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Money: 5000 Years of Debt and Power- Book Review

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Michel Aglietta, most famous as the cofounder of the regulation school of economics, has written Money: 5000 Years of Debt and Power.  As the title suggests, it’s a bold exploration of the history of money and, by extension, finance in general.  The book demonstrates that money not only shapes economics, but society itself.

Aglietta starts off by giving a brief history of money and commerce.  He dispels the myth of the prehistoric bartering system of the “pre-money” era of humanity that everyone was taught in school.  There’s no archaeological evidence that bartering was ever the standard for commerce.  As the book title reminds us, items such as shells have been used from antiquity as a currency in societies that haven’t mastered metalwork.  The start of the Bronze Age around 5000 years ago ushered in both a rapid rise in industrialization and the use of metal coinage as a form of payment for increasingly large and cross-border transactions.  A coin’s makeup of gold or silver determined its value in a manner that served as a consensus in the ancient world.

Over time however, money became more complex due to war and trade.  Indebted men often had to end up selling their wives, children or themselves into slavery to pay off their debt.  Thus,  “[Athenian statesman] Solon carried out the first monetary reform. This was an effort in Athens before the end of the 6th century B.C., in an effort to alleviate the poor peasants’ debts to the landowners.  According to Plutarch’s account, Solon reduced the value of these debts by 30% by devaluing the drachma by this same proportion.”  Monarchs started to unilaterally re-value their currencies or mint lower-quality coins to fit the needs of the state.

One of the foremost determinants of currency value in the pre-modern era was the availability of gold and silver.  If a ruler lost access to mines or the means to buy precious metal, then financial disaster would likely ensue.  Conversely, striking gold literally would be the same as striking gold metaphorically.  Britain, France and especially Spain became fabulously wealthy in the colonization era by stealing gold and silver from Africa and the Americas.

Ironically, this “dual standard” of gold and silver would also create instances of incredible currency volatility.  Spain brought back so much silver from the Americas that it massively deflated the value of silver, which ultimately caused lasting economic harm to Spain.  Too many or too few coins in a country’s circulation can have ripple effects around the world.

Thus, Dutch and British economists started to move the global market towards the scriptural system during the Enlightenment.  Increasingly complex financial instruments, such as interest-bearing business loans, were developed by merchants in Amsterdam and London.  “A purely metallic [bullion] system creates money on the basis of a pre-existing and prior source of wealth: the metal that has already been extracted from the ground.  On the contrary, the creation of scriptural money by issuing debts transferable to third parties is only valid if these debts can ultimately be settled. They’ll only be settled if the issuer has acquired some value that allows it to honor the debt.  Money is thus created on the basis of anticipated future wealth.”  Modern finance was thus born, fuelling colonial commerce and industrialization.

The book spends the bulk of its attention exploring the post-WWII “Bretton Woods” era of finance, in which the gold standard was replaced by the current supremacy of the US dollar.  This has had profound impacts on everything from diplomacy to Third-World development to Middle East conflicts via the “petrodollar”.  Dollar primacy in the global economy walks hand-in-hand with the US’ laissez-faire attitude towards the regulation of banking institutions and other market actors.  Aglietta expresses some reservations with this status quo.  For instance, he writes, “The tendency towards growth in international capital movements hasn’t had a positive effect on long-term growth… Studying a wide sample of developed and emerging countries, Dani Rodrik & Arvind Subramanian have shown that opening finance up internationally had no effect from 1985-2005.  More recent Bank for Internat’l Settlements studies conducted by Stephen Cecchetti and Enisse Kharroubi have even suggested that the opening up of finance had a negative effect on global productivity.”

With the Great Recession and the current political and currency instability in the US, Aglietta argues that the world needs to move past the dollar standard.  Certain millennial economists might offer up cryptocurrencies as a savior for global commerce.  Aglietta is bearish on this proposal; he writes, “Bitcoin is nothing but a disembodied monetary instrument… detached from any notion of the public good and disconnected from any sovereign authority that might guarantee its liquidity and perennial endurance. Bitcoin maintains the illusion of a virtual community through the networks of those who promote & exchange ideas about it, but it is not supported by any hierarchically organized banking system overseen by a central bank or by a clearing system that would allow the lasting sustainability of payments to be guaranteed.”  The euro could arguably be suitable replacement for the USD, but Aglietta is likewise pessimistic.  He writes extensively about the limitations of the euro and the European Central Bank.  Since the euro is a non-sovereign currency, it has severe limitations in terms of revaluation and addressing financial crises, among other issues.  He’s slightly less pessimistic about the renminbi.  For an interesting overview of the renminbi’s long-term prospects as a global currency, read the final chapter of this book, then compare it to the Renminbi chapter of George Magnus’ RED FLAGS.

His proposal is for a system called Special Drawing Rights (SDR).  It’s essentially a global Central Bank that sets universal banking standards, ensures liquidity in cases of a recession or depression by acting as a last-resort lender for national banks and offers better access to credit for developing countries.  Many of these problems were supposed to be addressed during Bretton Woods negotiations and later by the formation of the IMF; Aglietta writes about why these initiatives failed.

Aglietta firmly lays out the case for the centralization of authority in MONEY.  He bemoans the impotence of current banking institutions and the competing exchange rats and financial policies of different nations.  On the climate crisis, Aglietta writes, “Biodiversity and climate change are the two great environmental fields that appear as public goods and are therefore impossible to substitute for forms of capital produced according to market-based incentives.”  He expresses optimism in a future where markets are regulated more efficiently and there’s a lot more coordination between different banks and nations to address financial crises and manage inflation and exchange rates.

Russell Whitehouse is Executive Editor at IntPolicyDigest. He’s also a freelance social media manager/producer, 2016 Iowa Caucus volunteer and a policy essayist.

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Economy

Afreximbank Meets Ahead of Russia-Africa Summit

Kester Kenn Klomegah

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The African Export-Import Bank (Afreximbank) plans to hold its 26th annual meeting in Moscow on 18-22 June. A series of closed sessions will be held as part of the event including the meeting of Board of Directors of Afreximbank and a meeting of Shareholders of Afreximbank, as well as the open Russia-Africa Economic Conference.

The African Export-Import Bank, the Roscongress Foundation, the Ministry of Finance of the Russian Federation, and the Russian Export Centre are the key organizers of this event. The Afreximbank Annual Meetings is a high-level event, bringing together political and business leaders from across Africa to discuss the issues of trade, industrialization, export, and financial stability and efficacy.

Key themes planned for the economic conference are: State of Russia-Africa Relations: An Overview; Mining Industry: An Integrated Approach to the Fields Development; Prospects for Multilateralism in an Era of Protectionism; Railways Infrastructure as the Key Element for Development in Africa; South-South Trade: Path for Africa Integration into the Global Economy.

The other topics are Emerging Trends in Sovereign Reserves Management; Reflections on the Transformative Power of South-South Trade; Launch Afreximbank ETC Strategy; Cyber Solutions and Cyber Security for Solving Governmental and Municipals Tasks; Financing South-South Trade in Difficult Global Financing Conditions; The Future of South-South Trade and Infrastructure Financing.

Over 1,500 delegates are expected to attend the economic conference, including shareholders and bank partners, government representatives, members of the business community and media representatives. The conference will be a crucial stage in preparation for the full-scale Russia-Africa political summit and the accompanying economic forum, scheduled for October 2019 in Sochi.

“Russian and African countries are basically on the track of bilateral strategic partnership and alliance based on openness and trust. The fact that the Afreximbank Annual Meeting is to be held in our country gives a positive momentum for the mutually beneficial cooperation of the parties ahead of the full-scale Russia-Africa Political Summit that will take place in Sochi in October, and will add to the inclusive nature of the events,” emphasized Anton Kobyakov, Advisor to the President of Russian Federation.

Following the setup of the Organizing Committee for the Russia – Africa summit and other Russia–Africa events in Russia in 2019, Russian officials have described that this year truly as a year of Africa for Russia.

“We witness the clear growing interests from the both sides to establish the new level of relationships, which means a perfect timing to boost the economic agenda. All economic events planned for this year will become a platform to vocalize these ideas and draw a strong roadmap for the future,” Russian Export Center’s CEO, Andrei Slepnev, argued in an emailed interview with Buziness Africa.

In December 2017, Russian Export Center became a shareholder of Afreximbank. Russian Export Center is a specialized state development institution, created to provide any assistance, both financial and non-financial, for Russian exporters looking for widening their business abroad.

On March 19, the Organizing Committee on Russia-Africa held its first meeting in Moscow. President Vladimir Putin put forward the Russia-Africa initiative at the BRICS summit (Russia, Brazil, India, China, and South Africa) in Johannesburg in July 2018.

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The silent revolution

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Jamaica is well known for its beautiful beaches, Bob Marley, and reggae music. But what is less known is that the Caribbean island started a silent revolution after being one of the most indebted developing countries in the world. Jamaica has shown a macroeconomic turnaround that is quite extraordinary.

As Bob Marley said, “It takes a revolution to make a solution”. After decades of high debt and low growth Jamaica has changed its growth trajectory, with positive economic growth for 16 consecutive quarters and growth getting closer to two per cent.

During that period, the Jamaica Stock Exchange went up more than 380 per cent.The credit agency Fitch upgraded the island’s debt to B+ rating with a stable fiscal outlook, and unemployment hit eight per cent in January, the lowest in decades.

The Government had a wake-up call when its debt overhang peaked at almost 150 per cent of GDP in 2013. With the support of the International Monetary Fund, the World Bank and the Inter-American Development Bank, the country embarked on an ambitious reform programme. These efforts have paid off. Jamaica is now one of the few countries that has successfully cut public debt by the equivalent of half its gross domestic product in a short time frame.

The fiscal turnaround and economic transformation were possible because of the strong commitment across political parties over two competing administrations and electoral cycles. The country also critically benefited from a sustained social consensus for change and the strong backing of the private sector.

The country has generated primary fiscal surpluses of at least seven per cent of GDP for the last six years, and remains steadfast in its commitment to fiscal discipline. These fiscal results make Jamaica a top performer internationally.

For this silent revolution to continue and bring greater prosperity to all its people, Jamaica will need to further boost the investment climate, strengthen economic and climate resilience and invest more in its people to build human capital. These are necessary complements to the maintenance of a strong macroeconomic framework and would help boost economic growth and job creation. There are encouraging signs that Jamaica is taking action in these areas.

With regard to the business climate, the National Competitiveness Council has adopted a road map to fast-track reforms to improve the business environment. Jamaica features in the top 20 countries in the world for its comprehensive credit reporting systems and ranks among the best globally in the area of starting a business, according to the World Bank’s 2019 Doing Business report. It only takes two procedures and three days for an entrepreneur to start and formally operate a business.

There have been advancements on public-private partnership investments. For instance, the Norman Manley International Airport public-private partnership was recently completed with advisory support from the International Finance Corporation — the private sector arm of the World Bank Group.

Jamaica is also a front-runner among Caribbean countries in promoting climate and financial resilience in the face of natural disasters. The economic cost of these disasters for the Caribbean is substantial, exceeding US$22 billion between 1950 and 2016, compared with US$58 billion for similar disasters globally. One serious storm or natural disaster could set back the country’s growth prospects and development achievements of recent years. To tackle this, the Government has adopted a Public Financial Management Policy Framework for Natural Disaster Risk Financing to facilitate the availability of dedicated resources for recovery in the face of disaster risks.

In order to further support Jamaica in its efforts to strengthen the economy, build resilience, and support human capital development, the World Bank will expand its financing by US$140 million. This financing package will be for a series of two operations to help Jamaica be better prepared to mitigate the financial impact of natural disasters and build stronger infrastructure, and an additional project to strengthen social protection.

Despite unemployment at a new low, still too many young people are struggling to find a job. For Jamaica to continue to grow and prosper, it also needs to develop the skills for the workforce of tomorrow, especially in the areas of technology and digitalisation. This requires a sharp focus on creating the conditions for youths to strive and succeed in the modern business world and close cooperation with the private sector in this respect.

Today, more than ever before, young Jamaicans can dream of a brighter future where “every little thing is gonna be alright”. This is the generation that must aim higher and can write a new chapter for its country.

As we celebrate the 55th anniversary of the World Bank-Jamaica partnership, we look forward to working together to build on the success of the past few years and promote growth, jobs and resilience for Jamaica.

World Bank

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With or without sanctions, Iran needs to say goodbye to oil money

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Except Norway, almost all oil producing countries have made themselves more or less reliant on oil money.

Only oil producing countries with a small population, such as Kuwait and Qatar which is also a great gas exporter, have so been safe from fluctuations in the oil market. But, countries with large population, such as Iran, are prone to volatility in the oil market, let alone the mad sanctions introduced against the country.

There is no doubt that oil money has affected politics, economy, management system, culture, spending and consumption habits and many other issues in oil rich countries.

For example, Iran now has one of the cheapest energy prices in the world. This has led to an extravagant use of energy, especially an excessive use of private car, in the country.

Let’s make an example to clarify that oil money is not the road to progress and a vibrant economy. In the 1970s, Iran was more developed than South Korea, but now South Korea is much more successful than Iran in terms of economy and technology. South Korea does not have oil, but it has provided an opportunity for a competitive economy and capitalized on its talents.

It is true that the war imposed on Iran in the 1980s hindered Iran’s progress and inflicted about 1 trillion dollar in damages on the country, yet officials failed to take serious steps toward creating a competitive economic atmosphere with a focus on research and technology. The oil money has been the main blame for such an economic approach.

According to the successive five-year development plans which end on 2021, Iran had to reduce dependence on oil to a great extent, however, successive administrations, with varying degrees, did not fully act based on the development plan.

Iran is now subject to the toughest ever illegal sanctions by the Trump administration. Just on April 22, the United States ended sanctions waivers on Iran’s exports and announced it wants to zero out Iran’s oil exports by May 1.

Whether the Trump administration succeeds or not to implement its oil threats is an issue that we should wait and see, but it is necessary that Iran take a departure from oil export how much painful it will be.

Sorena Sattari, a graduate of Sharif University of Technology who serves as vice president for scientific affairs, told a meeting in Hamedan on Tuesday that sanctions have provided an opportunity that knowledge-based companies to intensify their efforts. Sattari also said plans have been drawn up to manufacture equipment and machinery that are subject to sanctions. 

Also, whether we like it or not, fossil fuels, especially crude oil, are losing their importance as renewable energy resources are gradually taking the center stage.

Saying goodbye to easily-gained oil revenues is a bitter pill that Iran should swallow. To do so, though very difficult under tough sanctions, officials need to find other sources of income.

They can invest on tourism as Iran is among the top countries in hosting touristic sites, establish an environment for a transparent competitive economy, close loopholes of corruption, involve competent persons in managerial posts, introduce a sound and workable tax system, end unnecessary subsidies, and more importantly prioritize research and development (R&D).

First published in our partner Tehran Times

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