinea-Bissau (a former Portuguese colony joined in 1997), Mali, Niger, Senegal, and Togo. Their common currency is the “franc de la Communaute Financiere de l”Afrique (CFA franc), which is issued by the Central Bank of the West African States (BCEAO) located in Dakar, Senegal. CEMAC has six members: Cameroon, the Central African Republic, Chad, the Republic of Congo, Equatorial Guinea (a former Spanish colony joined in 1985) and Gabon. Their common currency is “franc de la Cooperation Financiere Africaine”, which is issued by the Bank of the Central African States (BEAC) located in Yaounde, Cameroon. It is worth mentioning that the BCEAO and the BEAC were headquartered in Paris until the late 1970s.

Since 1948, the two CFA francs were pegged at the rate of 50 CFA francs per French franc. In 1994, the CFA francs went through devaluation, 50 percent to be exact. At present, the arrangement of France to the two unions are a fixed peg to the euro, a convertibility guarantee by the French Treasury and lastly, a set of legal, institutional and policy requirements. The CFA franc zone links three currencies: the two unions and the euro. The CFA franc is fixed at 655.957 per euro. WAEMU and CEMAC each have their own central banks that are independent of each other. The CFA francs can be converted to the euro, but cannot directly be converted into each other. The money is sent to France as an operations account in the French Treasury by the two central banks. Furthermore, “at least 20 percent of sight liabilities of each central bank must be covered by foreign exchange reserves, at least 50 percent of foreign exchange reserves must be held in the operations account and increasing interest rate penalties apply if there is an overdraft. France is also represented on the board of both institutions.” In “Colonial Hangover: the Case of the CFA”, Pierre Canac and Rogelio Garcia-Contreras explain,

“The functioning of the Operations Accounts is critical to maintaining the convertibility of the CFA francs at the official exchange rate while, at the same time, allowing the regional central banks to maintain some monetary autonomy. The Operations Accounts are credited with the foreign reserves of the BCEAO and the BEAC, but can be negative when the balance of payments of the CFA zone members is unfavorable. When this is the case, the French treasury lends foreign reserves to the two central banks. This special relationship with the French treasury allows the two African central banks to maintain the fixity of the exchange rate while allowing them to have some limited control over their monetary policy. The amount of borrowing allowed is unlimited although subject to several constraints in order to limit the size of the debt. First, the central banks receive interest on their credit in the Operations Account, while they must pay a progressively increasing interest rate on their debit in the account. Second, foreign reserves other than French francs or euros may have to be surrendered – a practice called ‘ratissage’, or additional reserves may have to be borrowed from the IMF. Third, the French treasury appoints members to the boards of the BCEAO and BEAC in order to influence their respective monetary policies and to ensure their consistency with the fixed parity. The autonomy of both African central banks is curbed by the French authorities, thereby prolonging the colonial relationship between France and its former colonies.”

Apparently, representatives from France fill important positions in the Presidency, Ministry of Defense, Central Bank, Treasury, Accounting and Budget Departments, and Ministry of Finance, which allows them to have oversight and influence policy decisions. One French scholar observed that ministries from Francophone African states make around 2000 visits to Paris in an average year. Adom shows the money kept at the French treasury earns no or very low interest for the franc zone nations. In 2007, the former Senegalese President, Abdoulaye Wade had stated that the funds can be used to boost investment, economic growth and alleviate poverty in the member countries instead of sitting in France.

After the 1994 devaluation, the two CFA francs were pegged at the new rate of 100 CFA francs per French franc. The reason for the devaluation was accounted to loss of competitiveness as the French franc appreciated against the currency of major trading partners. These zones competitiveness was in the French market, but not to world markets. In the 1980s, there was a fall in the price of raw materials and a depreciation of the dollar. As a result, the growth and export of these nations were impacted. The governments of these zones were facing budget deficits, which they financed by borrowing from abroad until the IMF refused to lend them any more money in 1993. As for trade between the unions, it is low due to an external tariff. Capital flows between these unions is highly restricted. The hope that a monetary union would increase trade among the CFA franc zones never materialized.

Neocolonialism and France

Kwame Nkrumah stated, “…imperialism… claims, that it is “giving” independence to its former subjects, to be followed by “aid” for their development. Under cover of such phrases, however, it devises innumerable ways to accomplish objectives formerly achieved by naked colonialism. It is this sum total of these modern attempts to perpetuate colonialism while at the same time talking about “freedom”, which has come to be known as neo-colonialism.”

In “Government accounting reform in an ex-French African colony: The political economy of neocolonialism”, P.J.C. Lassou and T. Hopper state, “colonialism does not cease with the declaration of political independence or the lowering of the last European flag. Decolonization is a formal facade if former colonies cannot acquire the socio-economic base and political institutions to manage themselves as sovereign independent countries. The modern manifestation of colonial and imperialist traits is commonly labeled neocolonialism, which is sometimes linked to ‘dependency’. Neocolonialism occurs when the former colonial power still controls the political and economic institutions of former colonies.”

France is carrying out neocolonialism by disguising this arrangement as a monetary union. These nations gave up their sovereign right to France. Neocolonialism is an impediment to development within African nations. France’s intervention was carried out through economic, political and militaristic ways. The ‘Accords de Cooperation’ was signed by African leaders who gained power with France’s help at independence. On the other hand, the ‘Accords speciaux de defence’ provided France power to intervene militarily to protect African leaders who protected France’s interests. Lastly, the economic accords require former colonies to export their raw materials such as oil, uranium, phosphate, cocoa, coffee, rubber, cotton … etc to France while importing industrial goods and services primary from France. Furthermore, these nations reduce or ban their raw material exports when French defense interest require.

Lassou and Hopper stress that accounting is a neglected part of development policies, especially in Francophone Africa. They share that “market-based reforms when applied in the South generally and Africa specifically…promote neocolonialism, enabling former colonial powers to retain control over political and economic institutions of former colonies to the advantage of multi-national corporations and trade whereby ‘Southern’ countries export cheap raw materials to ‘Northern’ countries and import high value-added goods and services in return.”

According to the Human Development Index, out of 187 countries, the last three and seven of the worst ten countries are from Francophone Africa. France’s neocolonialism approach is extremely subtle and paternalistic. The former French President, Jacques Chirac, said, “ We forget one thing: that is, a large part of the money that is in our [I.e., the French’s] wallet comes precisely from the exploitation of Africa [mostly Francophone Africa] over centuries.” In 2008, he went on to say, “without Africa France would slide down into the rank of a [third] world power.”

Dependency Theory and Francophone Africa

Africa, Asia, and Latin America have pursued sustainable development since gaining independence. However, a few countries succeeded in actually developing their economies. In the 1950s, Raul Prebisch and other economist came up with the dependency theory, which explains why “economic growth in the advanced industrialized countries did not necessarily lead to growth in poorer countries.” Prebisch suggested that poor countries (periphery nations) exported raw materials to the developed countries (center nations) and imported finished goods. Moreover, there is a dynamic relationship between dominant and dependent states. Andre Gunder Frank claimed that the capitalist world system was divided into two concentric spheres: center and periphery. The advanced center countries need cheap raw materials from the underdeveloped periphery as well as a market to send their finished products.

It has been decades since African countries gained independence. However, this independence was replaced by a dominance-dependence relationship known as post-colonialism. A dominance-dependence occurs “when one country is able to participate in a definitive or determining way in the decision-making process of another country while the second country is unable to have the same participation in the decision-making of the first country.” Furthermore, the foreign and domestic policies of the independent African nations continue to be influenced by outside powers, especially their former colonizers. The post-colonial relationship when it came to former French colonies is the dominant role held by France.

French colonialism was one of state colonialism. It was one of direct rule where native chiefs assisted French administrators, which led to the rise of local elites who were educated in the French system. The former colonies were indoctrinated with French culture, language, and law. In the time of independence, sub-Saharan colonies decolonized in a non-violent way while former British colonies gained their independence through war, a violent way that loosened the relationship towards Great Britain. Because freedom from France was carried out through non-violence, it came naturally for local elites to take power and continue their strong ties with France.

Through the CFA franc zone, France is able to control the money supply, monetary and financial regulations, banking activities, credit allocation, and budgetary and economic policies of these nations. In addition, it breeds corruption and illegal diversion of public aid between France and its former colonies. For instance, conditional French public aid has forced these African states to spend the ‘aid’ money on French equipment, goods or contracts with French firms, especially construction and public work firms.

S.K.B. Asante points out that regional integration approaches do not remove the neocolonialism and dependency the African continent faces. He states, “none of the regional schemes have adequate provisions for attacking the all-embracing issue of dependency reduction nor have the efforts made towards this objective had any significant impact…the problem of dependency poses difficulties for African countries attempting a strategy of regional integration. Dependency serves as an obstacle to de-development it not only limits the beneficial effects of integration in both national and regional economy.”

Economic Performance of the CFA Franc Zones

France is the main trading partner of the CFA franc zones. CFA franc zones, unlike other African nations, have avoided high inflations due to France. The two zones between 1989 and 1999 had 33 percent of imports and 40 percent of Foreign Direct Investment from France. These regions are highly dependent on France. Despite their ties to France, these CFA franc zones remain extremely poor. The two regions had a population of 132 million in 2008 where 70 percent are in WAEMU and 30 percent are in CAEMC. Their total GDP is equal to 4 percent of the French GDP. These regions are “producers and exporters of raw materials, including oil, minerals, wood and agricultural commodities, and agricultural commodities, they are highly sensitive to world price fluctuations and the trade policies of their trading partners, mainly the EU and the US. Their industrial sectors are rather underdeveloped.” Non-oil producing nations within the CFA franc zones have very low GDP per capita.

According to Assande Des’ Adom, even after the currency was devalued, the CFA franc zones still suffer from currency misalignments. Adom points out, “the current monetary arrangements between the former colonies and France were designed based essentially on the economic interest of the latter. A prominent Ivorian economist goes even further to explain how franc zone’s member countries indirectly finance the French economy through these peculiar monetary arrangements.”

The CFA franc zone is challenged by globalization, volatile oil and raw material prices in addition to regional security problems. It can be argued that the “dependency and neocolonial practices surrounding the relationship between France and former colonial possessions in Africa is the inability of CFA countries to build up monetary reserves.” In today’s world, control of a country is carried out through economic and monetary ways. Nkrumah had warned

“The neocolonial state may be obliged to take the manufactured products of the imperialist power to the exclusion of competing products elsewhere. Control over government policy in the neo-colonial state may be secured by payment towards the cost of running the State, by the provision of civil servants in positions where they can dictate policy, and by monetary control over foreign exchange through the imposition of a banking system controlled by the imperial power.”

In conclusion, the CFA franc zones continue to be dominated by the political will, economic interest, and geopolitical strategy pursued by the French republic. It seems some elite leaders do not wean away from France’s influence. President Omar Bongo of Gabor said, “France without Gabon is like a car without petrol, Gabon without France is analogous to a car without a driver.” The previous quote can be applied to almost all of the franc zone nations. The set up of the currency unions benefits France more than its members. French colonialism is preventing the development of these nations and causing them to be dependent.

Community Currencies: A Ray of Light in the Rust Belt

In times of severe recession, cash can be hard to come by. To somewhat maintain their standard of living and avoid being further driven into poverty, some communities developed their own alternative currencies. These community currencies are parallel systems of exchange. They are growing in popularity in countries such as Greece, which is currently battling the failures of modern capitalism, and could also be implemented in parts of the United States. The Rust Belt states could benefit from the implementation of similar initiatives. We take a quick look at how:

Community Currencies in Europe: Volos

The existence of community currencies as parallel monetary systems is justified by ecological economics, a branch of research that focusses on the interdependence of human economics with the natural environment. The aim is to promote sustainable development through the revival of vital aspects of the socio-economic fabric that have taken a backseat with the rise of capitalism: rebuilding social capital, replacing material consumption and bringing back value to labor to mean more than just as a mere factor of production. In short, it brings the market and its dynamics back to the grassroots level where it is simply an arena for the facilitation of provisioning survival rather than primarily for capital gains and growth.

The way community currencies work is best explained through a real-life example. Take, for instance, the story of Volos, a fishing village located in central Greece. Volos has experienced hard times since the Greek debt crisis began several years ago. Now, barter forms the basis of their system of exchange. The underlying currency is a local alternative unit of account called the TEM.

The TEM acts as a temporary IOU that allows for a more immediate exchange of goods and services the villagers in Volos require to maintain their daily living standards. People can exchange ironing service for language lessons, or potatoes for fish, and so on. The exchanges are supported by an online platform where ads for community members’ needs are posted. The system has come into existence to resolve villagers’ limited access to cash. It’s helped to maintain demand and prevent an economic standstill.

Community Currencies in the US: Time Banks

The most popular form of community currency initiated in the US has been the Time Banking system. Time banks were originally set up to create a social support system within neighborhoods, allowing group members to trade goods and services without money. Each hour of community work is exchanged at the bank for a unit of time-based local credit that can be redeemed for other goods and services. In this way, the labor is valued based on time, not market prices.

The positive impact Time Banking leaves on a community extends well beyond just the ability for low-income groups to access goods and services that might otherwise be unaffordable. It also helps alleviate to some extent the systemic problems of inequality that are often not factored into its cost. Although such systems have sprouted around the United States, they have gained much recognition. Participation rates at Time Banks have remained very low, and it remains unclear why.

Can Community Currencies be used more extensively?

So if Community Currencies can improve economic well-being among low-income groups, why is it not more popular? First, the systems have not been studied sufficiently. A lack of research on Community Currencies and their benefits has limited our understanding of their potential, and their growth in popularity.

Second, there are inherent geographic constraints that community currencies have yet to overcome. Under the current format, payment in community currencies is only accepted within small areas. As such, they can only be used for the exchange of goods and services that were arbitrarily made available within those areas. In order to make the system more successful, the geographic reach should be extended, allowing for more goods and services to be taken up in the system.

State intervention could make this happen. A local government could offer tax incentives to private healthcare facilities within the geographic sector of the community currency. In exchange, the health-care facility would accept payment from uninsured low-income clients in the alternative currency. If more necessary goods and services can be included in the range of products made available there would be more sustainable.

Therefore, Community Currencies require the strong and continued support from their local government to remain successful. In Greece, a first step was made several years ago, when parliament passed a law that allowed barter groups to be classified as non-profit organizations. The local government in Volos was appreciative of the change, given that it allows for some semblance of normal everyday life to continue in a time of austerity.

One reason why government might be reluctant to endorse more of these programs is that it challenges the conventional payment system. However, a community currency as a limited IOU need not pose a threat and can be of significant help in keeping up demand. This allows for more stable incomes for a larger proportion of people in the economy and the capacity to generate more tax revenues in the long run. This is especially relevant in an economic environment that is highly dependent on bank credit to remain functional.

As such, the potential of community currencies should not go unrecognized. Governments should step in to help broaden the system, and allow for their participants to reap the full benefits. This way, community currencies can be an invaluable source of demand in times of crisis.

The Case for Community Currencies in the ‘Rust Belt’

The Rust Belt comprises the set of states bordering the Great Lakes, which were once famous for being the heart of manufacturing and industry in the US. This changed with the economic decline brought about by the recessions of the late 1970’s and early 80’s, which continued to worsen with the further decline of US manufacturing.

Entire towns and villages in this region have disappeared along with the core industry that once sustained them. Some towns were able to salvage their economies by capitalizing on tourism or education, but this is not a strategy that can be extended to the entire region. States such as Michigan and Ohio also cope with an aging population, male joblessness, and rising opiate addiction. There is a dire need for the region’s underprivileged to become active and positive contributors to society again.

If aided by the state, community currencies could be the starting point for the Rust Belt states to begin their journey back to being the productive contributors to the US economy that they once were. Just like in Volos, it could boost economic activity and allow members to contribute to the rebuilding of their community.

The economic benefits of State regulated Community Currencies could include incentives for sharing skill sets to allow more unskilled workers to become employed. There would be less dependence on welfare as the marginalized begin to seek more socially and individually meaningful ways of sustaining themselves. This would also offer a much-needed boost to local economies that would be limited to purchasing goods and services within the community

The success of such initiatives often depends on communities coming together and organizing to collectively achieve economic wellbeing, setting aside social and class differences. The effective implementation of community currencies in places like Volos was ultimately determined by the way such systems are maintained and nurtured by the entire community under the appropriate community leadership. Whether such social dynamics also exist to the required extent in the communities of the Rust Belt is still something to be discovered. If so, then there may well be a light on the horizon to guide them out from under the burden of years of poverty.

Written by Athulya Gopi
Athulya is originally Indian, born and brought up in the United Arab Emirates. She joined the Levy Masters Program in 2016 after leading a successful career in credit insurance over the last 8 years. She has a few more years of worldly wisdom than her fellow classmates! The choice to swap her role as the head of commercial underwriting with that of a full-time student came after being inspired to see how Economics works in the real world.

Hidden in Plain Sight: Illicit Financial Flows

The importance of Illicit Financial Flows (IFFs) in the context of economic development has slowly come to grasp people’s attention. The World Bank defines IFFs as “money illegally earned, transferred, or used that crosses borders.” Since 2006, the Global Financial Integrity (GFI), a Washington, DC-based think tank, has done extensive research on IFFs. Their studies emphasize that the developing world lost $7.8 trillion in IFFs between 2004-2013—whereby $1.1 trillion was lost in 2013 alone. Studies have shown there is a strong correlation between IFFs and higher levels of poverty and economic inequality. The United Nations just passed its first resolution on combatting IFFs, as it is pertinent to achieving the Sustainable Development Goals. This article explores further how IFFs occur, their role in keeping economies from developing—especially in the African continent, and some suggestions to tackle them.

Illicit financial flows are often mistaken as capital flight. This assumption is false because capital flight could be entirely licit. We can group the IFFs in three categories: commercial activities, which account for 65% of IFFs; criminal activities, estimated to be about 30%; and corruption, amounting to around 5%. Trade mis-invoicing is the most common way illicit funds leave developing nations, averaging 83.4%. Trade mis-invoicing means moving money illicitly across borders by misreporting the value of a commercial transaction on an invoice that is submitted to customs. It is carried out by under-invoicing exports and over-invoicing imports. Under-invoicing the value of exports means writing the price of a good as being less than the price actually paid, in order to show reduced profits and then pay less in taxes. Once the good is exported, it will be sold at full price and the excess money will be put in an offshore account. Over-invoicing the value of imports is when the price of a good is listed as being higher than the seller actually intends to charge the client. The excess money is deposited in the importer’s offshore bank account. There is the misconception that IFFs are largely due to corruption when in fact they account only for 5%, as mentioned above. With invoice manipulation of prices, there is no need for bribing anymore.

Another scheme used in IFFs is misreporting the quality or quantity of the traded products and services. According to a report by the United Nations Economic Commission for Africa and the African Union Commission, in 2012, Mozambican records showed a total export of 260,385 cubic meters of timber, while Chinese records alone show an import of 450,000 cubic meters of the same timber from Mozambique. Other strategies consist of creating fictitious transactions (which consists of making payments on goods or services that never materialize), transfer mispricing (which involves the manipulation of prices), and profit shifting (which is popular among corporations looking for favorable tax rates).

Role of IFFs in Keeping Economies from Developing

Illicit Financial Flows act as a barrier to economies from developing and achieving the UN Sustainable Development Goals. Illicit financial outflows—facilitated by secrecy in the global financial system—are bleeding developing countries dry. UNCTAD emphasizes that developing countries will need $2.5 trillion every year until 2030 to achieve their goals on health, nutrition, education and the rest. But pledged capital inflows are only around $1.2 trillion. Preventing or even reducing IFFs can fill this funding gap. Seven out of the past 10 years, IFFs were greater than Official Development Assistance (ODA) and Foreign Direct Investment (FDI) given to poor nations.

The IMF estimates that developing nations lose $200 billion from tax revenues per year due to IFFs, while OECD countries lose $500 billion. Specifically, the United States (US) loses $100 billion annually. Tackling IFFs is in the interest of the US. Even though both developed and developing countries are victims of IFFs, developing countries suffer greater losses.

When it comes to most significant volume of IFFs, Asia is leading by 38.8% of the developing world over the ten years of this study. However, when IFFs are scaled as a percentage of gross domestic product (GDP), Sub-Saharan Africa tops the list averaging 6.1% of the region’s GDP.

At the Seventh Joint Annual Meetings of the ECA Conference of African Ministers of Finance, Planning and Economic Development and African Union Conference of Ministers of Economy and Finance in March 2014 in Abuja, Nigeria, a Ministerial Statement was issued, which states that:

“Africa loses $50 billion a year in illicit financial flows. These flows relate principally to commercial transactions, tax evasion, criminal activities (money laundering, and drug, arms and human trafficking), bribery, corruption and abuse of office. Countries that are rich in natural resources and countries with inadequate or non-existent institutional architecture are the most at risk of falling victim to illicit financial flows. These illicit flows have a negative impact on Africa’s development efforts: the most serious consequences are the loss of investment capital and revenue that could have been used to finance development programmes, the undermining of State institutions and a weakening of the rule of law.”

Former South African president Thabo Mbeki stated at a High-Level Panel on IFFs “Africa is a net creditor to the rest of the world.” The amount of IFFs out of Africa were between $854 billion and $1.8 trillion over the period 1970-2008, according to estimates by GFI. There is a campaign to end IFFs, “Stop the Bleeding”, led by Trust Africa Foundation. Mr. Mbeki stressed that Africa can no longer afford to have its resources depleted through IFFs. On the other hand, illicit financial transfers by African elites paint a different picture. It shows that African elites lack confidence in their own economies. Because they have the privilege to go abroad for education and healthcare, they are less likely to invest in their own countries.

Curbing IFFs

When searching the literature on IFFs, the focus seems to be on developing nations, which are the source. However, there is little focus on the destination countries like Switzerland, Ireland, United Kingdom, etc. A paper by GFI titled “The Absorption of Illicit Financial Flows from Developing Countries: 2000-2006”, discusses that there are two types of destinations for money leaving the developing world. These are offshore financial centers and non-offshore developed country banks. The greatest challenge is getting the money back from the destination countries.

The OECD and the Stolen Asset Recovery Initiative (StAR) surveyed frozen assets held by OECD countries and how much of them were returned to the countries of origin . Between 2010 and June 2012, $1.4 billion of corruption-related assets were frozen and only $147 million was returned.

During the Arab Spring, banks and governments froze billions of dollars held by previous leaders along with their associates from Tunisia, Egypt, and Libya. However, following the Arab Spring, only few assets have been returned and the process of recovering stolen assets is very cumbersome. In order to recover stolen assets, there needs to be solid enough proof that these assets were in fact gained through corruption to begin with.

Illicit financial flows is an issue that plagues the developing world. Nations are denied tax revenues that could be geared towards providing necessities, employment, and economic growth. Nations should hold their financial institutions accountable if they participate in tax evasion activities. There is a need for the creation of financial supervision agencies focused on IFFs. Another suggestion would be the development of a global trade-pricing database so that customs officials are not tricked by false prices. Lastly, the Bank of International Settlement should publish data on international banking assets by country of origin and country of destination in order to better comprehend where IFFs are headed.

Written by Mariamawit F. Tadesse