Friday, January 27, 2017

Ending Corruption and Cash

At the recent World Economic Forum annual meeting held in Davos, Switzerland, an interesting Issue Briefing entitled "Ending Corruption" took place with renowned Nobel Prize-winning economist, Joseph Stiglitz, a professor of economics at Columbia University and Mark Pieth, a professor of criminal law at the University of Basel.  Stiglitz and Pieth recently published a paper "Overcoming the Shadow Economy" that looked at secrecy-havens and how they facilitate both money laundering and tax avoidance and evasion which they believe contribute to both crime and the high degree of global wealth inequality.

The issue dealt with during this briefing was corruption, particularly the shadow economy, the subject matter of their aforementioned joint publication.  To put the discussion into context, it is also important to remember that the November 2016 moves by India's Modi government/the Reserve Bank of India to demonetize the Indian economy by banning bank notes with Rs 500 and Rs 1000 denomination, a move that has led to a shortage of cash as 86 percent off the nation's currency has disappeared from circulation.  This move was made under the guise of reducing corruption thereby increasing tax revenue in India but has had significant negative impacts on Indian consumers.  It has also led to an increase in digital transactions and an increase in the size of balances allowed in mobile wallets on smartphones used for online payments.  Mobile wallet companies have noted massive increases in the use of mobile wallets with approximately 1 million wallet users joining every day since demonetization.

Interestingly, the Reserve Bank of India also expresses another concern about the old Rs500 and R100 notes, stating the following:

"The incidence of fake Indian currency notes in higher denomination has increased. For ordinary persons, the fake notes look similar to genuine notes, even though no security feature has been copied. The fake notes are used for antinational and illegal activities. High denomination notes have been misused by terrorists and for hoarding black money. India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace. In order to contain the rising incidence of fake notes and black money, the scheme to withdraw legal tender character of the old Bank Notes in the denominations of Rs 500 and Rs 1000 was introduced." (my bold)

Here's how India's government is selling the concept of a cashless society, using Prime Minister Modi's likeness as a huckster:

Now, let's get back to the WEF Issue Briefing.  Here is Joseph Stiglitz answer to the following question:

Q - "I'm very interested by the view of the panel on the radical move that the Prime Minister of India took to fight corruption which was to suppress the banknotes and change them.  What do you think about that?"

A - "So, let me say on the first question, I actually, I believe very strongly that  for countries like the United States, we could and should move to a digital currency and get rid of currency and I have an NPR paper coming out on using, digitalizing electronic money so that you would have the ability to trace this corruption.  There are important issues of privacy and issues of cyber security but it would have, certainly, very big advantages on knowing....and I think you could attack some of the cyber issues because of the transparency."

When asked by the moderator whether such a move to a cashless society would have a short-term impact on the economy, he responded:

"I think over the long term, the benefits will exceed the cost and yes, there are transitional issues and they may not have carried out those transitional issues in the best possible way but I think over the long term, its a move in the right direction because I think the corruption is very enervating in many of these societies."

If you wish to hear the exchange for yourself, please go to the 25 minute mark.

Basically, India is the global test case for demonetization, a process that was sold to Indians as a means to both reduce corruption and reduce the incidence of counterfeit currency.  When we start hearing both politicians and central bankers touting the disadvantages of a cash society, we'll know that cash is about to disappear as a medium of exchange.  From the comments made by Joseph Stiglitz, we can see that he is firmly in the camp of banning cash all in the name of reducing corruption and increasing transparency, moves that will be appealing to governments if they are tied to increasing tax revenues in this time of ultra-high public debt.

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