Increasing Local Economic Sustainability

* Master's Thesis: Complements to Economic Systems: Increasing Local Economic Sustainability. Ivan Tsikota. 2011-05-14. EC9901 Master’s Thesis, 30 hp . Department of Economics , Stockholm University

URL = https://issuu.com/ivantsikota/docs/tsikota_final [1]

E-mail: [email protected] ; Full version available at [2]

Abstract

"The purpose of this thesis is analysing implementation of complements to economic systems (e.g. Local Exchange Trading Systems, Complementary currencies, Barter Networks etc.) and critically assessing potential thereof in counter-balancing macroeconomic instability, inflation and adverse environmental effects of conventional economic systems on the local level. This paper contributes to understanding the role of local authorities in the field of using complements to economic systems and discusses means by which one can foster effects thereof in communities. Another contribution of this paper is a proposal for a generic taxonomy of complementary economic systems. Results of the research suggest that complements to economic systems clearly have positive micro- and macroeconomic effects, affecting employment and welfare, alleviating poverty, providing wider access to goods and services, and in some cases acting in a counter-cyclical fashion; they contribute to more efficient distribution of goods and services from social perspective."

Table of Contents

"The present paper is structured as follows: Section 2 discusses issues relating to information and data; Section 3 provides an overview of complements to economic systems in order to highlight existing research on the matter; Section 4 addresses the issues of lacking clarity on the matter and provides a new taxonomy for economic complements; in Section 5, case studies on the use of economic complements are classified within the new taxonomy and analysed; Section 6 contains discussion, and Section 7 concludes."

• 1. Introduction 3
  • 1.1. Aim and objectives 4
  • 1.2. Methodology 5
  • 1.3. Results 5
  • 1.4. Limitations 5

• 2. Information and data 6

• 3. Complements to the economic system 7
  • 3.1. Exchange networks 7
    • 3.1.1. Local Exchange & Trading Systems 7
    • 3.1.2. Barter networks 9
  • 3.2. Interest-free banking 9
  • 3.3. ‘Interest-free’ money 12
  • 3.4. Time banking 13
  • 3.5. Complementary currencies 14

• 4. Methodological issues 16
  • 4.1. Earlier classification attempts 16
  • 4.2. Suggested taxonomy 17
  • 4.3. Example of the taxonomy use 19

• 5. Case study analysis 19

• 6. Discussion 27
  • 6.1. Results from the case studies 27
    • 6.1.1. For-profit complementary economic systems 27
    • 6.1.2. For-profit complementary economic systems with social goals 27
    • 6.1.3. Not-for-profit complementary economic systems 28
  • 6.2. Local authorities participation 28

• 7. Conclusions 29

Excerpts

Introduction

Ivan Tsikota:

"In the past 25 years, the world has experienced 87 monetary crashes (Lietaer 2007). Literature and anecdotal evidences suggest that municipalities in various corners of the globe, e.g. Greece, Ireland, Spain, Brazil, the United States and other countries, are still suffering consequences of the recent financial crisis. Researchers, policy-makers and public activists suggest different remedies to address macroeconomic instability. Their approaches can be classified into top-down and bottom-up ones. In the former case, initiative comes from the central level, usually the government; whereas in the latter it emerges at the grass-root level, with community and civil society organizations being main actors.

At the same time, little attention is paid to local authorities. As municipal institutions are becoming more significant in the face of globalization, it is important to see what they can do in order to attain greater economic sustainability. The idea of complements to the conventional economic system was formulated in the first half of the twentieth century. Within the last 30 years, various initiatives like Local Exchange & Trading Systems, interest-free financial institutions, time banks, complementary currencies etc. have emerged.

1.1. Aim and objectives The aim of the thesis is providing an overview of ways to address macroeconomic instability on local level by using complements to economic systems. Objectives of the study are as follows:

• Performing a comprehensive literature survey in the field of complements to economic systems
• Collecting and analyzing case studies on the matter
• Reconciling various approaches to complements to economic systems
• Investigating, in what ways local authorities can contribute to the process of using complements to economic systems

1.2. Methodology The method applied is literature survey and case studies analysis. Case studies were selected in order to represent all complements to economic systems using academic sources bearing in mind the need for replicability and verifiability of the study. The goal function was set as defining positive and negative impacts, which are brought to local communities by the implementation of complements to economic systems. Thirty-three case studies were analysed. It became apparent during the work on the present paper that there exists a lack of consensus among researchers regarding types and purposes of economic complements, which arises from the absence of general classification of complements to economic systems. In order to overcome it, an overview of earlier classification attempts was performed, and a taxonomy was suggested. Case studies were grouped accordingly.

1.3. Results Results of the research suggest that complements to economic systems clearly yield positive micro- and macroeconomic results, affecting employment and welfare, alleviating poverty, providing wider access to goods and services, and in some cases acting in a counter-cyclical manner. Moreover, in the majority of instances they also bring social benefits: inclusion and empowerment of poor people, strengthening the community. Analysis suggests that local authorities can contribute by providing competence, management, financial resources, ensuring consistency of the data, developing a legal framework. Civil society also appears to play an important role.

1.4. Limitations For the purpose of this thesis, descriptive approach was used. Acknowledging some limitations thereof, it is important to state that such a choice was not only a conscious strategy, but also the reflection of the state of art in the area for the time when the paper was written. Moreover, this approach is necessary for pin pointing areas for further research."

Findings

Comparative Typology of Complementary Economic Systems

Ivan Tsikota:

"6.1. For-profit complementary economic systems

This category represents largest systems in terms of scope, both in turnover and membership. The systems have the longest record of operation an demonstrate clear positive economic effects, both on micro- and macro levels. In one instance (Islamic banking in Iran), favourable developments both in the monetary and the real sector were reported. Example of Swiss barter network suggests that these complementary systems have a potential to work in a counter-cyclical and anti-inflationary fashion; further research is needed to generalize this observation for the whole group. In most case studies, consistency in resolving social issues was noted: growth of employment opportunities, empowerment of poor people etc. Several shortcomings are worth noting. First of all, a ‘principal-agent’ problem; both in cases of credit financing and barter exchanges proofs against mal-use are needed. In view of this, participation of local authorities is advisable.

6.2. For-profit complementary systems with social goals

Distinctive feature of systems from this category is their social orientation. It arises from the focus of their operation, which can be generalized as providing help to the local community. Analysis of the case studies suggests that they are successful in realizing it by alleviating poverty, ensuring the social engagement, empowering population and in some cases favouring gender balance.

In economic terms, these systems provide wider employment opportunities, increase welfare of the clients, and may be flexible to external changes (e.g. Triodos Bank). It can also be argued that they provide more optimal allocation of financial resources (or goods) from the social perspective, since all operations are fulfilled with the participation of groups from the local community.

6.3. Not-for-profit complementary systems

This category represented the biggest sample with 20 case studies having been classified into it. In the majority of examples, positive economic effects of implementing these systems were observed; they comprised growth of welfare of the local population, increase in employment opportunities, widening of the access to financial resources/good/services, and stimulation of business-cycle. Social effects included resolution of problems with housing for homeless people, reviving connections in labour markets, and fostering community building. The analysis suggests that support from the state is needed for a successful operation of the systems.

It was found that non-profit complementary systems may lack membership, which adversely affects the range of goods and services provided, and represents an impediment for success of such systems."

Recommendations for Local authorities' participation

"Analysis of the case studies revealed several issues relating to the performance of complementary economic systems, namely: ‘principal-agent’ problem, low level of participation/awareness of people, low level of expertise in some systems etc. With the exception of for-profit complementary systems, there is a lack of coordination at a level above grass-roots initiatives. One of the consequences of this is, for instance, the lack of data on the matter or discrepancies therein.

In view of the aforementioned, local authorities may contribute to the performance to success of complementary economic systems in the following ways: coordination of efforts between public and civil society organizations, providing necessary legal framework, ensuring its transparency and unanimous enforcement, introducing safeguards against possible mal-use and/or fraud, collecting and sharing data, raising public awareness, and serving as a contact platform for businesses and members of the communities. They may help in addressing the shortcomings of voluntary character of many initiatives, namely high dropout rate and low expertise. Analysis suggests that there is also a need for international cooperation, and local authorities are not only a candidate, but also the best candidate for it. In this respect, it is advisable to create an international platform for sharing best practices, developing guidelines for complements’ use, and standards for data collection and dissemination."

Conclusions and discussion

Ivan Tsikota:

"This paper has investigated possibilities for local authorities to enhance economic sustainability by means of complements to the conventional economic system. A case-study approach was used to take different types into account: Barter and Local Exchange Systems, Complementary Currencies, and Time Banks. Analysis suggests that use of such types of complements indeed provide positive effects, both economically and socially, and conclusions derived are consistent with existing literature on the matter. In particular, use of all types of complements studied leads to social benefits: better inclusion of otherwise excluded people, creation of better community feeling etc.

It is possible to conclude that some of the complementary systems, e.g. barter networks are particularly strong in addressing the issues related to conventional money, namely macroeconomic instability and inflation. The effects of other complements on the aforementioned parameters are ambiguous due to the lack of empirical evidence and are subject for further research. At that, one can conclude that all complements provide wider employment opportunities, growth of welfare, and richer access to credit facilities. Analysis of interest-free banks suggests that this type of financial institutions can foster more efficient allocation of resources in terms of addressing socially and environmentally relevant issues. Possibly, this is the way to respond to the need of economic development balanced with preservation of natural resources and providing social equity, which was outlined by United Nations - Department of Economic and Social Affairs (2010)i. The performed research also indicates that most of the complements can provide sustained growth, i.e. the one where transactions performed are backed with real goods and services. Effect of complementary currencies pegged with national money in this context is not clear and requires furhter empirical research.

It may be concluded that participation of local authorities in initiatives relating to the use of complements to economic system is highly needed in the following ways: coordination of efforts between public and civil society organizations, providing necessary legal framework, ensuring its transparency and unanimous enforcement, introducing safe-guards against possible mal-use and/or fraud, and collecting and sharing data. Local authorities can also contribute by raising public awareness and serving as a contact platform for business companies and communities. They may help in addressing the short-comings of voluntary character of many initiatives, namely high drop-out rate and low expertise. -Analysis suggests that there is also a need in the international cooperation, and local authorities are not only a candidate, but also the best candidate for it. In this respect, it is advisable to create an international platform for sharing best practices, developing guidelines for complements use, and standards for data collection and dissemination.

It was concluded that there is a lack of clarity on subject of complements to economic system in the literature: researchers vary in assigning complements to a certain category or use different terms for various complements; existence of ‘mixed’ complements is another aspect of this issue. One of the results of the present research is a proposal of taxonomy for complementary economic systems. The suggested approach is wider in scope than earlier attempts. Its starting point is partly based on the work of Lietaer & Hallsmith (2006), but it bears several distinctive features. First of all, it is aimed at complementary systems in general, and not only at complementary currencies. Secondly, a distinction is made between tools and mechanisms in complementary systems. The taxonomy differs from the one suggested by Blanc (2011) in terms of scope and by more practical orientation.

Particular strengths of the thesis are emphasis on local authorities, which seems to have been overlooked before, suggestion of the taxonomy for complementary economic systems and the amount of case studies analysed. Possible weakness of this paper is, perhaps, the fact that it is too wide in scope, and some issues could have been analysed in more detail."