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When Facebook unveiled its new digital currency libra, it explicitly said the initiative was intended to address the problems faced by the world’s unbanked: the 1.7 billion people without a bank account. As well as facing inconvenience, these people generally pay over the odds for financial services like bank transfers or overdrafts.
This is a pretty big potential market for Facebook so it’s not surprising that it would target the opportunity. But could libra really transform access to financial services for those who are currently excluded? There are reasons to raise serious doubts.
Across the world, the main reasons people give for not holding a bank account is that they don’t have enough money, don’t see the need for an account, find it too expensive, or another family member already has one. Not having the right documentation is also a barrier, as is distrust in the financial system.
But the specific barriers to financial inclusion vary significantly by region and are usually a combination of social and economic factors. For instance, while cost is a big barrier in Latin America, lack of documentation is the big issue in Zimbabwe and Philippines.
This makes it difficult for any one intervention to be a solution to this huge group of people. Worryingly, the Facebook “white paper” that outlines libra does not really engage with these problems or say how it plans to overcome them.
People’s trust in institutions can be very important in influencing the extent to which they use their services, as I have found from my own work into microfinance, which I have presented at conferences but is yet to be published in an academic journal.
I have found that people are more likely to choose something familiar over something novel. Since libra will be a new currency relying on digital wallets and built on blockchain online ledger technology, it is not short of novelties. Inspiring trust is therefore likely to be a major challenge.
And simply signing someone up to an account – be it a bank account or a digital wallet – is only part of the financial inclusion challenge.
In India, 190m people still do not have bank accounts, but the percentage of the population who do have accounts has steadily increased to 80%. In 2017, however, nearly half of all bank accounts in the country had seen no activity over the whole of the previous year. One of the reasons is financial literacy, which remains low both in India and many other developing countries. Many people in India have said they are simply unaware of the different benefits of a bank account, such as overdraft facilities or credit schemes.
As many as 62% of the world’s unbanked have received only a primary-level education or less, and in poorer countries the proportion is almost certainly going to be higher. Expecting such people to make complex currency conversions into a new virtual currency is asking a lot.
In the first place, there is a need for financial literacy measures and initiatives aimed at motivating them to use the services available. Without this additional support, there is a strong risk that Facebook will boast large numbers of sign-ups but very low rates of transactions from the people who are most in need.
Only a few days since Facebook’s announcement, libra has faced strong pushback from regulators and policymakers around the world. There is much concern about this proposed shift of power from central banks to a private corporation.
But aside from questions about the ethics of data privacy or the creation of a supranational currency, libra faces an important practical question. On the one hand, it is not clear how a model such as libra, where there will presumably be little or no physical presence in many countries, would interact with and adhere to local regulations.
On the other hand, if it does conform to the local standards of each country, it is unclear how it will overcome challenges like signing people up and strict documentation requirements. Will it really be able to serve the unbanked better than local providers who are used to the challenges in that specific market already?
Entrepreneurs and businesses can either start with a problem and think of the best way to solve it; or they can start with a solution and find the biggest and best problem it might solve. I’m not convinced that libra is a good move in either direction. Facebook either has a huge amount of work to do to adapt its solution to fit the problem better, or it needs to redefine the problem that it is trying to fix.
The debate around the UK’s level of involvement in the EU single market after Brexit may lead to a significant u-turn in government policy. Having initially said it would not seek a customs union with the EU after Brexit (after leaving the full, existing customs union), it looks as though the UK government’s position is softening. Given the alternatives to the single market that are available to the UK, a potential u-turn is welcome.
Leaving the single market but agreeing to a customs union doesn’t rule out the UK making its own trade deals. However, it should be careful what it wishes for. Freedom comes at a price. A customs union only covers trade in goods, so the UK would need an umbrella agreement to cover its other arrangements with the EU.
The World Trade Organisation (WTO) sets out the basics in Article XXIV of the General Agreement of Tariffs and Trade (GATT). In essence, a customs union is where tariffs are removed between members of the union, and the tariffs charged on imports coming from outside the union are harmonised across members of the union. This definition seems straightforward but when you dig deeper into Article XXIV, you find that while these rules apply to trade in goods, they say nothing about services – which are of course very important for the UK.
The text is also quite vague about the products that should be covered by the customs union, stating only that “substantially all trade” should be included. Of course, as soon as you start excluding products from your customs union, then borders with frictions, such as border checks, start to emerge. Therefore, the issue of whether any agreed customs union would be complete needs careful consideration. However, it’s clear that the WTO rules are too vague for anyone to claim that the UK cannot create an incomplete customs union if the EU agrees.
What we know is that an incomplete customs union, where product coverage is less than 100% or trade policies are not fully harmonised, could give the UK more freedom to sign its own trade deals. Turkey, an example of a country in an incomplete customs union with the EU, has a number of Free Trade Agreements with non-EU countries. However, if the UK steps outside the EU Customs Union and creates an incomplete UK-EU Customs Union, then embarks on signing new trade deals, there would need to be rules agreed regarding the coexistence of trade agreements. In simple terms, when the clauses in different trade deals start to conflict with each other, there will need to be a way to resolve these disputes.
Is all this freedom a good thing? It would take the UK further away from the complete customs union, which is the desire of Brexit supporters. However, signing even very simple trade deals will require considerable capacity and time, with the potential for significant delays even between signing and implementation. The EU also already has a long list of arrangements in place. Those with Japan and Mexico are the most recent examples. The UK is likely to find it harder to make deals when outside a large trade block. Furthermore, signing free trade agreements with non-EU countries would not compensate for losses due to new trade barriers against the EU countries.
Staying close to the EU may also protect the UK from the US government’s trade wars in crucial markets such as metals, fuels and chemicals. As the EU demonstrated in the case of the steel dispute, it can successfully negotiate exemptions from the new protectionist US tariffs. The UK, acting alone, may not have enough economic and political weight to do the same.
An incomplete customs union with the EU will be a step towards minimising the losses of Brexit, while giving opportunities to negotiate new free trade agreements related to particular goods. UK manufacturers selling final goods (transport, electrical equipment, computers, for example) to the EU, depend on the supply of intermediate goods (components for that electrical equipment and computers) from the EU in the first place. If even moderate tariffs are imposed, the flow of intermediate goods from the EU may come to a halt. If agricultural goods are excluded from the new UK-EU customs union, it opens up further possibilities for negotiating new free trade agreements with non-EU countries.
And since the customs union option doesn’t cover services, one option would be to have a broader umbrella agreement, perhaps an economic integration agreement, to also cover services.
A customs union in itself, and certainly one that gives the UK the flexibility to sign its own trade deals with non-EU countries, would not automatically solve the Irish border issue – a complete customs union (going further than even the WTO definition) would be a prerequisite for that. The political compromises, which are being discussed within the Conservative party, suggest a complete customs union is most unlikely. Therefore, even if a u-turn is forthcoming, many other challenges remain.
This article is republished from The Conversation under a Creative Commons license.
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