Mr. Farage made me happy and then worried. UKIP should support NGDP level targeting

If there is anything that the governing Tory party in the UK is fearing then it is the UKIP. The anti-EU UKIP wants to take the UK out of the EU, but it also wants something less – monetary reform!

This is UKIP leader Nigel Farage in the City AM:

“WHEN Mark Carney takes over as our new governor of the Bank of England, at this time of “exceptional” economic crisis – his words not mine – he must be fully armed and working to a clear political direction from the start. Carney’s first day on the job should be an economic D-Day for the UK.

That is why I want to be the first UK political leader to commit my party to changing the Bank of England’s mandate. It’s time to put the Bank, with its increasing powers and broadening economic reach, on the side – incontrovertibly – of the struggling people of Britain.

The status quo is not an option. British voters have made it clear in three by-elections, each time with rising force, their feeling of intense anger at the Westminster and Brussels elite. Ukip carries the flag for these voters. I’m proud that I can give voice to their anger, while offering them something positive to do with their vote. But Ukip offers more. We offer a future in which Britain is free to govern itself, to enforce its own laws, to control its borders, and to make its successful way economically – trading at a profit and able to honour promises to its citizens. A first and crucial step is that we take back the commanding height of our economy – the Bank – and put it to work driving employment, growth and confidence.

I expect George Osborne to use this Budget – three years late – to open the debate on the objectives of the Bank, and to lay out the options for change. But I call on him to go further. He must put some red British meat into the dish. He should announce which option he prefers, and set a fixed timetable for the consultation and the decision. He must guarantee that, by Carney’s first day, the new framework is in place.

Why do I put this pressure on him? Because one of the many failures of this government has been its inability to take the decisions needed to put growth and confidence first. The list of its jellied failures to decide is long – on energy, aviation, housing, roads, and infrastructure investment. Neither the public nor businesses know whether to be confident and spend, invest, or hire.”

When I saw Mr. Farage’s comments today my response was wauw! This is pretty incredible – the Tories are coming under attack from the right to change the mandate of the Bank of England in a more pro-growth oriented direction.

So what is the Market Monetarist response? Well, it is easy. Yes Mr. Farage is completely right – the BoE’s inflation target is terrible and should be changed. He is also right the that the UK economy needs monetary “stimulus” in the sense that nominal GDP has fallen well-below the pre-crisis trend level.

However, I must say that Mr. Farage’s comments also come across as being advocating a significant level of monetary activism which I find very problematic. In fact it seems like Farage is just calling for monetary stimulus – yes that might be needed at the moment, but it is terribly dangerous if the institutional framework is not correct. We don’t want a return to the inflationary 1970s. We want a monetary constitution for Britain. Not a hawkish or a dovish monetary policy, but a neutral monetary policy. UK monetary policy has been overly tight so monetary easing should be welcomed, but I much prefer this to happen within the framework of a proper NGDP level targeting regime.

Therefore, Mr. Farage you are right to be outraged by the UK government’s lack of action on changing the Bank of England’s mandate, but you should be more clear on the mandate you want. Ask for an NGDP level target for Britain. It is in the country’s best interest!

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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