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Economy

Is it time for the rise of local currencies?

Prof. Murray Hunter

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It’s an almost long forgotten historical fact that most trade was undertaken by local based currencies right upto the 20th Century. Australia had a number of colonial currencies before federation in 1901. The United States of America had a number of currencies issued by private banks before the Federal Reserve Bank was formed in 1913, and individual states of the European Union had their own national currencies before the mega-currency, the Euro was launched in 1999.

However given the trend to larger and “stronger” currencies, the hype of the Euro, the protection of the US Dollar as the major trading currency, a very quiet trend has been going the other way. In contrast, more than 2,000 local currencies, in some form or the other, have been launched in various communities around the world.

Literature on the phenomenon of the local currency almost doesn’t exist in contemporary economic literature. Therefore the purpose of this article is to have a look at local currencies, and try and answer the following questions; Why do communities launch them? Do local currencies have any benefit to these communities?, and What is the real potential of these currencies?

A local currency, sometimes referred to as a community currency, is a means of exchange used by members of a community that have some common bonds. Local currencies are usually not backed by a national government, nor is it officially a legal tender within the region it circulates within. A local currency is usually intended for trade within a limited geographical area.

Money is essentially an agreement to use something as a means of exchange. Any local currency can be denominated by the prevailing national currency, or measured in any commodity, or even labor units to determine comparative unit value, so people know how to use it as a medium of exchange. This redemption measure, if realizable, is usually a major factor giving users confidence in its present and future value.

A local currency is a potential tool of monetarism, where it can help to define an economic boundary where certain groups readily accepts it as a medium of exchange.

Local currencies are usually created on the value judgment, supported by E.F. Schumacher’s ideas that there should be a focus on the development of local economy. The proponents of local currencies would usually aspire towards developing a diverse local economy full of diverse micro-activities which would promote local production, local self sufficiency, and the maintenance of profits within the local area by local businesses. They would hope that the local currency and the corresponding changing spending habits (use of a local rather than national currency) would promote a preference and loyalty to local products and businesses, rather than goods and businesses from outside.

The proponents of local currencies would also probably aspire towards developing personal relationships in trade and desire to get away from the “McDonalds landscape” where the same restaurants, stores, and service businesses exist in everyplace with an emerging mono-culture. Thus the introduction of a local currency would be seen as a method of encouraging the de-standardization of their local community through promoting the development of vibrant diverse community activities.

The success of any local currency depends upon the assumption that a single country may not be an optimum currency area, where different regions within a country may be better off with different currencies. This would allow the development of local comparative advantage over national comparative advantage. This is very much against the spirit and purpose of macro-economic policy during the development phase of most economies, which has generally promoted centralization, the growth of SMEs into larger corporations so that economies of scale are developed to the point where firms can exercise competitive advantage in the international market.

Even though local currencies worked extremely well in the 19th Century (remember they were most often redeemable in gold then), the track record of the contemporary local currencies hasn’t been good. The successful ones like the Berkshare have been proxy currencies with an a generally agreed par value with the national currency. In fact, it is only the Berkshare used in the Berkshire region of Massachusetts, that has been touted as the success story of local currencies. The Berkshire has a large number of users, which manages to keep the currency circulating within the local community. However in the Berkshire case, the community was already pre-disposed to producing local products for the local community. Many others have failed or ceased to exist through low levels of support within communities. While others like the Kelantan Dinar launched in 2006 was effectively sabotaged by the Malaysian Federal Government through repeated statements that the Dinar was not legal tender.

One of the impediments of any successful local currency is developing a critical mass of community support that would keep the circulation velocity high enough to maintain its perceived value.

A more notoriously use of a local currency was in the Cocoas Islands, where the Malay workers once ruled by the Clunies-Ross family were paid in Cocos Rupees, a currency John Clunies-Ross created and which could only be redeemed at the Clunies-Ross owned company store. Large retail corporations have successfully used forms of complementary local currencies as coupons, gift certificates, and point systems, to enlist customer loyalty.

Although there is scant evidence that any local currency to date has actually promoted local economic wealth, the mediocre track record of local currencies does not mean they don’t have great potential in the future as a means of achieving specific economic objectives needed in many economies today. From a macro-economic point of view, a local currency is a perfect tool for local micro-economic management, where the objective is to develop micro and SME industry to serve the immediate community. This will more and more become an important objective both in developing and developed economies around the world due to poor local enterprise diversity in many places.

A local currency, coupled together with a hybrid of crowd funding organized by local cooperative banks, would be a powerful alternative for providing credit to local enterprises that the conventional ‘big’ banks have been hesitant to service.

There may be another philosophical reason for adopting this approach as well. The banking sector has become so centralized, that most governments across the world have deemed their local banks ‘too big to fail”, where these privately owned institutions are almost above the law, or worse still, become a law unto themselves. All lending, trade, interest rates, and other credit facilities are controlled by these banks. No government took any great effort to regulate these institutions post 2008, because the job was too difficult and very few had the political will to do it.

The nature of a national currency has given banks great power to create money through debt creation. Most money that makes up the currency system is actually electronic. There are no notes or coins or supporting wealth to back up this money. It’s just a figure on a computerized ledger system where, if any bank was asked to produce the physical currency, it would be impossible. Technology has allowed this system to evolve, which arguably has been one of the underlying causes of financial crises i.e., electronic selling mortgages and derivatives etc. This is upsetting the balance of wealth in every country, where GINI indexes are actually widening.

Centralization has generally meant higher interest rates over time since single currencies and centralised banking came into existence. This suited government which found it easier to deal with a more centralised banking industry and fund economic activity. This also caused a rural crisis which was partly solved through the formation of specialized and subsidized rural banks in some cases.

One could also argue that the housing crisis was also caused by central currencies where investments made in land as a ledge against inflation of a national currency was encouraged and promoted.

However a local currency may be able to challenge the dominance of these banks, which impose their credit policies upon communities from outside. The local currency may help to provide some economic freedom from the interest rates banks apply to communities, and the prevailing inflation rates on the national scene.

This can be done by using local currencies to provide new means of obtaining credit and capital funding for businesses that banks won’t fund. It is here local currencies can help most, where governments all over the world have failed to influence the banking sector to step into the area of micro-finance. In this period, nearing on deflation, i.e., real wages are relatively decreasing, a local currency may enable local trades people to exchange labor for local goods much more effectively.

The means of trade is typically changing today where the traditional means of exchange with state currencies are being discarded for electronic and cyber alternatives. One thing is for certain is that national currencies will be weakened by the number of alternatives to currencies and banking that are springing up on the internet and social media today.

The potential of local currencies has become a forgotten tool of development. New employment in the future is likely to be created through small business with limited capital. Very few large corporations will dramatically increase employment as they are looking for ways to reduce employment.

Many multinationals open and shut in the developing world, and move on to places where they can make larger profits, leaving vacuums in employment. Therefore micro enterprise and SME development, as well as seeking to diversify local economies should be a major economic objective.

A local currency should go hand in hand with a local community banking system. Any local banking system should have a simple system that is easily understood, be consistent with existing system, be redeemers of currency (i.e., current currencies are not redeemable in anything, if a local currency is redeemable against a national currency gives it intrinsic value), provide a universal measurement of value to provide a sense of security, eliminate interest and install discount rates on loan repayments – i.e., voucher, and be organized at a local and community level.

Credit unions have existed for a long time and this is not far away from the concept espoused here. However governments through their support for ‘big’ banks, and banks through acquisitions and aggressive commercial practices have done their best to destroy this type of institution, which has stood in the way of banks taking over control of the economy, through central lending policies.

One must not forget that money is a social instrument. Local currencies are a ‘bottom-up’ approach to development rather than usual policy initiatives which come from a central government. Local currencies seem to have one thing in common, which may be the primary reason that promoters create them in the first place. That is the enhancement of local identity and sense of community within a region. Advocates of local currencies would argue that a local currency helps to form a sense of community which may lead to localized entrepreneurial start-ups in ventures that serve these communities. This would primarily be in specialized food businesses, etc. Thus local currencies could be seen as a source of social justice in helping to promote local entrepreneurial activities. Opportunity is also a human right.

A local currency, imaginably used, may be able to promote a micro-business sector to cover the local economic void that now exists in many communities. Local businesses can be nurtured through using hybrids of local currencies for alternative financing linking into variations of local crowd funding, and thus reflect local economic value better.

Local currencies may be more protective of international exchange rate fluctuation, thus protecting local economic buoyancy, which appears to be on the rise of late. A local currency may even be able to assist in lowering the high cost levels many developed economies, which has destroyed the simple economic model of local production to serve local communities. It is all about going back to the future in macro-economic policy to recreate local comparative advantage once again.

As pointed out by the author of Sacred EconomiesCharles Eisenstein, it was Taiwan, Japan, and South Korea, which fostered local production through import replacement protectionist policies in the 1980s that have prospering middle classes today. Compare this with Mexico which opened up free trade and openly allowing in foreign investors, gained very little in knowhow, technology, and permanent capital. Further, countries like Brazil and Thailand are taking measures to protect their economies from the flood of cheap US dollars buying up domestic assets. In both these cases the currency acted as a protection mechanism from the outside world in a form of economic sovereignty. Compare this to the situation in Greece which does not have its own currency.

Perhaps the real reasons why local currencies are introduced are non-economic. Local currencies are more about building community pride and developing ‘cultural capital’ against national and international trends.

The objective of a local currency and the attached value system to it, is to create or recreate a local community, product and service economy that meets the needs of local society from the local society itself. It aspires to develop a self financing community.

This is a very powerful tool for community development, to create micro-economic activity back in the communities that have become economically barren, and then to capture the value of local trade and hold it within the community.

As Bernard Lietaer said, ‘civilization needs a new operating system and fast’. This is indeed very relevant for many parts of the world today.

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Economy

Trade in fake Italian goods costs economy billions of euros

MD Staff

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Global trade in fake Italian goods such as luxury handbags, watches, foodstuffs and car parts is taking a bite out of Italy’s economy equivalent to around 1-2% of GDP in terms of lost sales, according to a new OECD report.

Trade in counterfeit goods and the Italian economy estimates the total value of counterfeit and pirated Italian goods sold worldwide at over 35 billion euros for 2013, equivalent to 4.9% of global Italian manufacturing sales. This resulted in over 25 billion euros in lost sales by Italian companies in a year when Italy’s GDP was 1.6 trillion euros.

Past OECD analysis of data from nearly half a million customs seizures around the world over 2011-13 has shown that trade in counterfeit goods is worth nearly half a trillion dollars a year, or 2.5% of global imports. US, Italian and French brands are among the hardest hit, and with an economy that thrives on producing high-value products, protected by intellectual property rights and trademarks, Italy is especially vulnerable.

As well as examining the impact of trade in fake Italian products, the report also looks at the impact on Italy of imports of counterfeit goods. It finds that fake imports were worth over 10 billion euros, or 3% of imports, in 2013 and resulted in foregone domestic sales by Italian wholesalers and shops of around 7 billion euros. The fake items were imported mainly from China (50%) and Hong Kong (29%), followed by Greece (6%), Singapore (4%) and Turkey (2%).

The combination of trade in fake Italian products and imports of counterfeit goods resulted in a loss of public revenues in Italy equal to 10 billion euros, or 0.6% of Italian GDP. Counterfeiting and piracy also led to the loss of at least 87,000 jobs in Italy in 2013, equivalent to 2% of the country’s full-time equivalent employees.

The highest losses in sales, in euro terms, in the Italian wholesale and retail sectors due to counterfeit and pirated imports in 2013 were for high-tech electronic, electrical and optical products, followed by clothing, footwear, leather and related products. In terms of market share, the biggest losses were in the watch and jewellery sector, where the counterfeit market caused a 7.5% loss in sales.

The report shows that around half of the fake goods smuggled into Italy in 2013 were sold to consumers who were aware they were buying fake products, with the remaining share purchased unknowingly. The share of fakes bought knowingly in Italy ranges from 15% from food items to 60% for watches and IT and communications devices.

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Economy

A contemplation on Washington-Beijing trade war

Mohammad Ghaderi

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The decision of the Trump’s government to start its research on the devastating effects of China’s measures on the American economy has led to a sharp reaction by the new generation of Beijing Communists. It is clear to everyone that Donald Trump and his companions at the White House have challenged the “open doors” policy of Mao’s sons.

What attracts the attention more than anything else amid this conflict, is the insistence of the US president on protectionist policies on one side, and Beijing’s resistance to these policies on the other side. In other words, Washington and Beijing are going to enter a full-fledged trade war during the presidency of Donald Trump. What has happened so far has only provided the basis for such a controversy. Here are some point that need to be taken into consideration:

Firstly, the withdrawal of the United States from multilateral trade rules in the international system, and the insistence on unilateral economic protectionism, is the result of a special outlook which is dominant at the White House ruling. Economic unilateralism and the pursuit of protectionist policies are two main indicators of Trump’s economic approach in the field of global trade and international economics. Obviously, Trump will firmly stand against the Chinese charges of unilateral protectionism. Beyond that, Trump knows well that if he can institutionalize his unilateral protectionist policies within the eight years of his possible presence at the White House, next American governments will have a very difficult job to change this irregular (but smart) structure. Therefore, the charge of “protectionism” can’t force Trump to retreat from its economic policies towards Beijing and other powerful international players.

The second point is that Trump has entered a new economic confrontation with Beijing which relies on the possible violation of intellectual property rights and other issues related to technology.  Pursuing his goals, Trump didn’t resort to changing exchange rates, creating administrative and bureaucratic barriers, anti-dumping laws, direct subsidies to US domestic companies, import quotas, and most importantly, customs tariffs. Rather, on his economic confrontation with Beijing, he focused on the least costly way which was intellectual property rights. This equation is somewhat complicated: The fact is that the President of the United States intends to use terms such as intellectual property in the field of invention and trade as a cover for applying nationalist protectionist policies. In order to complete this process, Trump will further strengthen bureaucratic administrative law in the near future as opposed to importing Chinese goods. In short, Trump’s short-term goal is to create bureaucratic obstacles so that it would be difficult for China to import goods and products to the US .

The third point is about the introduction of customs tariffs against Chinese goods. The Trump government has also increased tariffs on some of the imported goods from China. Trump also subsidizes American producers. However, it is not yet clear that granting industrial subsidies to domestic factories and manufacturers in the United States could lead to lower commodity prices, and more importantly, to increase the productions’ quality.

Basically, this is the critique that comes with protectionism. Accordingly, making barriers to imported goods and the introduction of punitive tariffs can endanger consumers and even the government in the long run. Due to lack of competition with imported goods, the owners of such industries practically have no incentive for increasing the quality of their manufactured goods, and the competition formed in the domestic market is also not usually a dynamic one. This rule also applies to the imposition of punitive tariffs on Chinese goods.

China is buying the most Treasurys at the US government auctions since 2011. It wasn’t without a reason that politicians like Hillary Clinton, the Democrat candidate in the 2016 presidential election, have warned against economic opposition with China. In such a situation, the United States full-fledged trade war with Beijing can be interpreted as a major business and economic mistake.

Undoubtedly, the open-door policy is against the approach taken by trump based on protectionist economy. Since 1899, China has been pursuing an open door policy for its economic development. The open-door policy would allow for a system of trade in China  open to all countries equally, and no country has particular privilege over other countries. This approach is in contrast to the monopolistic economic thinking (based on unilateral protectionism). Unilateral protectionism is not only opposed to the open door policy, but also directly targets the principles of liberal economics.

Finally, the adoption of unilateral protectionist policy by the Trump’s government will be followed by the Chinese retaliatory measures, which will further lead to a devastating trade war between Beijing and Washington. Many American economists warn against this economic confrontation. Many American economists have argued that Trump has embarked on an economic war with China, without creating the necessary requirements inside the country. Hence, Trump’s protectionist policies can’t improve the US domestic industry. Alan Tennyson, a well-known American businessman who has been supporting Trump during the presidential competitions, is now firmly opposing the imposition of punitive tariffs on Chinese goods, and believes that it would be an unplanned intervention in the US economy.

Many American economists are criticizing of Donald Trump’s protectionist approach in this equation: all these economists are warning about a major economic war between the United States and China. The conflict between Washington and Beijing, based on Trump’s unilateralist policies, can redefine the economic ideas of both countries. “The emergence of modern protectionism” or “redefining open door policy” can be the objective outcome of this conflict. On the other hand, China and the United States will probably both use the tools and methods in the economic conflict, which contradicts their economic red lines in recent years.

In such a situation, we will witness a lot of changes in the economic and business structure of both countries. It should not be forgotten that in the field of economics and commerce, many revisions occurred during international disputes, and not in the stabilized international markets. It should be acknowledged that this conflict isn’t going to be limited to Washington and Beijing, and their trading partners, voluntarily or involuntarily, will enter this war.

First published in our partner MNA

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Economy

Deeper reforms in Korea will ensure more inclusive and sustainable growth

MD Staff

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Short-term prospects for the Korean economy are good, with an uptick in world trade and fiscal policy driving growth, but productivity remains relatively low and the country faces the most rapid population ageing in the OECD area, according to a new report from the OECD.

The latest OECD Economic Survey of Korea looks at recent economic developments, as well as the challenges to ensure that the benefits are shared by all. The Survey projects growth of about 3% for the 2018-19 period, and lays out an agenda for ensuring broader-based and more inclusive growth going forward.

The Survey, presented in Sejong by the head of the OECD Korea/Japan Desk, Randall Jones, highlights the need for new policies to help the government overhaul the traditional export-led growth model and to promote innovation led by SMEs and start-ups. It discusses reforms to the large business groups (chaebols), to achieve higher productivity and more inclusive growth, and proposes policies to enhance dynamism in SMEs and boost entrepreneurship. It also outlines the key challenges for reaching higher levels of well-being.

“Korea has rebounded after several years of sub-par growth, and the expansion is expected to continue,” Mr Jones said. “However, the traditional economic model of manufacturing and export-led growth is running out of steam. The challenge going forward will be to develop a new growth model that addresses today’s economic and social polarisation and leads to a more sustainable and inclusive economy for all Koreans.”

Despite the important role of the large business groups in Korea’s economic growth, the Survey says that a more balanced economy with larger roles for services and SMEs would promote inclusive and sustainable growth. The Survey suggests that strengthening product market competition, by relaxing barriers to imports and inward foreign direct investment and liberalising product market regulation, would reduce rent-seeking behaviour by large firms. Corporate governance reform is also necessary.

Beyond chaebol reform, the Survey identifies measures that would enhance dynamism and productivity growth in SMEs, including regulatory reforms, better access to credit, changes to the insolvency framework and improvements to the vocational education system.

The Survey proposes a range of potential reforms to boost well-being in Korea, including measures to expand female employment; labour market reforms to break down the segmentation between regular and non-regular workers; policies to reduce elderly poverty; and the use of economic instruments to reduce greenhouse gas emissions and air pollution.

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