Believe it or not – Africa is just a very good story

I am in Stockholm this morning – the main topic for today’s meeting is the prospects for the African economies. I have for a long time had the view that Africa could very well turn into the best investment story in the world.

There is no doubt that my view of Africa is to a large extent influenced by my having worked professionally on the Central and Eastern European economies for more than a decade and I see a lot of the same potential in Africa as the miracle we have seen in countries such as Poland and Slovakia over the past now more than 20 years.

In contrast to the common perception, I do not think Africa is destined always to do badly. Indeed, I believe that in 20 years we will be able to point to success stories in Africa in the same way we talk about the success of Poland or Slovakia today.

The end of the Cold War – now it is finally showing in Africa

It was the end of the Cold War and the collapse of communism that started the catch-up process in Central and Eastern Europe that led to most of the significant progress in living conditions for ordinary people in the former communist countries and led also to the spread of democracy and respect for human rights. Not everything is perfect in Central and Eastern Europe – far from it – but few would argue that life was better for Central and Eastern Europeans in 1989 than today.

The change in Central and Eastern Europe was very visible when the Cold War ended – the Berlin Wall disappeared, free elections were held, economic reforms were (mostly) swift and with the support of Western governments. However, what most people do not realise is that the end of the Cold War was equally – if not more – important for the African countries. While the Cold War was indeed cold in Europe, in Africa very hot wars had continued since the 1960s as a direct result of the Cold War.

Effectively the continent had been spilt between the East and the West and both parties had their own dictators running things (or rather mismanaging and looting). When the Cold War ended, the new democratic Russia stopped financing communist dictators in Africa and as communist regimes in countries such as Ethiopia or Angola opened up or collapsed, the West stopped funding ‘their’ dictators in Africa. This effectively meant that the number of dictatorships in Africa became a lot fewer in the 1990s.

As dictators fell across Africa and democracy spread (yes it is far from perfect anywhere in Africa), market reforms took off and the African economies gradually opened up.

So, as in Central and Eastern Europe, there is a direct line from the end of the Cold War to market reforms.

As in Central and Eastern Europe, the reforms sparked an economic take-off but unlike in Central and Eastern Europe the economic take-off in Africa has been much less noticed by commentators, policymakers and investors. However, it remains that over the past decade African countries such as Angola have been among the fastest growing countries in the world. Indeed, a country such as Angola has had a significantly more impressive growth record over the past 10 years than emerging market darlings such as Brazil, Turkey and Poland.

The best emerging markets story for the next decade

The picture of Africa is changing – over the past decade Africa has gone more or less unnoticed but more and more investors are now discovering it and more and more investors are realising that Africa could very well be the new catch-up story. Indeed, I would argue that the African story might very well become the best emerging markets story in the coming decade.

I believe there are numerous reasons why one should be optimistic about the medium- and long-term growth outlook for Africa.

First – the obvious reason – Africa remains very poor, so there is a lot of catch-up potential. Being the poorest continent in the world, the catch-up potential is the greatest.

Second, the catch-up potential is being unlocked, as reforms spread across the continent. Without these market reforms, Africa will not unlock its enormous potential. We have already seen serious reform across the continent but Africa is still lagging way behind when it comes to opening up and freeing up the economies. Africa should learn from countries such as Poland that moved swiftly when communism came to an end. African leaders should realise that if they want to be re-elected they should undertake economic reform to spur economic growth. Put another way, former Polish Finance Minister Leszek Balcerowicz should be a frequent visitor to Africa – as far as I know he is not.

Third, war raged Africa for nearly three decades. However, although over the past two years we have seen wars in North Africa and civil unrest in more places on the continent, the general picture is that Africa in general has become a peaceful (but not necessarily safe) continent.

Fourth, Prime Ministers and Presidents generally leave office when the lose elections in Africa. This did not used to be the case. Elections used to be rare. Today, they are common across Africa. They might not live up to the standards we are used to in Europe and North Africa but democracy is, nonetheless, spreading across the continent. With democracy comes accountability and with accountability comes better economic policies.

This is largely an overly rosy picture and we all know Africa’s problems: tribal conflicts, corruption, AIDS, bad infrastructure, an overreliance on foreign aid and so on. However, we all know this but it is all changing and in my view will continue to change in the coming decade. Therefore, I am optimistic.

Private provision of public goods – the case of money

One of the most interesting prospects for Africa in my view is how technology is helping to overcome some of Africa’s traditional problems.

For decades, Africa has been struggling with very weak government institutions. Consequently, the protection of property rights has been weak and, in general, there has been little respect for the rule of law. Even though this is changing, the process is often frustratingly slow. However, now it seems likely that technological developments could replace government institutions.

Take the telecom industry, for example. In most places in Africa, landlines have not worked well. This used to be a major problem. However, now mobile telephony is taking over. Private companies today are providing cheap and accessible telecom solutions to Africans. Today, more than half of all adult Africans own a mobile telephone.

In Kenya, today most economic transactions are carried out using the mobile-based electronic money M-pesa. In this sense, mobile-based money is taking over the role of cash-in-hand money and it is quite easy to imagine that mobile money will spread across Africa. Indeed, one could ask why M-pesa-style monetary regimes should not replace regular central banking – in the same way that mobile telephony has replaced out-dated dysfunctional landlines across Africa.

Another example is that mobile money has solved Zimbabwe’s so-called ‘coin problem’. After Zimbabwe effectively moved to dollarising the economy, the problem of a lack of dollar (and cent) coins emerged. However, this problem has now been solved with a private mobile phone-based solution.

Therefore, one could easily imagine the spreading of de facto Free Banking – private money issuance – across Africa as technological developments make this possible. In general, Africans are more likely to trust the money provided by international telecom providers such as Safaricom than they are to trust their own – often corrupt – central banks. Therefore, why not imagine a system of mobile-based free banking across Africa, with the mobile money being backed by, for example, the US dollar or even by Bitcoins or similar ‘quasi commodity’ money.

I am not trying to forecast what will happen to central banking in Africa but the development of M-pesa and the solution of the coin problem in Zimbabwe show that there are often private-based solutions to collective goods problems and as technology becomes cheaper and cheaper these solutions are increasingly likely to become accessible to African, which is likely to help boost African growth in the coming decade.

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The (mobile) market just solved Zimbabwe’s “coin problem”

I wonder if any of my readers remember my post about how ““Good E-money” can solve Zimbabwe’s ‘coin problem’”.

In my post on Zimbabwe’s so-called “coin problem” I came up with a possible solution:

“This might all seem like fantasy, but the fact remains that there today are around 500 million cell phones in Africa and there is 1 billion Africans. In the near future most Africans will own their own cell phone. This could lay the foundation for the formation of what would be a continent wide mobile telephone based Free Banking system.

Few Africans trust their governments and the quality of government institutions like central bankers is very weak. However, international companies like Coca Cola or the major international telecom companies are much more trusted. Therefore, it is much more likely that Africans in the future (probably a relatively near future) would trust money (or near-money) issued by international telecom companies – or Coca Cola for that matter.

In fact why not imagine a situation where Bitcoin merges with M-pesa so you get mobile telephone money backed by a quasi-commodity standard like the Bitcoin? I think most Africans readily would accept that money – at least their experience with government issued money has not exactly been so great.”

Guess what – the power of the market will never disappoint you. See this story:

EcoCash, a mobile money-transfer service operated by telecommunications company EcoNet Wireless Zimbabwe, has reached a million subscribers in under six months since its launch, according to Mobile Money Africa. EcoCash enables money transfers across all networks between mobile users, a rapidly expanding sector of the Zimbabwean population.

And in a country where 80 percent of residents do not have access to mainstream bank accounts, a service that requires nothing but a mobile phone is a popular and more convenient alternative. Mobile phone users now make up 77 percent of the population, compared to just 6 percent in 2006, reports Mobile Money for the Unbanked. And EcoNet Wireless, EcoCash’s parent company, has that market cornered in Zimbabwe, with 6.5 million customers, which represents 70 percent of the market share of cell phone users, according to Mobile Money Africa….

….Within that segment, EcoCash has seen success by targeting the low-end market. Customers don’t need to have bank accounts, and 1,400 street agents throughout the country help make subscribing a quick and easy process. Agents receive a commission when customers total transactions reach $50, encouraging agents to target those likely to be actively using the service…

While the legalization of foreign currency in 2009 has pulled Zimbabwe’s previously plummeting economy out of a nose-dive, it’s also created challenges, including a shortage of change. The “coin problem” can make small transactions difficult to complete accurately, reported the New York Times, and small transactions tend to be the kind low-income users make. But now mobile cash services like EcoCash allow precise payment, regardless of the size of a transaction.

The ease of transactions is just one factor contributing to the skyrocketing popularity of EcoCash. Actual banks are more difficult to access than mobile phones, and the dark history of the Zimbabwean dollar contributed to widespread distrust of traditional banking services, reports the Zimbabwe Daily Mail.

…Visibility aids EcoCash in its market domination. EcoCash markets its services through advertisements on public mini-buses, known as kombis, in urban areas, and over radio talk shows in rural areas. Widespread marketing helps keep EcoCash ahead of other, smaller competitor. And while some competitors require users to have bank accounts, EcoCash allows customers to bank with just their phone.

…EcoCash modeled much of its strategy off of the success of Kenyan mobile money service M-Pesa, also under the umbrella of a telecommunications company,Safaricom. M-Pesa’s popularity has exploded in Kenya, with a customer base of close to 15 million subscribers, up from 2 million over five years.

Like EcoNet, M-Pesa’s parent company, Safaricom, dominates the telecommunications market in Kenya with a 67 percent market share, according to The Zimbabwe Independent. Like EcoCash, M-Pesa grew rapidly in its first year, although EcoCash’s first-year growth outpaced that of M-Pesa. And while Microfinance Africa reports that other countries have had difficulty replicating the long-term success of M-Pesa, similar marketing and business strategies and market domination make EcoCash a potential candidate to exhibit similar growth.”

PS I know I promised more posts on African monetary reform – I hope I soon will get to it…

 

UNrelated post: Please have a look at Mayor Bill Woolsey’s fantastic blog Monetary Freedom. Bill’s posts over the last two weeks are incredibly good!

Forget about East African Monetary Union – let the M-pesa do the job

It is not only in Europe that the idea of currency union has considerable political backing. This is certainly also the case in Africa. In fact there is already de facto a currency union (officially two currency unions) in Central and Western Africa in the form of the two CFA franc zones. Furthermore, there are also discussions about currency unions in Eastern Africa and in Southern Africa.

The euro crisis should give African policy makers a lot of reasons why not to rush into currency union – even taking into account the present problems with credibility in the present monetary regimes in many African countries. The experience from the euro zone is that if sufficient economic, financial and political (and dare I say cultural) convergence is not achieved between the members of the currency union then it could have disastrous consequences.

I have come across an interesting new(ish) working paper (“Are Proposed African Monetary Unions Optimal Currency Areas? Real and Monetary Policy Convergence Analysis”) by Simplice A. Asongu that discusses convergence in Western Africa and in Eastern Africa. Here is the abstract:

“A spectre is hunting embryonic African monetary zones: the EMU crisis. The introduction of common currencies in West and East Africa is facing stiff challenges in the timing of monetary convergence, the imperative of bankers to apply common modeling and forecasting methods of monetary policy transmission, as well as the requirements of common structural and institutional characteristics among candidate states. Inspired by the premise of the EMU crisis, this paper assesses real and monetary policy convergence within the proposed WAM and EAM zones. In the analysis, monetary policy targets inflation and financial dynamics of depth, efficiency, activity and size while real sector policy targets economic performance in terms of GDP growth at macro and micro levels. Findings suggest overwhelming lack of convergence; an indication that candidate countries still have to work towards harmonizing cross-country differences in fundamental, structural and institutional characteristics that hamper the convergence process.”

Monetary union in Eastern Africa has for years been the official stated goal of the Eastern Africa Community (EAC). The countries in the EAC are Kenya, Tanzania, Uganda, Rwanda and Burundi.

The EAC is a much looser union than the EU and just the fact that an internal market in Eastern Africa has not even been fully implemented should make one very cautious about EA monetary union. Despite of that work with monetary integration in the region goes ahead – even though the pace is much slower than had been the official political ambition. For the latest official comments from EAC on Eastern African Monetary Union see here.

In my view Asongu’s paper clearly shows that monetary union should not be rushed through. Rather policy makers should look for other possible reforms that will enhance trade and financial integration in Eastern Africa.

Endogenous monetary integration with M-pesa

It is certainly not obvious that the present “monetary borders” in Eastern Africa are optimal. Just the fact that borders across Africa are highly artificial and to a large extent due to colonial history could e an argument for currency unions across different countries in Africa – including in Eastern Africa. However, there is no reason why such monetary integration should happen through the introduction of common (monopoly) currency in the EAC. In fact there might be a better privatised option in the form of the so-called M-pesa and other electronic payment forms.

Over the last couple of years M-pesa which is a mobile telephone payment system (M-pesa means Mobile Money) has become hugely popular in Kenya and in many ways M-pesa has led to a quasi-privatisation of the monetary system in Kenya and M-pesa clearly has the potential to become a fully privatised parallel currency in Kenya.

M-pesa has also been introduced in other Eastern African countries but the success has been much more limited in countries like Tanzania than in Kenya. I believe that the primary reason for the success of M-pesa in Kenya is the fact that authorities wisely have not applied banking regulation to the M-pesa. On the other hand M-pesa is much more regulated in other Eastern African countries, which most likely has hampered the expansion of the M-pesa (and similar payment systems) in other East African countries.

I believe that many of the advantages of monetary union could easily be achieved by enhancing the use of M-pesa style payment systems across Eastern Africa. The main advantage of currency union is the reduction of transaction costs, but this is also the main advantage of M-pesa style systems. So if the EAC wants to help monetary integration in Eastern Africa then it would make much more sense to agree on common regulation of M-pesa style payment systems and allow these systems to be used across the EAC. In that regard it should of course be stressed that this regulation should be as “light” as possible and should not hamper the development of electronic and mobile based payment systems.

The clear advantage of such solutions for monetary integration in EAC would be that it would become “endogenous” meaning that households and corporations would only use a “common” currency (in the form of for example M-pesa) if they benefit from the use of that “currency”. Hence, one could easily imagine that most companies in for example Tanzania and Kenya would start using M-pesa style payment systems also for cross border payments, while for example households in Rwanda would prefer another payment system. Monetary Union limits monetary competition. This should never be the purpose of monetary reform. On the other hand deregulation (and common EAC regulation) of mobile payment systems will enhance monetary competition and likely lead to a more efficient form of monetary integration. Said, in another way why not let the market decided on the size of the optimal currency area?

If the EAC nonetheless wants to go ahead with creating a common currency it should opt for a “parallel currency” solution where the national currencies are maintained and the common currency is created as a common “accounting unit”. This accounting unit could take the form of what George Selgin has termed Quasi-commodity money (QCM), where the money base is expanded at a fixed yearly rate for example 5 or 10% based on an automatic electronic algorithm. It would be natural that private suppliers of M-pesa style payment systems would use this common accounting unit as the reference unit of accounting.

This is basically a suggestion for a privatised monetary integration in Eastern Africa. If successful this would lead to monetary integration in Eastern African and significantly reduce transaction costs of cross-border transactions, which exactly is the purpose of the EAC’s proposal for monetary union, but it would avoid the problems associated with lack of economic and political integration.

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PS I use the term M-pesa here as a form of payment system rather than as the specific brand. Therefore, this post is not an endorsement of M-pesa, but rather an endorsement of monetary reform that allows the development of mobile and electronic payment systems in Africa.

PPS Simplice Asongu also has another related working paper that I can recommend: How has mobile banking stimulated financial development in Africa?

This post is part of my “Project African Monetary Reform” (PAMR). I am currently also working on a post on the experience with currency union within the CFA franc zone(s).

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Related posts:
The spike in Kenyan inflation and why it might offer a (partial) solution to the euro crisis

“Good E-money” can solve Zimbabwe’s ‘coin problem’

M-pesa – Free Banking in Africa?

Project African Monetary Reform (PAMR)

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This post has also been published as a guest blog at Centre for African Development and Security.

Project African Monetary Reform (PAMR)

Project African Monetary Reform (PAMR) – post 1

The blogoshere is full of debates about US monetary policy and the mistakes of the ECB are also hotly debated. However, other than that there is really not much debate in the blogoshere about monetary policy issues in other countries. I have from I started blogging said that I wanted to broaden the monetary debate and make it less US-centric. Unfortunately I must say I also tend to write a lot about US monetary policy and there is no doubt that most of my readers are primarily interested in US monetary affairs. However, I still want to have a broader perspective on monetary theory, policy and history. Therefore as of today I am launching Project African Monetary Reform (PAMR).

I have no clue where PAMR will lead me other than I have a large interest in the African continent and it’s economies so why not combine it with my interest in monetary policy? My regular readers will know that I already have produced a number of posts related to African monetary issues. PAMR as such will not be a major change and I will not promise any regularity in my posts in the PAMR “series”, but I hope PAMR can be a framework within which I can write a bit more on African monetary matters. I will not get into the business of forecasting central bank behavior and market movements (I spend time on that kind of thing in my day-job), but I will hope to contribute to the discussion about monetary reform in Africa. Something still badly needed in many African countries.

In the process of studying monetary reform issues in Africa – we might even learn some good lessons for more “developed” economies like the US and the euro zone. So even if you are not interested in what is going on in Africa you might learn from tracking PAMR.

I therefore also would like to invite other economists, academics and policy makers with interest in African monetary reform to get in contact with me so we might be able to build a network of people with such interests. Furthermore, I would as always welcome guest posts concerning African monetary issues from other economists with special knowledge or interest in African monetary reform. I can be contacted at lacsen@gmail.com

Furthermore, I will invite you my dear readers to give me suggestions for the next post in the PAMR series. I want to take a look at the monetary policy set-up in a “random” African country. You my dear readers will make the choice on what country I should start with. But I rule out writing something on the three large ones: South Africa, Nigeria and Egypt. You can write the suggestion here or drop me a mail. I am all hears.

Some of my previous posts related to African monetary issues:

The spike in Kenyan inflation and why it might offer a (partial) solution to the euro crisis

“Good E-money” can solve Zimbabwe’s ‘coin problem’

M-pesa – Free Banking in Africa?

 

Time to try WIR in Greece or Ireland? (I know you are puzzled)

The ECB so far has refused to sufficiently increase the money base to meet the increase in the demand of money and as a result euro zone money-velocity has contracted. We are basically in a monetary disequilibrium. Normally we would say an excess demand for money can be reduced in two ways. Either you can increase the money supply or the price of money can increase sufficiently to reduce the demand for money until it matches the supply of money. An increase in the price of money of course means a drop in all other prices – deflation.

However, there is a third option – we could also increase the supply of money substitutes. This could be in the form of free banking – privately issued money – or through different forms batter systems. I have also earlier examined the impact ofthe so-called M-Pesa system in Kenya and how M-Pesa likely has increased money-velocity (reduced money demand) dramatically in Kenya. I suggested that could offer a partial solution to the euro crisis. A similar idea could be to create a system similar to the Swiss Wirtschaftring system (WIR).

WIR is basically a barter club of corporations and households and in a sense WIR functions as a parallel currency in the Swiss economy. Here is a description from a paper by Wojtek Kalinowski:

“The Swiss currency known as the WIR is by far the oldest and most important complementary currency presently in circulation. It remains, however, largely unknown. Created in 1934, it is currently used by approximately 60,000 small and medium-sized businesses found in all economic sectors, but primarily building, commerce (wholesale and retail), and manufacturing … In 2008, the volume of WIR-denominated trade was 1.5 billion Swiss francs …a figure that makes it far superior to any other parallel currency but which is still only an insignificant portion of the global monetary mass (0.35% of M2 in 2003).”

What I find particularly interesting with the Swiss experience is the counter-cyclical nature of the use of WIR. In a 2009 paper by James Stodder “Complementary Credit Networks and Macro-Economic Stability: Switzerland’s Wirtschaftsring”  it is demonstrated that there is a clear negative (positive) correlation between GDP growth (unemployment) and the turnover of WIR. Hence, this indicates that WIR tends to help equate money supply and money demand (reduce monetary disequilibrium). If you have studied George Selgin’s theory of Free Banking then you should not be surprised by this result.

Time for WIR in Greee or Ireland?

The deflationary trends are very strong in some euro zone countries such as Ireland or Greece. So what is needed is an increase in the money supply, but as the national central banks do not determine the local money supply (that is firmly in the hands of the ECB) that option does not exist. However, a WIR style system could be a second or third best solution for doing something about the monetary disequilibrium in these countries.

Obviously, it will likely be far too little to end the crisis and the best solution obviously still would be for the ECB to significantly ease monetary conditions. However, that should not stop deflation and crisis hit euro zone countries from removing legal barriers to the introduction of WIR style systems. Furthermore, one could easily imagine that euro zone governments and central banks could move to facilitate the creation of WIR style systems in their countries.

Obviously, this kind of discussion would not be necessary if the ECB moved to reduce monetary disequilibrium, but times are desperate – and that is why you for example see the reemergence of the old Irish punt certain places in Ireland (See here).

Finally I should add that some proponents of local currencies and WIR systems see them as a kind of “small is beautiful” system and a system to protect local producers. I strongly disagree with this kind of protectionist view and in that sense I completely agree with the views of George Selgin. See here.

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Update: See also this paper by James Stodder.
Update 2: In the comments below James Stodder recommends Irving Fisher’s book on “Scrip Currencies” and Georgiana Gomez’s recent book (2009) “Argentina’s Parallel Currency: The Economy of the Poor”. I knew Fisher’s book before, but was unaware of Gomez’s book (so I ordered it…)

The spike in Kenyan inflation and why it might offer a (partial) solution to the euro crisis

The euro zone is suffering from deflationary pressures and there is an obvious a need for monetary easing. On the other hand Kenya do not have that problem. In fact Kenyan inflation (and NGDP) has risen sharply since 2009. In some sense you can say that Kenya has what the euro zone needs and it is therefor interesting to examen why Kenya inflation has risen in recent years. I should of course stress that I don’t think the the euro zone need Kenyan monetary policy, but monetary developments in Kenya in recent years might nonetheless tell us how we could get monetary easing in countries like Greece and Spain – even if the ECB maintains it’s “do-nothing” stance (in fact the ECB is passively tightening monetary policy on a daily basis these days).

There are a number of reasons for the increase in inflation in Kenya, but notable reason undoubtedly is the increase in money-velocity since 2010. The increase in money-velocity to the financial innovation called M-pesa. M-pesa is a mobile based payment system operated by the mobile telephone provider Safaricom.

See here from African Development Bank (ADB) report on East African inflation from 2011:

“In the case of Kenya, the advent of financial innovation such as e-money may have contributed to the increase in velocity of money as seen by the corresponding rise in the number of M-PESA subscribers (Figure 8). The M-PESA has brought more than 14 million customers into virtual banking. According to the IMF (IMF, 2011), M-PESA processes more transactions domestically within Kenya than Western Union does globally. The M-PESA platform also provides mobile banking facilities to more than 70 percent of the country’s adult population. Evidence shows that the transactions velocity of M-PESA may be three to four times higher than the transactions velocity of other components of money.

The increase in the velocity of money induced by these activities may have in turn propagated self-fulfilling inflation expectations and complicate monetary policy implimentation. The monetary authorities may inadvertently follow looser monetary policy if the stock of e-money grows more rapidly than projected.

Further, since effective monetary policy is anchored on a constant money demand function, under conditions of unstable money, rising velocity and deep supply shocks, monetary policy based on interest rate targeting has a limited impact in controlling inflation.”

This of course is an argument why the Kenyan central bank should stop operating a “monetary policy based on interest rate targeting”, but it also shows that if the central bank operationally targets the interest rate (this is what both the Federal Reserve and the ECB do) then a positive or negative shock to velocity will impact nominal GDP and inflation.

And this also provides a partial solution to the euro crisis. Imagine if M-Pesa was introduced in Spain and/or Greece and had the same impact on money-velocity as in Kenya then that would obviously increase Greek and Spanish nominal GDP even if the money supply is kept unchanged.  That would seriously reduce the pressure on public finances and improve the general macroeconomic environment by reducing deflationary pressures.

Obviously this would not work if the ECB would counteract the increase in money-velocity by reducing money supply and given the track record of the ECB that can unfortunately not be ruled out (remember that few other central banks would have hiked interested under the circumstances the ECB hiked last year). That said, a sharp increase in Greek and Spanish money-velocity would certainly do no harm at the the moment. In fact it is badly needed.

So is this in anyway realistic? Well, I doubt the introduction of a M-Pesa style system would in anyway be enough to solve the euro zone crisis. Furthermore, it should be noted that M-Pesa has not in general been regulated within the framework of the regular Kenyan banking regulation and this is clearly part of the reason for the success of the scheme. I doubt that any European central bank would have a similar open-minded view of e-money as the Kenyan central bank. However, that does not change the conclusion that technological development and a liberalization of banking legislation in the crisis hit European economies could give an badly needed boost to money-velocity – and the ECB would not have to buy one-single Spanish government bond to achieve it. Just allow M-Pesa mobile banking and you can at least make some sort of monetary easing more likely.

PS the clever reader might realize that this is a very moderate Free Banking style proposal to reduce monetary disequilibrium in the euro zone.

“Good E-money” can solve Zimbabwe’s ‘coin problem’

The New York Times reports on the Zimbabwe’s so-called “coin problem”:

“When Zimbabweans say they are waiting for change, they are usually talking about politics. After all, the country has had the same leader since 1980.

But these days, Robson Madzumbara spends a lot of time quite literally waiting around for change. Pocket change, that is. He waits for it at supermarkets, on the bus, at the vegetable stall he runs and just about anywhere he buys or sells anything.

“We never have enough change,” he said, manning the vegetable stall he has run for the past two decades. “Change is a big problem in Zimbabwe.”

For years, Zimbabwe was infamous for the opposite problem: mind-boggling inflation. Trips to the supermarket required ridiculous boxloads of cash. By January 2009, the country was churning out bills worth 100 trillion Zimbabwean dollars, which were soon so worthless they would not buy a loaf of bread.

But since Zimbabwe started using the United States dollar as its currency in 2009, it has run into a surprising quandary. Once worth too little, money in Zimbabwe is now worth too much.

“For your average Zimbabwean, a dollar is a lot of money,” said Tony Hawkins, an economist at the University of Zimbabwe.

Zimbabweans call it “the coin problem.” Simply put, the country hardly has any. Coins are heavy, making them expensive to ship here. But in a nation where millions of people live on a dollar or two a day, trying to get every transaction to add up to a whole dollar has proved a national headache.”

This is of course is a very visible monetary disequilibrium – the demand for coins simply is outpacing the supply of coins. As a consequence Zimbabwe is now struggling with a quasi-deflationary problem. Somewhat paradoxically taking recent Zimbabwean monetary history into account.

Monetary history is full of this kind of “coin problems” that we now have in Zimbabwe and there are numerous solutions to the problem. In the NYT article one such solution is suggested is that the Zimbabwe government should start minting coins again. However, in Zimbabwe nobody is willing to accept in coins made produced by the government and who can blame them for that?

Good E-money

However, there is another solution that would make a lot more sense and that is simply to allow for private minting of coins. George Selgin in his 2010 masterpiece “Good Money” describe how Britain’s ‘coin problem’ in the 1780s was solved. Here is the book description:

“In the 1780s, when the Industrial Revolution was gathering momentum, the Royal Mint failed to produce enough small-denomination coinage for factory owners to pay their workers. As the currency shortage threatened to derail industrial progress, manufacturers began to mint custom-made coins, called “tradesman’s tokens.” Rapidly gaining wide acceptance, these tokens served as the nation’s most popular currency for wages and retail sales until 1821, when the Crown outlawed all moneys except its own.”

In fact we are already seeing this happening in Zimbabwe in a very primitive form – again from the NYT:

“Zimbabweans have devised a variety of solutions to get around the change problem, none of them entirely satisfactory. At supermarkets, impulse purchases have become almost compulsory. When the total is less than a dollar, the customer is offered candy, a pen or matches to make up the difference. Some shops offer credit slips, a kind of scrip that has begun to circulate here.”

So credit slips, candy, pens and matches are used as coins. Obviously this is not a very good solution. Mostly because the “storage” quality of these quasi-coins is very bad. The quality of candy after all deteriorates rather fast is you walk around with it in your pockets for a couple of days.

Among the problems in Zimbabwe is also that there is really not any local “manufacturers” that would be able to issue coins which would be trusted by the wider public and as the general “trust” level in Zimbabwean society is very low it is questionable whether any local “agent” would be able to produce a trustworthy coin.

However, a solution might be found in another African country – Kenya. In Kenya the so-called M-pesa has become a widely accepted “coin”. The M-pesa is mobile telephone based payments. Today it is very common that Kenyans use there cell phone to make payments in shops with M-pesa – even with very small amounts. Hence, one can say that this technological development is making “normal” coins irrelevant. You don’t need coins in Kenya. You can basically pay with M-pesa anywhere also in small village shops. M-pesa is Good Money – or rather Good E-Money.

Therefore, the Zimbabwean authorities should invite international telecoms operators to introduce telephone based payments in Zimbabwe. The mobile penetration in Zimbabwe is much lower than in Kenya, but nonetheless even in very poor Zimbabwe mobile telephones are fairly widespread. Furthermore, if it could help solve the “coin problem” more Zimbabwean’s would likely invest in mobile phones.

Hence, if private telecom operators were allowed to introduce (lets call it) M-Mari (Mari is shona for ‘money’ as Pesa is swahili for money) then the coin problem could easily be solved. In Kenya M-pesa is backed by Kenyan shilling. In Zimbabwe it M-Mari could be backed by US dollars (or something else for that matter).

The future African monetary regime – M-pesa meets Bitcoin

This might all seem like fantasy, but the fact remains that there today are around 500 million cell phones in Africa and there is 1 billion Africans. In the near future most Africans will own their own cell phone. This could lay the foundation for the formation of what would be a continent wide mobile telephone based Free Banking system.

Few Africans trust their governments and the quality of government institutions like central bankers is very weak. However, international companies like Coca Cola or the major international telecom companies are much more trusted. Therefore, it is much more likely that Africans in the future (probably a relatively near future) would trust money (or near-money) issued by international telecom companies – or Coca Cola for that matter.

In fact why not imagine a situation where Bitcoin merges with M-pesa so you get mobile telephone money backed by a quasi-commodity standard like the Bitcoin? I think most Africans readily would accept that money – at least their experience with government issued money has not exactly been so great.

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