As I watched the live televised debate between the incumbent chancellor and opposition shadow chancellors, my mind wandered to the realities facing emerging/frontier market finance ministers and central bank governors. Whilst their developed market counterparts can dissect tax credits and layered allowances in the knowledge that they have a reasonable handle on their national income breakdown (and thus taxable income streams), financial stewards in emerging markets have to balance budgets from narrow taxpayer bases. While journalists salivate over politicians and corporate tsars who have amassed wealth beyond the reach of the taxman, the simple truth is that the majority of these populations cannot afford to, or simply do not pay tax. Hawkers, traders, casual labour, subsistence farmers all fall within what we call the informal economy. Depending on the country or region, this informal economy can be close to (or possibly even greater) than the formal economy.
To deepen the formal economy, or narrow the informal sector, as policy makers like to say, requires significant investment in financial infrastructure. Banks have to extend their customer base to reach the ‘unbanked’. Merchants need to accept more than cash. Card issuers and acquirers need to reduce the relatively high charges levied to merchants for use of major international card networks. ATM networks need to be expanded, and the in store banking model that we all take for granted in the UK needs to be rolled out to large and small retailers. Central banks need to be able to manage their cash better. I recall watching a man lug a briefcase of cash around to pay a simple lunch bill once during Zimbabwe’s hyperinflation. In this case, he received a discount for paying cash as notes were in short supply. ATMs need scarce power, as do point of sale terminals. And the card issuing bank has to pick up the phone (if the merchant is able to get through) to authorise the transaction. The central bank in question resolved the problem, not by fixing the payments system, but by issuing higher denomination notes and lopping off zeros. A hundred billion dollar note.
With some well placed investment in financial infrastructure, the path to re-absorb the informal sector back into the formal economy can be well lit. And soon, we could see detailed live debates between emerging/frontier markets financial politicians on how to best manage the economy. With the governments and banks not leading the charge, impetus is coming from other corners. East Africa has shown us some interesting innovations in mobile payment applications, driven by Telco’s. I remember playing with a live wireless PoS demo in a hotel in Johannesburg 6 years ago, designed by some guys working in a small micro-bank. Today, we see a small attachment that turns a mobile phone into a credit card device.
I am confident that the innovations will continue. Question is, what will the financial sector look like in 10 years? And what will these finance ministers and central bank governors be debating then? I hope to never have to see a trillion dollar note –one billion was scary enough.