by Raihan Ronodipuro and Anna Kolotova
by Raihan Ronodipuro and Anna Kolotova
Economic Crises Must Not Lead to Cashless Economies
The global economic crisis resulting from the pandemic has inevitably led to commentators focusing once again on the “cashless economy” debate. For some, the rise of cashless economies across the globe is an unavoidable step towards a global digital economy. For others, hard cash remains the backbone of fragile economies in poorer countries and a mainstay of individual freedoms and civil liberty in richer ones, and its removal would simply accelerate the already widening economic gap between rich and poor.
Economic crises have been shown to increase the amount of cash in circulation as individuals begin to hoard cash as a response to fears that banks may close their doors and disappear along with people’s savings. For example, between 2007 and 2010—during the last economic crisis—cash in circulation increased from $53 billion to over $70 billion. This time around, it is estimated that one in ten people in the United Kingdom is stockpiling cash at home, just in case.
Yet, some actors see economic crises as opportunities to advocate for going cashless. Governments, central banks, and the fintech industry have continued to extoll the virtues of cashless economies, despite the fact that hard cash has often remained the linchpin for economic recovery leading to stable growth in the aftermath of economic disaster. There are several recent examples of governments going cashless to reboot economies, with often adverse consequences, most notably Venezuela.
In Venezuela’s case, cashless is senseless
Venezuela’s reputation as an oil-rich petrostate has been ravaged during the ongoing Bolivarian revolution that has destroyed the economy and led to disease, starvation, hyperinflation, and massive emigration from the country. Starting in 2010, during the presidency of Hugo Chávez, the crisis then intensified during the 2010s oil glut under the Nicolás Maduro government, which failed to cut spending despite falling oil revenues, compounding the economic crash. GDP subsequently fell by over two-thirds between 2014 and 2019.
An obvious result of the hyperinflation resulting from the crisis has been that Venezuela’s currency, the bolívar, has been rendered practically worthless and banknotes have become scarce. The Maduro government, which has assumed quasi-dictatorial powers, dabbled in conspiracy theories, claiming that cash was being smuggled across the Venezuela-Colombia border in order to sabotage the economy and bring down the regime.
“Colombia along with the [border] mafias are leading this attack against Venezuela. They are stealing 50- and 100-bolívar banknotes to take them out of the country,” Maduro said in 2017.
Inevitably, more and more U.S. dollars are appearing in Venezuela as individuals struggle to survive and there have been increased fears of government overreach and an attack on civil liberties as the Maduro regime pushes for cashless solutions to save the economy and act as a rebuff to a perceived capitalist threat from the U.S. “They [United States] have a war against our physical currency. We are moving this year to a more profound digital economy, in expansion. I’ve set the goal of an economy that’s 100% digital,” Maduro exclaimed.
Maduro used the crisis to press for a completely cashless society, ignoring the fact that up to 40% of Venezuelans do not have bank accounts. Venezuelans now use their debit cards for all sorts of mundane transactions, from buying foodstuffs at the market to petrol for their cars, often saving their precious cash for imperative services like paying for the bus.
This has led Maduro to target the public transport system as the first stage of a plan he calls “the digital bolivar,” in spite of the fact that the Venezuelan public transport system is ill-equipped for processing digital payments, having never adopted a fare card system. Moreover, importing point-of-sale terminals and debit cards are proving extremely costly, resulting in a decidedly slow rollout of the cashless system. In an extremely unstable economy in need of rapid growth like Venezuela’s, this is more of a hindrance than a help.
India: Cashless to curb “black money”
Maduro is certainly not the only strong-man leader to advocate for a cashless economy for political gain. In 2016, Indian Prime Minister Narendra Modi announced a demonetization program targeting, as the Indian Express explained, “Rs 500 and 1000 currency notes with effect from midnight, making these notes invalid in a major assault on black money, fake currency and corruption.”
Of course, these measures paid little attention to the striking fact that India’s working poor, a large majority of the population, completely rely on cash on a day-to-day basis, with 97% of all transactions involving an exchange of rupees.
Modi’s announcement had an immediate negative effect on the smooth running of the economy, with poor people across the country with no access to a bank account unable to exchange their now worthless currency for legal tender. This led to an unhealthy reliance on informal lenders taking advantage of desperate individuals. Indeed, the government completely failed to adequately prepare for the chaos caused by the demonetization process, failing even to print sufficient replacement banknotes to reboot the economy.
Just a few months after Modi’s announcement, the negatives effects became clear. “This has actually hurt the poor enormously,” said Nasser Munjee, chairman of DCB Bank and a company director at HDFC and Tata Motors. A massive decline in the demand for vegetables and other crucial foodstuffs due to the lack of cash for people to pay for them led in turn to many losing their jobs. A later report from Harvard University’s Quarterly Journal of Economics concluded that “in modern India cash plays a special role in facilitating transactions.” It appears that this had not been fully taken into account by Modi’s government.
Cash as an instrument of recovery
This worldwide political duplicity with regards to cash fails to take into account how cash can be a real instrument of recovery and economic reconstruction in a time of crisis. As economies around the globe slowly begin their road to recovery, it has become clear that in many countries consumers are sitting on large hoards of cash. The European Central Bank, for example, has stated that the amount of euro banknotes in circulation has risen to €156 billion during the pandemic in spite of a decline in cash as a share of daily transactions in what it has called a “paradox.” The trillions saved globally by consumers is touted by many economists as the key to global economic recovery. The cash saved is cash to be spent and an opportunity to be seized. Strong-man leaders would do well to take heed.
After a career spent in large companies in Europe, Africa, and Asia, Anders Bailey became a freelance international business consultant. Taking advantage of his retirement, he now offers his analysis and commentary on current issues that catch his attention.