A gradual approach on note ban would have been better, says Kenneth Rogoff

US economist Rogoff on how the currency swap exercise underway in India is different from what he advocates in his book, The Curse of Cash


US economist  Kenneth Rogoff says India is not phasing out the high-value notes as new notes are being introduced, which, he says, is not good for a developing economy. Photo: Aniruddha Chowdhury/Mint
US economist Kenneth Rogoff says India is not phasing out the high-value notes as new notes are being introduced, which, he says, is not good for a developing economy. Photo: Aniruddha Chowdhury/Mint

India is withdrawing too much currency too soon from the economy, American economist Kenneth Rogoff said during a talk while launching his new book, The Curse of Cash.

The book makes a strong case for removing high-denomination currency notes from circulation in advanced economies because the notes facilitate organized crime and have an adverse impact on macroeconomic policy.

Rogoff was speaking at the London School of Economics to a packed audience of students and academics on Wednesday night.

Rogoff’s central argument is that the world is awash with too much cash. He makes a clear distinction between cash and money, and his solution is the removal of paper money, although he is unwilling to speculate what form new money might take.

He notes how developed economies with a high record of tax compliance are gradually moving away from cash. And yet, there is too much cash: there are $4,200 for every American circulating in $100 bills. Most Americans carry less than $70 in their wallets at a time.

What are those notes doing, and who benefits from the notes?

Rogoff finds the clues lie in tax evasion, drug trade, terrorism, corruption, human trafficking and other unlawful activities which make the world less safe and provide fewer resources to governments keen to spend money for development. “My proposal is about tax fairness—if the government gets more, it can spend more,” he said.

Rogoff is curious about the currency swap exercise underway in India. It is markedly different from what he advocates in his book, he said.

Noting the four-hour window Prime Minister Narendra Modi gave when he announced the move on 8 November, Rogoff said, “It is probably not a good idea to do it so quickly—you need to do it over a long cycle. India’s motivation is similar to what I have written about in my book, I acknowledge that corruption has crippled the Indian economy, but the strategy India has adopted is very different from what I have advocated. A gradual approach would have been far better.” The other difference he points out is that India is not phasing out the high-value notes, as new notes are being introduced. “I don’t see such a move as being good for a developing economy,” he said.

According to Rogoff, a developed economy should phase out the highest bills (such as $100 and $50) over three to seven years, $20 over a decade, and it might require two decades to remove smaller bills, if financial inclusion has worked properly and the poor are not left out of the system.

Referring to the Indian case, he said, “we won’t know for a few years if there are long-run benefits”. While the minister for information and broadcasting, M. Venkaiah Naidu, said on Wednesday that the prime minister’s aim is to go for a cashless economy, Rogoff is not advocating that. “The cost of going cashless for a developing economy is too large; it can hurt too many innocent people and may not affect the really bad guys,” he said.

As a former chief economist at the International Monetary Fund, Rogoff (who teaches at Harvard and is an international grandmaster in chess) has been a keen student of global economics and one of the finest scholarly interpreters. The book he co-wrote in 2009 with Carmen Reinhart, This Time Is Different: Eight Centuries of Financial Folly, was an outstanding account of financial history.

At the time of the crisis, Rogoff noticed that the essential tools central banks had to revive economies in a slump— stimulating growth by cutting interest rates—simply didn’t work, nor did quantitative easing, or increasing money supply, yield a growth spurt. Squeezing currency—in particular high-value notes—from the economies would make it easier for central banks to re-establish control, as well as make it harder for illegal activities to flourish, more difficult for people to conceal their income from tax authorities, and leave an identifiable trail to nab criminals. “Very few people hold large bills” in developed economies, he said, adding that shows such as Narcos and Breaking Bad showed how hard it is to store or move large amounts of cash.

Shifting cultural attitudes towards cash takes time, but some developed economies have made the use of cash superfluous. Sweden has wired cash registers at retail outlets, connecting them with the treasury, so that each time a receipt is issued, the tax authorities have access to the data. This has reduced tax evasion. Other policy options include different exchange rates for electronic money and paper currency.

Criminals will figure out ways to beat the system, but Rogoff thinks other ways of settling transactions are cumbersome. For example, governments can reduce the use of artificial currencies like the bitcoin. Gold is not easy to transport, and uncut diamonds no longer have the kind of liquidity they once had. (The Kimberley Process Certification Scheme, aimed at combating trade in conflict diamonds, makes it hard for smuggled diamonds to enter the legitimate international trade in rough diamonds).

Rogoff believes people will use far less cash in future. In America, he has noticed that young people hardly carry cash, and the few of those who do, carry large bills. But that day is still some time away in London. The sales staff of the bookstore selling The Curse of Cash hadn’t received Rogoff’s memo. Their card-reader wasn’t working, and they would accept only cash.

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