A common cents approach to money

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By Khaled Diab

With the United States and Europe on the verge of bankruptcy, the time has come to consider a radical solution – a single global currency.

Monday 26 September 2011 

Western economies – and the global economic order they still dominate – seem to be stumbling from one debt crisis to the next: from the sub-prime mortgage crisis, which triggered the whole sorry mess, to the ongoing euro and European sovereign debt crises, not to mention the near-default of the United States on its ballooning foreign debt.

This ocean of debt in which the West is being subsumed is largely due to irresponsible lending – and also borrowing – decisions fuelled by the unprecedented availability of ‘cheap credit’ in consumer-driven societies apparently bent on living beyond their already-considerable means while widening the gap between the haves and have-nots.

Critics have rightly singled out the banks who, in the belief that they had magically eliminated ‘risk’ through financial hocus pocus, have taken us to the edge of the abyss. They were aided and abetted in their pillage by the removal of many of the checks and balances from the international financial system.

But it is not just the architecture of financial markets that is at fault. Not only is the sovereign debt crisis currently being compounded and made worse by financial speculation, the unsustainable levels of sovereign debt on both sides of the Atlantic – with traditional trust in and sentimentality towards the dollar keeping the wolves at bay for now from the United States – are to a large part a product of the current currency regimen.

The United States, especially, and Europe, to a lesser degree, both possess powerful reserve currencies, which is both their fortune and misfortune, owing to the distortionary effects. Their fortune because its attractiveness to the world – both as a medium for international trade and as a reserve currency held by central banks and even individual businesses and citizens – means they can borrow at cheaper rates than they would be able to get if the dollar and euro were just local currencies.

But it has also proven to be their misfortune by providing them with debt that is so cheap that it would’ve been almost insulting to turn it down. In the United States, the effects of the world’s willingness to lend to the treasury has resulted in a situation where four in every 10 dollars spent by the government is borrowed and total public debt is $14.7 trillion, which is roughly equivalent to the country’s annual GDP.

The solutions to the debt crisis so far envisioned or rolled out mostly involve throwing more money, in addition to the trillions already spent or committed, at the system in the hopes of shoring it up and salvaging it, in what has been labelled ‘Keynesian economics’.

But perhaps the ultimate solution is to borrow another of Keynes’s theories, which few are currently considering, and that would be to throw away the existing currency system altogether and replace it with a single global currency, or ‘supranational currency’, which, perhaps unsurprisingly, is supported by the emerging powers of China and Russia.

In the early 1940s, John Maynard Keynes, the legendary British economist, proposed the creation of what he called the ‘Bancor’ which, backed by barter and its value expressed in gold, would be used for international trade transactions, thereby removing the distortions. And, at the Bretton Woods conference, Britain suggested that a supranational currency would be the best option for the post-war world order. The United States, blinded by the idea of the dollar becoming the world’s reference currency, torpedoed the idea.

But as the so-called ‘Triffin dilemma’ highlights, there is a fundamental conflict of interests between a national currency playing the dual role of a global reserve currency, with the inevitable outcome being ballooning deficits.

In addition to addressing this deficit disaster, a single global currency can break the destructive boom and doom cycles we are experiencing increasingly intensively. It will also remove unfair distortions in the global economy, remove the possibility of speculation, and even reduce inflation.

The disappearance of the dollar and, to a lesser extent, the euro in international transactions would ensure that Western economies no longer punch above their weight and developing economies no longer punch below their weights.

The decades-old debt crisis experienced by developing and under-developed countries is not only due to poor lending decisions on the part of international banking institutes and corruption among ruling elites, but also because these debts are payable in dollars and other hard currencies. In order to earn enough dollars to pay off their debts –the enormous interest and the principal amounts – poorer countries are forced to gear their economies towards maximising hard currency-earning exports.

Although critics of a single global currency point to its alleged inflexibility and how it would hinder national governments from adopting appropriate monetary policies, but it would free them up to focus more on economic policy. What critics also overlook is that a single currency, by removing currency volatility, would make international trade more efficient by removing exchange rate distortions, not to mention fairer, by giving an accurate valuation of a country’s economic fundamentals.

A global currency could also be complemented by a global minimum wage.

As a first step in the right direction, a notional, electronic global currency, against which national currencies have fixed exchange rates, could be created to be used on global financial markets and for import/export transactions.

In the longer term, despite the logistical nightmare involved, a physical, single global currency should be the ultimate goal. But unlike the euro, it should come equipped with its own powerful and robust central bank in which all countries, or alternatively regional blocs, should have seats commensurate to their economic size.

A single global currency is not a panacea to the world’s economic woes, but it will make the international trading system fairer and more efficient.

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Egypt’s heartless economic growth

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 By Osama Diab

Economic growth in Egypt has mainly benefited the well-off, with many of the poor falling off the tightrope of the poverty line.

18 October 2010

Two and a half years ago, a usually hectic Cairo became quiet and empty. It was the afternoon on a working day, when streets are normally congested with endless queues of cars. Government officials blamed the lull in activity on a sandstorm. But it wasn’t sand that kept people at home – it was a storm of anger, sparked by textile workers in the Nile Delta city of Mahalla.

On 6 April 2008, Mahalla carved out its name as a centre of labour resistance. A hundred kilometres away, much of Cairo went on a general strike in solidarity with Mahalla’s textile workers. Many across the nation also went on strike at home or protested in solidarity with them. And many have continued to commemorate the date of 6 April in the years following by staging demonstrations. There is also a prominent opposition youth movement named after the 6 April events.

While the city of Mahalla was literally set on fire due to clashes between the police and the public, government officials in Cairo were busy concentrating on their goals of achieving high economic growth rates and attracting foreign investment. The Egyptian cabinet prides itself on recent signs of economic wealth. Egypt’s economy (nominal GDP) has tripled in less than 10 years, from LE373.6 billion in 2001 to LE1,008 billion in 2009. All economic performance indicators have been positive, especially since the appointment of Prime Minister Ahmed Nazif’s cabinet (aka the ‘businessmen cabinet’) in 2004. 

Investment has also been flooding into the country in large amounts, making Egypt a major destination for foreign direct investment (FDI) in the Middle East and Africa. In 2001, Egypt received US$500 million in FDI, which increased 24-fold to US$12 billion in 2007, according to the World Investment Report.

It wasn’t long before the new money became visible. North Coast resorts, Italian designer shops, international high-end cuisine from all over the world, and mansions and luxury compounds springing up in New Cairo and 6 October City are all signs of this newfound wealth. Ahmed Ezz, businessman and National Democratic Party secretary-general for organisational affairs, famously argued that the increasing sales of luxury cars are living proof that Egypt is much more prosperous now than before. But, more accurately, these increased sales are living proof that the 1% of Egyptians who can now afford luxury cars are more prosperous.

No one can deny the rapid expansion of Egypt’s economy in the past decade. Egypt saw high growth rates of 7% for three consecutive years prior to the global economic downturn. The government is proud, but is the average Egyptian also proud?

Not really, because it was only when Egypt was witnessing this impressive yet questionable growth that labour strikes spread like wildfire. Social tension, if not social unrest, is on the rise, and political stability is at stake. 

Despite significant growth and the flow of large amounts of cash, many Egyptians still struggle to put food on the table. Labour strikes have been increasing in number as a new way of demanding change. It is obvious to any observer that something has gone wrong: the new money was not enough to stabilise the country socially and politically. On the contrary, an increase in negative social and political vibes have coincided with positive growth, an irony many experts and analysts are trying to grasp.

“We want to reach the poverty line”

Hundreds of strikes have been calling for the settlement of overdue payments or an increase in extremely low wages. A climax was reached on labour day this May when Egypt’s workers collectively demanded a minimum wage of LE1,200. Their slogan was “We want to reach the poverty line.”

With all the ostentatious signs of wealth and prosperity surrounding Egypt’s poverty-stricken, and with high inflation triggered by rapid economic growth, LE1,200 seems to be only just adequate for workers to survive. But the government does not agree.

It seems that Egypt’s government suffers from its businessman mindset. It is happy that the country is making profit, but fails to recognise there are other aspects to a country that need to be addressed: a nation is not just an enterprise.

The missing link in Egypt’s development formula is the social and political dimension neglected by the Nazif cabinet . The cabinet runs the country in the same way its members run the companies they own, where the only goal is to make profits on the balance sheet at the end of the year.

They also see a booming economy in the circles of the other businessman they are surrounded by, and it can be observed, from their statements – such as Ahmed Ezz’s pronouncement on luxury car purchases – how isolated they are from reality.

Trickle-down should not be left to nature

The government has been promising Egyptians that trickle-down will eventually happen and that citizens must wait and be patient before they can reap the harvest of economic growth, when the wealth trickles down to all layers of society.

We have been patient, but everything seems to be going in the opposite direction. According to the Human Development Report of 2010, Egypt ranks 123 out of 182 when it comes to income equality, with the richest 10% controlling 27.6% of Egypt’s wealth. Egypt ranked 111 out of 177 in the 2006 report.

According to Ahmed el-Sayed el-Naggar, economist and editor-in-chief of the al-Ahram Centre for Political and Strategic Studies’ annual economic report, there are two things that are vital if the whole of society is going to benefit from economic growth and if income is to be distributed more equally: taxes and wages.

One of the main objectives of taxation is redistributing wealth. In most tax systems, the more you make , the greater the percentage the government charges you in order to carry out its infrastructure projects and offer social services, such as pensions, healthcare, and so on.

In Egypt, there are only three tax brackets, with the highest starting at LE40,000 a year (LE3,333 a month). In other words, citizens making LE40,000 a year are positioned in the same bracket as those who make hundreds of millions. According to el-Naggar, the fewer tax brackets there are, the less efficient and the more unequal the system is. Imposing higher rates on upper-bracket income is a conventional and well-known way to redistribute wealth, he says.

Let’s compare the tax system in Egypt with that of other countries. In the United States, the bastion of capitalism, the highest income tax band is 35%, while it reaches 52% in some European countries, such as the Netherlands. In Egypt, Law 91/2005 reduced the highest income tax band from 42% to just 20%, as part of the government?s tax reform plan.

el-Naggar believes the current wage system in Egypt is one of the worst in the world. “It forces people to take bribes and steal, because it’s impossible to live off that income,” he says.

According to el-Naggar, the minimum wage in the government for a university graduate is LE108, which is only enough to buy 2.5kg of meat. In contrast, in 1979, the minimum wage for graduates was LE28, which was worth 35kg of meat. “So even if we have growth, the upper class is in total control of the newly obtained wealth,” says el-Naggar.

“The growth was more in the financial economy than the real productive economy,” explains el-Naggar. “The other thing is that growth is not real unless accompanied by social policies that improve the distribution of wealth through having a fair wage system, a fair taxation system, and a fair subsidy system.”

 This article was first published in the al-Borsa newspaper on 26 September 2010. Republished here with the author’s permission. ©Osama Diab.

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Making globalisation pay

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By Khaled Diab

Big corporations are using the banking crisis as an excuse for exploiting cheap labour. Is it time for a global minimum wage?

4 February 2010

For beer lovers, Belgium is the nearest place to heaven on earth. The country’s 125 or so breweries produce an estimated 800 standard beers, each of which is served in its own distinctive glass. This mushrooms to nearly 9,000 when special editions are included.

Given this ocean of booze, you would expect that the temporary loss of a handful of beers would cause hardly a ripple. In a country where beer receives the kind of appreciation reserved for wine in other cultures, the recent threat to supplies of some of Belgium’s favourite tipples captured headlines and caused distress.

The “Beer Crisis”, as it became known, was caused by striking workers blockading three breweries owned by the world’s largest beer giant, AB InBev, which, among other things, produces the popular but bog-standard Stella Artois and the more upmarket Abbey beer Leffe.

The immediate cause of the blockade was AB InBev’s plans to trim its Belgian workforce by 300 (with another 500 to be scrapped in the UK, Germany, the Netherlands and Luxembourg), ostensibly because of falling beer consumption in western Europe.

Despite the inconvenience to the beer-drinking public, most Belgians are sympathetic with the strikers. “We’re with the strikers,” declared one regular at a café in Halle. “If the beer flows dry, that is only a relative problem.”

This is because, InBev (previously known as InterBrew), though it is admired for raising the global profile of Belgian beer, has become infamous for its cavalier attitude towards its workforces, which have endured several ‘restructurings’ in recent years to cut costs, while the management pays itself lavish bonuses, engages in expensive prestige acquisitions (such as the US makers of Budweiser), and exports jobs to countries where labour is cheaper.

Faced with this public relations disaster and the loss of market share to smaller breweries, InBev’s management has backed down for the time being and the blockade is being lifted.

Workers at the nearby Opel plant in Antwerp have not been so fortunate. Despite an offer of a €500 million bailout from the Flemish government, and voluntary pay cuts agreed by the unions, troubled US car giant GM has decided to close the 85-year-old Antwerp plant, axing 2,600 jobs in the process. The decision is all the more puzzling because the plant still turns a healthy profit.

It seems that InBev and GM are taking advantage of the current financial crisis. Both are shifting jobs to countries where labour is cheap, while GM seems to be subsidy shopping and has successfully pitted the German government against the Belgian government.

And they are not alone. With their massive revenue streams and the mobility to shift their assets rapidly, countless multinationals have used globalisation to hold governments to ransom and stack the global trading system unfairly in their favour by ‘outsourcing’ their operations to so-called low-cost countries while selling their output in higher-cost wealthy countries.

So what can be done to curb this kind of corporate excess and greed and put a brake on this undignified race to the bottom?

One idea could be to develop an international minimum wage and integrate the concept into the architecture of the World Trade Organisation, especially since the Doha round of trade talks is ostensibly aimed at triggering sustainable development. What could be more sustainable for the global economy than affording all workers a decent income?

But, even assuming that WTO member states can muster up the political will to set such a global standard – after all, both rich and poor countries would have their own reasons for opposing it – attempts to set an international minimum wage would face umpteen practical hurdles.

For example, if you set it as an absolute amount, what would you take as your reference? Universalising, say, western European levels would be unaffordable for developing economies and unfair to European workers who have to contend with some of highest costs of living in the world.

Instead, we could determine a minimum standard of living to which all workers should be entitled and use that to calculate a fair wage for each country using purchasing power parity. However, given the magnitude of global income disparities, this would disadvantage local companies in poorer countries who, compared with multinationals, do not possess the resources to pay such wages – nor can the domestic markets they cater for absorb the extra cost.

So, until we have true global economic convergence, it would be far better to start the process of fairer trade at home, and more strictly regulate our multinationals. Today’s giant corporations are often likened to small countries. However, there are important differences: they are not tied down by geography and, given the paucity of international regulations, they can get away with practices that would be considered unscrupulous or even illegal in their home territories.

Just as the vast majority of developed economies from which most multinationals hail have minimum wage systems in place, it’s time global corporations were made to apply similar practices in their overseas operations in poorer countries.

In addition to an absolute rock bottom wage which they cannot go below, multinationals should be obliged to implement an indexed salary system in which workers in their overseas operations cannot earn less than, say, half of what a worker doing a similar job in their home territory earns.

Complaints are bound to be heard about how this interferes with the efficient functioning of the free market. But I doubt CEOs and top managers would be so blase if it was their own jobs that were to be outsourced. I’m sure India and other developing countries are teeming with intelligent, capable entrepreneurs who could probably do a better job than many of our current crop of avaricious business leaders, and at a fraction of the cost.

Besides, the free market already functions inefficiently – the rich domestic markets of multinationals are still quite well-protected fortresses. And, though we may have freer movement of goods and services than in the past, the movement of labour is severely restricted. In a truly free market, workers would go where the best-paying jobs are, rather than the jobs going to where the worst-paid workers are.

More importantly, at its core, economics is about human wellbeing and if free-market orthodoxy fails to deliver on this, then something needs to be done to balance efficiency against ethics.

This column appeared in The Guardian Unlimited’s Comment is Free section on 31 January 2010. Read the related discussion.

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