Dual currencies may help developing countries brace for bumpy post-Brexit ride

(Credit: Philip Brewer/Flickr)

In the wake of the unprecedented Brexit vote last month, economists who focus on the needs of developing and emerging economies are putting all options on the table.

According to a recent report by Phyllis Papadavid of the Overseas Development Institute, many developing and emerging economies can expect strong volatility in their currencies post-Brexit. Those most acutely affected will be countries that export goods primarily to the U.K., including Bangladesh, Mauritius, Fiji and Kenya.

Besides finding new trading partners and working to diversify their income streams, Papadavid advises these countries to consider another, some might say more radical, step: setting up a dual-currency exchange system – one for exports and commercial transactions and another for critical imports. Such an approach would use the currency itself as a shock absorber to large macroeconomic swings.

In her report, Papadavid pointed to China and Ethiopia as two countries that have successfully used a dual currency approach.

Ethiopia used its overvalued exchange rate to import critical machinery. At the same time, the country operated a cheaper exchange rate to increase exports. In an interview with Humanosphere, Papadavid noted that as a result of this dual-exchange rate, Ethiopia today has “the best infrastructure on the continent.”

What does it take to implement and maintain such a system?

China operated its dual exchange system for more than a decade and a half (1979-1995), though Papadavid suggested the approach should only be used for a short time to get through a crisis. In addition, she cautioned, “It requires an effective state.”

By way of comparison, Papadavid noted that in Argentina during the late 1980s and early 1990s such a system didn’t work out very well. At one point, the country had multiple official and unofficial exchange rates of the national currency. “They didn’t have that goal to build out the infrastructure,” she said. “It was largely a firefighting measure.”

But what if a government doesn’t want to take such a leap? Are there other ways to buffer developing economies from macroeconomic shocks besides setting up multiple exchange rates?

Bernard Lietaer, an international expert in the design and implementation of currency systems, doesn’t think that state intervention is always required. “The arguments [in the ODI report]are valid,” Lietaer said in an interview with Humanosphere. “But, we have other cases where it requires less heavy central control, and that works, as well.”

Lietaer mentioned by way of example the WIR Bank of Switzerland, which was founded in 1934 as an independent barter exchange for businesses. Today the cashless exchange includes about 60,000 small and medium Swiss enterprises and allows them to conduct business using a mix of WIR francs and Swiss francs by check, credit card and online. Research even suggests that such online barter exchanges, when operated on a national scale, may provide counter-cyclical support to the overall economy.

On a much smaller scale, but similar to the WIR Bank exchange network, are the community currency projects that have been set up in the slums of Kenya by Will Ruddick, founder of the Grassroots Economics Foundation.

Reached at his home in Mombasa, Ruddick shared his perspective on macroeconomic currency interventions.

“National economies are a legacy, an outdated concept,” said Ruddick. “Lines on maps don’t equate to economies. It’s a collection of markets.”

In his experience, the top-down approach often fails to meet the needs at the community level. “The Central Bank of Kenya has no way of dealing with market and community level lack of liquidity that is chronic during certain times of the year,” he says.

But Ruddick’s team is attempting to address that problem. Today in Kenya the community currency networks that Ruddick has set up, officially called Sarafu-Credit, are used by more than 1,000 businesses across five networks: two in Mombasa (including the precedent-setting Bangla-Pesa currency), and three in Nairobi. Most often the credit vouchers are used as a “top-up” for purchases made with the national currency, the Kenyan Shilling. Twenty-two schools are also members of the network, accepting a portion of Sarafu-Credit for fees and private tutoring costs.

Ruddick and his team are currently investigating whether Kenya Savings and Credit Cooperative Organizations (SACCOs) could take over managing the community currencies. Such a combined approach could even give individuals who are new to banking a credit score. By receiving first an interest-free line of credit in the community currency, they could later qualify for loans in the national currency.

The program is already expanding rapidly beyond Kenya. Through the Grassroots Economics Foundation, two new community currency networks have been established in South Africa (in Kokstad and north of Cape Town). Additionally, Ruddick said that they’ve registered to start projects in Uganda later this year, and they hope to start programs in Nigeria next year.

“In Africa, they tend to be very nervous about anything that is not controlled by the center,” said Lietaer. A former Belgian central banker himself, as well as co-designer of the Euro, Lietaer today advocates remaining open to trying new initiatives. “The most important thing is to let go, instead of trying to control everything.”

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Andie Long

Andie is a writer and PR/marketing consultant, based in Seattle. She focuses on inclusive solutions to poverty and climate change. She's also a certified game designer. Follow her on Twitter @andielong