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Readers should be aware of my respect for the years of research and writings of Dr. Befekadu Degefe, a well known economist. He has recently spoken (Ethio-Mehdar Vol2 No 62) about the superiority of the private banking model vs the public banking model which I argue strongly in favor. In my opinion, when people understand the state-owned public banking model, they will embrace it simply because it represents a superior model.
We are living in a difficult period where things that are shaping the philosophical and political vision that could take our economy back are increasingly questioned. I believe, this time again, the world is in transition, and a shift does seem to be happening behind the scenes; and this is particularly true in the once-boring world of banking.
In many ways today money rules; and it’s through banks that the moneyed interests have gotten their power. Banking in an age of greed is fraught with usury, fraud and gaming the system for private ends. But there is another way to do banking; the neighborly approach which rather than feed off the community, banking can feed the community and the local economy. This is what I wanted to underline in my recent interview with Ethio-Mehdar. Whether the message was well understood or not, I can’t say, but without responding directly to Dr. Befekadu, I will simply expose why I favor policies that encourage the establishment of public banks.
Today, our local banks are hardly interested in community lending. As a matter of fact over 60% of their profit is generated through non-loan activities. Indeed banks today do not base their decisions first and foremost on the needs of people and the environment. A bank manager recently told me how its branch in Debre Birhan mobilizes resources locally to be invested elsewhere. And yet studies show that investing locally is as profitable if not more than taking the money elsewhere.
Private community banks are often the partners of small local businesses. What separates them from private banks is that they plow those deposits back into their community in the form of loans to small business and consumer loans. The private commercial banking system has and continues to favor the few at the expense of the many. The bondage from debt created money has doomed many business people to the fate of contrite beggars in search of securing loans.
So yes, I say community banking is coming back to basics. In the end, it is about customer convenience and understanding customer needs and goals. Obviously the traditional banking industry opposes the idea, saying a community development bank would compete with commercial banks for business and politicize a state’s lending decisions. There’s nothing wrong crowding a usurious private bank, nor involving the community to decide for the prosperity of the local economy.
In the past years I have come across many voices that patiently explain how the money system works, and how and why public banks will become an improvement over the present finance systems. Indeed, one has to just peek at the increasing public banking initiatives in America to learn that over 20 states are today aggressively pursuing some form of state banking legislation and people are actively looking for real alternative monetary reform to ease present dismal economic conditions.
Check out Costa Rica where publicly-owned banks have been available for so long and work so well that people take for granted that any country that knows how to run an economy has a public banking option.
So says political activist Scott Bidstrup, who writes:
For the last decade, I have resided in Costa Rica, where we have had a “Public Option” for the last 64 years.
There are 29 licensed banks, mutual associations and credit unions in Costa Rica, of which four were established as national, publicly-owned banks in 1949. They have remained open and in public hands ever since—in spite of enormous pressure by the I.M.F. [International Monetary Fund] and the U.S. to privatize them along with other public assets. The Costa Ricans have resisted that pressure—because the value of a public banking option has become abundantly clear to everyone in this country.
During the last three decades, countless private banks, mutual associations (a kind of Savings and Loan) and credit unions have come and gone, and depositors in them have inevitably lost most of the value of their accounts.
But the four state banks, which compete fiercely with each other, just go on and on. Because they are stable and none have failed in 31 years, most Costa Ricans have moved the bulk of their money into them. Those four banks now account for fully 80% of all retail deposits in Costa Rica, and the 25 private institutions share among themselves the rest.
According to a 2003 report by the World Bank, the public sector banks dominating Costa Rica’s onshore banking system include three state-owned commercial banks (Banco Nacional, Banco de Costa Rica, and Banco Crédito Agrícola de Cartago) and a special-charter bank called Banco Popular, which in principle is owned by all Costa Rican workers. These banks accounted for 75 percent of total banking deposits in 2003.
In Competition Policies in Emerging Economies: Lessons and Challenges from Central America and Mexico (2008), Claudia Schatan writes that Costa Rica nationalized all of its banks and imposed a monopoly on deposits in 1949. Effectively, only state-owned banks existed in the country after that. The monopoly was loosened in the 1980s and was eliminated in 1995. But the extensive network of branches developed by the public banks and the existence of an unlimited state guarantee on their deposits has made Costa Rica the only country in the region in which public banking clearly predominates.
Scott Bidstrup comments:
By 1980, the Costa Rican economy had grown to the point where it was by far the richest nation in Latin America in per-capita terms. It was so much richer than its neighbors that Latin American economic statistics were routinely quoted with and without Costa Rica included. Growth rates were in the double digits for a generation and a half. And the prosperity was broadly shared. Costa Rica’s middle class – nonexistent before 1949 – became the dominant part of the economy during this period. Poverty was all but abolished, favelas [shanty towns] disappeared, and the economy was booming.
This was not because Costa Rica had natural resources or other natural advantages over its neighbours. To the contrary, says Bidstrup:
At the conclusion of the civil war of 1948 (which was brought on by the desperate social conditions of the masses), Costa Rica was desperately poor, the poorest nation in the hemisphere, as it had been since the Spanish Conquest.
The winner of the 1948 civil war, José “Pepe” Figueres, now a national hero, realized that it would happen again if nothing was done to relieve the crushing poverty and deprivation of the rural population. He formulated a plan in which the public sector would be financed by profits from state-owned enterprises, and the private sector would be financed by state banking.
A large number of state-owned capitalist enterprises were founded. Their profits were returned to the national treasury, and they financed dozens of major infrastructure projects. At one point, more than 240 state-owned corporations were providing so much money that Costa Rica was building infrastructure like mad and financing it largely with cash. Yet it still had the lowest taxes in the region, and it could still afford to spend 30% of its national income on health and education.
Needless to say, this good example did not sit well with the local well-to-do and foreign business interests. It earned Figueres two coup attempts and one attempted assassination. He responded by abolishing the military (except for the Coast Guard), leaving even more revenues for social services and infrastructure.
Anyway, let’s stop here about Costa Rica, and let me conclude that my wish scenario for Ethiopia, is to do exactly what Costa Rica did so successfully for so many years. Invest in the Holy Trinity of national development—health, education and infrastructure. We need today Community Development Financial Institutions (CDFIs), including community development banks, community development credit unions, community development loan funds, community development venture capital funds, and microenterprise loan funds to help out local private enterprise get started and grow, and become major exporters, with stable state-owned banks that prioritize national development over making bankers rich. It worked well for Costa Rica for a generation and a half. It can work for any other country as well. Including Ethiopia!