Complements to Economic Systems: Increasing Local Economic Sustainability

Complements to Economic Systems Increasing Local Economic Sustainability Ivan Tsikota 2011-06-06

EC9901 Master’s Thesis, 30 hp Department of Economics Stockholm University Spring 2011 Supervisor: Conny Olovsson

Complements to Economic Systems: Increasing Local Economic Sustainability

Ivan Tsikota 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.

Keywords: complementary economic systems, sustainable economics, macroeconomic instability 1

Acknowledgments The author is grateful to the Swedish Institute for support during the studies period, to Conny Olovsson for feed-back and ensuring clarity and focus, to Lennart Erixon for valuable comments, and to Marilyn Mehlmann for information and insightful discussions.

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Contents 1. Introduction .................................................................................................................................4 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 economic systems............................................................................................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. Classifying complementary economic systems .........................................................................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. For-profit complementary economic systems ................................................................27 6.2. For-profit complementary systems with social goals .....................................................27 6.3. Not-for-profit complementary systems ..........................................................................28 6.2. Local authorities participation ............................................................................................28 7. Conclusions ................................................................................................................................29 Bibliography ...................................................................................................................................30 Annexes .........................................................................................................................................35 Annex 1: LETS development in some European countries ........................................................35 Annex 2: Classification of complementary currencies by Lietaer & Hallsmith (2006) ..............36 Annex 3: Suggested taxonomy of complementary economic systems .....................................37 Endnotes ........................................................................................................................................38

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1. Introduction 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 Providing a transition between Investigating, in what ways local authorities can contribute to the process of using complements to economic systems

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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.

The present paper is structured as follows: Section 2 issues relating to information and data are discussed; 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 5

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.

2. Information and data During preparation of the present paper several issues became apparent, the most important being data availability, and lack of consensus on the subject of economic complements.

Generally, it may be said that data on the subject is fragmented; there is no unified approach to collection and dissemination of statistics, and in some cases huge discrepancies in data are apparent. So, data compilation is a very labour-intensive process, somewhat of a cherrypicking. This issue is closely connected to the lack of clarity on the classification of the complements and to the fact that the approaches suggested in the literature tend to be more theoretical than practical.

Information available on the subject of economic complements comes from several sources: academic literature, books, and internet-publications, and generally depends on the type of complement. For instance, in the case of complementary currencies, one journal publishes materials on a regularly (yearly) basis – the International Journal of Community Currency Research. Many publications, including books, are of a theoretical or conceptual nature; only exceptionally do articles contain statistical evidence, and most of the econometric models in the area are centred on Islamic finance.

Internet space contains domains for web-sites of various initiatives; the level of activity there varies largely. Few of them contain raw data, and there is almost no information on crosscountry dynamics on the development of different complements. Some countries, e.g.

Germany, UK are better described than others. When it comes to international level, data is received from secondary sources - publications of other authors, e.g. Lietaer & Kennedy (2008), but the methodology of data collection is not documented. Hence, replicating their research represents some difficulty. Some discrepancies in the data were evident. For instance, some sources report 178 exchange systems in 2011 (Complementary Currency Resource Center, 2011), whereas according to a LETS-linkup calculation, this number is 1,500 (International LETS 6

Groups Directory, 2011). On the other hand, the aforementioned issues with access to regularly updated and unified statistics may indicate that the amount of initiatives where various complements are used is higher.

One reason for lack of regular statistical information is the voluntary character of work performed by people who are engaged in the initiatives described. At the same time, to the best of the author’s knowledge, there are no internationally agreed standards or guidelines on data collection and dissemination in the field of monetary complements. The notable exception is Islamic Finance, in case of which data availability is closely connected to the wide diffusion of IFIs and to the existence of international institutions ensuring good practices, providing regulations etc., e.g. Islamic Financial Services Board.

3. Complements to economic systems This section presents different complements to conventional economic system that are used for overcoming macroeconomic instability. Some of the complements presented, e.g. the ones relating to interest-free financing and barter, date back to ancient times, and some are new inventions: Local Exchange & Trading Systems, Time Banks, and Complementary Currencies.

There are inter-connections between different types of complements, e.g. exchange systems may operate with the help of complementary currency, Time Banking units are complementary currencies themselves, and so on.

3.1. Exchange networks Researchers in the field of economic complements distinguish several types of exchange networks; two of them are considered in the present paper: Local Exchange & Trading Systems (LETS) and barter network. More information thereon is provided in the respective sub-sections below.

3.1.1. Local Exchange & Trading Systems The LETS phenomenon appeared in Canada in the 1980s, in the town of Courtenay, and was initiated by Michael Linton as a response to economic recession caused by the disappearance of two major employers – a US air force base and a timber mill – and consequent liquidity 7

shortage (Pacione 1997). He introduced Green Dollar, a local currency pegged to the Canadian Dollar at 1:1. The initiative spread quite fast, and in the first two years it generated a turnover of 500,000 Canadian Dollars (Peacock, 1997). According to Pacione (1997), the turnover of Green Dollars at the time of his survey was 2 million.

In the 1990’s, the experience spread to other countries, e.g. Germany, Australia, the United Kingdom. In 1998, reportedly, there were more than 1,000 LETS systems in the world (Blanc, 1998). In 2001, this number was between least 1,076 (Taris, 2001), and 2,000 (Greco, 2001).

Now it is estimated that there are 1,500 LETS systems operating in 39 countries of the world (LETS-linkup, 2011); Sweden, for instance has four systems registered. Some of the per country dynamics is presented in the Annex 1. In many countries, local initiatives are linked up into a network, e.g. Tauschringe in Germany, SEL in France, LETSLink UK, Red Global de Trueque in Argentina.

The membership in LETS varies from tens to hundreds. Aldridge & Patterson (2002) report average membership in the UK to be 72, whereas in Germany it was estimated at 81 (Schroeder, 2006). The worldwide average size of LETS is around 80 members (Aldridge & Patterson, 2002; Schroeder, 2006). Peacock (1997) argues that such indicators may be misleading, because there is tendency that activities are performed by a small core of members. On the other hand, it may be misleading in the other direction, since one member may represent a whole household.

Turnover: According to Peacock (2006), the largest single existing LETS in 2006 was an Australian initiative based in Sydney, having over 1,000 participants, generating 400,000 Aus. Dollars in turnover. Gross turnover of LETS network in Germany in 2005 has been estimated at â‚Ź15 million (Roesl, 2006).

Majority of LETS members are women aged 21-59. However, income levels and employment status vary across countries. For instance, in the United Kingdom, most members were socially excluded people with low income and no job (Williams et al., 2001), whereas in Norway a majority of members had a stable income and full-time job (Gran, 1998). It is possible to conclude, though, that ideological reasons play a very important role in joining LETS.

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3.1.2. Barter networks The contemporary barter networks movement started with the establishment of the Swiss Wirtschaftsring, which was started in 1934. WIR still remains the largest organization of its kind.

In 1993 it had approximately 17% of companies registered in Switzerland (i.e. around 77.000) and an annual turnover of €1.5 billion (Greco, 2001). By the end of 2000, its membership increased to 85.000, covering 20% of all Swiss companies (QOIN, 2011). It operates with the use of electronic money, which is formally pegged to Swiss Franc at 1:1 rate. However, it is not possible to exchange WIR-credit onto Swiss Francs, which assures that circulation is limited to cooperative members only. In this case it may be viewed as an advantage, since participating companies back WIR-‘currency’ by goods and services; and loans repayment is guaranteed by collateral.

In 2010, 400.000 companies were engaged in barter on the global arena with a volume of annual trade of approximately $10 billion (Stodder, 2009). QOIN (2011) reports that all 500 firms featuring in Fortune’s rating perform barter exchanges; approximately 750 firms are engaged in international barter trade. In 2008, the turnover of all barter contracts was estimated at $10 billion, and expected growth for 2009 was 15% (International Reciprocal Trade Association, 2011).

Commercial barter networks operate on a fee-based model. For instance, WIR implements three types of charges to cover costs: transaction fee, service charge, and interest on loans (Lietaer, 2001), and the charge depends on membership status.

3.2. Interest-free banking The idea of not charging interest in business activity comes from various religious and scientific sources. Christianity, Judaism and Islam all had a ban on usury. For instance, the New Testament says: “But love ye your enemies, and do good, and lend, hoping for nothing again; and your reward shall be great, and ye shall be the children of the Highest” (Luke 6:35). In Biblical times, Hebrew law clearly prohibited usury (Kabir & Mervyn, 2007), and in Judaism issues of compound interest were resolved every seven years (Kennedy, 2008). Ban on usury now only pertains in the Muslim world, and with few exceptions, e.g. Triodos Bank in the

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Netherlands1 or JAK Bank in Sweden, most interest-free financial institutions exist within an Islamic paradigm.

The history of modern Islamic banking dates back to 1975, with the establishment of Bank Faisal in Egypt (Al-Salem, 2008). Worldwide, the number of Islamic Financial Institutions (IFIs) grew from 37 in 1997 to approximately 300 in 2009. In parallel with this development the size of Islamic financial funds on the global arena is increasing. In first quarter of 2010, they managed approximately $52 billion, and unlike traditional mutual funds, whose net assets decreased by $4.1 billion from 2007 to 2009, IFIs demonstrated growth even against the background of international economic crisis (Ernst & Young, 2010).

In Iran, Pakistan and Sudan only IFIs are allowed (Aggarwal & Yousef 2000), and in some other countries, e.g. Bangladesh, Egypt, Indonesia, Jordan and Malaysia, two systems co-exist (Chong & Liu, 2009). The first non-Muslim country in which an Islamic Bank was established was the United Kingdom; it opened in 2004. Some hand-picked data on development of IFIs in the world is presented in the Table 1.

Number of Islamic Year

financial

Turnover

Source

Institutions 1997

176

-

Bagsiraj (2003)

2000

200

$100 bln.

Darrat (2000)

2004

-

$450 bln.

Chong & Liu (2009)

2006

300

$500 bln.

Al-Salem (2008)

2009

~302

~ $800 bln.

Chong & Liu (2009), IFSL 2010

2013

N/A

est. $1.85 trln.

Al-Salem (2008)

Table 1: Development of Islamic Financial Institutions in the world

1

Technically, Triodos Bank is not an interest-free bank, since depositors can still earn interest on their investment (refer, e.g. to (Triodos Bank N.V., 2011)). It is listed here, though, due to its sustainability-oriented business model.

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Western and Islamic banking are different not only in the financial instruments used, but also in the philosophy2. First of all, according to (Aggarwal & Tarik, 2000) it is clearly stated in the Quran that: “Allah forbids interest and permits trade”. Gharar – uncertainty and risk – is not allowed (Chong & Liu, 2009) and neither is riba3 – interest. According to Kabir & Mervyn (2007), however, ‘the objection is not to the payment of the profits, but to a predetermined payment that is not a function of the profits and losses incurred by the firm or entrepreneur’. IFIs operate basing on two concepts: profit-and-loss sharing (PLS) and the mark-up principle (MUP) (Aggarwal & Tarik, 2000).

According to the PLS concept, the person providing credit has a right to share profits from the enterprise provided s/he is ready to also share risks and losses, in case it fails. Instead of an interest rate, contractors negotiate distribution of profits (or losses). Generally, two types of contracts are used in this category: musharaka (partnership) and mudarabah (‘finance by way of trust’ (Kabir & Mervyn, 2007)). In case of musharaka, both sides provide resources for the project and share risks of losses or gains. At that, profits are distributed in a pre-agreed proportion, and losses depend on the share invested. In mudarabah contracts, one party submits funding, and another performs management thereof. Profits are distributed on a preagreed basis, the assets are possessed by the providing party, and managing side has the right to buy them out.

MUP applies to agreements where the creditor buys goods on behalf of the borrower, and resells or rents it out. Most common forms of financing are murabaha and ijara. In the former case the creditor acquires the asset and then resells it at the original price plus a pre-agreed margin, whereas in the latter the goods are provided for use based on a repayments scheme with the option of the ownership transfer (analogue of leasing today). It is important to state the difference between conventional interest-based lending and murabaha financing; the fee is only charged for the creditors services in acquiring goods and is not dependent on time, i.e. the delay in the repayment of debt does not incur an increase in fee.

2

Please, refer to Kabir & Mervyn (2007) for further reading. In particular, pp. 98-99.

3

Though the question on the essence of riba is still discussed among Muslim practitioners and scholars (Chong & Liu, 2009), in the present paper it will be viewed as any form of return on credit.

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One example of an Islamic financial institution is the Grameen Bank, which in 2006 received the Nobel Peace Prize jointly with its founder, Muhammad Yunus “for their efforts to create economic and social development from below” (The Nobel Foundation, 2006). Grameen Bank’s main scope of activity is providing micro-credits to the poorest people in Bangladesh without any collateral requirement. The model works as follows. First of all, the loans are only issued to groups of five people, who cannot be related to each other. This is done in order to ensure collective responsibility, accountability, and peer pressure. First loans are allocated to two members of the group. Any new loans are issued provided all principal debts and interests have been repaid; the group leader is the last person entitled to apply for a loan. Interest rates are kept to market level, and 5% of credit is attributed to the group fund. Seemingly simple, this model works very successfully in the Bangladesh market. According to statistics from Grameen’s official web-site, as of February 2011 it had 8.36 million borrowers, 2,565 branches, and served around 97% of villages in the country. Total amount of loans disbursed is $10.38 billion, and the repayment rate is 97%.

A Western approach to interest-free banking may be illustrated through the work of, e.g. JAK bank in Sweden, whose model was described by, e.g. (Carrie, 2001). It is based on the use of ‘savings points’, which are earned based on the sum of the deposit, its duration and the factor, which depends on the deposit type. For instance, saving 10,000 SEK for 6 months with a factor 0.8 yields 48,000 points. If the person wishes to borrow 60,000 SEK, s/he will have to later deposit an amount of money for a period of time rendering 12,000 additional points.

3.3. ‘Interest-free’ money It appears that the theoretical foundations of interest-free money were first outlined by the German economist Silvio Gesell in his book “Natural Economic Order”4, where he suggested stimulating money circulation by introducing a demurrage fee for holding banknotes (Gesell, 1958), (Kennedy & Kennedy, 1995). Later, his ideas were praised by Irving Fisher and John Maynard Keynes5 (Blanc, 1998). The existence of a fee on money circulation explains the use of

4

Originally, “Die natürliche Wirtschaftsordnung durch Freiland und Freigeld”.

5

In 1933, Fisher published a book called “Stamp Scrip”. Keynes (2006) wrote: Gesell’s “work contains flashes of deep insight”.

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quote marks in the title; per se one can speak of a negative interest rate applied on cash assets.

Gesell’s ideas can be illustrated by the example of an experiment conducted in a small Austrian town Wörgl6 in 1932-1933. A local bank issued 5,490 ‘Free Schillings’ and backed them with the equivalent amount in the official currency. At the end of each month, the holder of the note had to pay 1% circulation fee from the face value, and was stamped accordingly. Such a small ‘fine’ for holding money caused people to try investing ‘free schillings’ at the earliest possibility.

As a result, within 13,5 months the free schillings circulated 463 times, generating a turnover of 2.283.840 Schillings. On top of that, unemployment dropped by 25%, income from local taxes grew by 35%, and investment in public works rose by 220%. The ‘circulation fee’ comprised 658 Schillings, all of which were spent on public works. However, when approximately 170 towns in Austria (including Innsbruck) expressed their interest in replicating the experiment, the National Bank of Austria prohibited printing of any local currency. (Kennedy & Kennedy, 1995) According to (Blanc, 1998), the experiment was replicated in the United States, where around 15 towns issued interest-free money. However, due to a lack of clarity with the procedures, the experiment worked out badly, fraudulence and barter flourished. Similar projects were also tried out in Canada and France.

3.4. Time banking Just like LETS or barter networks, time banks are bookkeeping systems in the first place, where time is used as a complementary currency. Naughton-Doe (2011) states that they are: “a community currency with an explicit social objective to grow social capital and combat social exclusion”. Time banks took off in 1986 in the United States with the initiative of Edgar S. Cahn, who aimed at addressing social issues and problems (Greco, 2001). By 2000, there were 300 time banks in the world (Lietaer, 2001). In 2007, there were 55 time banks in the United States; the United Kingdom had 84 active initiatives and 41 were in development (Collom, 2008). In

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Although it was not the first experiment of its kind: in 1930, Wära currency was implemented as a complement to the Reichsmark in Schwanenkirchen, Germany.

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Sweden, time banking started in 2007 with the introduction of the TidsNätverket i Bergsjön 7

initiative.

People taking part in a time bank get a certain amount of credits for their work (usually, healthcare, education, housekeeping etc.) and can later exchange them for the services of other people. Some systems, e.g. Time Bank Athens, incorporate a demurrage option - credits expire after six months (Sotiropoulou, 2001). Generally, membership consists of socially excluded groups of people: unemployed, poor, retired etc. (Seyfang, 2004). A major difference from LETS is the focus of time banks on services and social orientation (Seyfang, 2002).

Naughton-Doe (2011) distinguishes two types of time banking models: person-to-person, and person-to-agency. In the former case services are provided by citizens in an hour-for-hour exchange with the help of a broker. In the latter, contracts are signed with local community organizations. An example of the person-to-person approach is the Ithaca Hours system, which was established in 1991 and quickly spread all over the United States (Collom, 2008). Person-toagency systems can be represented by Time Banking Wales: within this approach, the focus is put on engaging with existing civil society organizations.

3.5. Complementary currencies Complementary currencies can be defined as “something else than a legal tender (i.e. national money) <that is used> as a medium of exchange, with the purpose to link unmet needs with otherwise unused resources” (Lietaer & Hallsmith, 2006). Usually, they are issued by a group of local activists or an organization. One distinctive feature of complementary currencies is their limited area of circulation8.

It is possible to distinguish the following types of complementary currencies: Fully backed by the national currency: SOL (France), Social currencies in Brazil, Lewes Pounds (UK), Eco-Pesa (Kenya) and others

7

For more information please refer to the web-site: http://www.tidsnatverket.se/

8

Though there are initiatives to introduce a global complementary currency. Please refer to (Lietaer, 2004) for further reading.

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Backed by guarantees from members of the exchange system: Time Dollars, some types of LETS systems Backed by goods: Green Bucks, Mendo Credits (both by locally grown food), Mulligan Books (with books), commercial vouchers (coupons) provided in promotional materials etc.

Backed by services: frequent traveller programs in airlines, some types of Regiogeld Transition complementary currency: backed by UK Pound, but apart from exchange facilitation serve the purpose of changing patterns in the local economy (Ryan-Collins, 2011) According to Lietaer & Kennedy (2008), in 2007 there were about 2,600 complementary currencies in the world, of which 55% were in Europe, 36% in Japan, 5% in the United States and Canada, 3% in Australia and New Zealand, and only 1% in the rest of the world. It is also worth remembering Argentinian experiments with complementary currencies used for barter.

Place (2001) reports that in 1995-2002, two thousand barter currencies were created there.

Moreover, between 2007 and 2009 Venezuela developed 11 barter currencies that are used in 13 states of the country. He also suggests that the Brazilian government had plans to assist 51 community banks in the country in order to reach 300 community currencies by 2012. Example of local currencies are provided by the Regiogeld projects operating in Germany. In 2006, they were active in sixteen regions of Germany, and another 50 initiatives of local currencies were developing (Rösl, 2006). According to (Thiel, 2011), there were 73 projects of this kind, of which 26 were active (20 Euro-based, 4 pegged with goods and services, and 2 using mixed type). The dominating project is Chiemgauer, issuing around €500,000. On average, €10,000 units are put into circulation9. As in the case of LETS in Norway, the core of Regiogeld projects is built up of middle-class people.

A new development in the field of complementary currencies is so-called ‘Transition currencies’, which appeared in 2007 in the UK as part of the Transition Town movement 10, and

9

Ibid.

10

More information about this is available on the web-page of the Transition Network: http://www.transitionnetwork.org/

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involves now around 370 businesses (Ryan-Collins, 2011). The main feature of this type of complementary currency is a focus on enhancement of local resilience, i.e. promoting local production, consumption and investment â&#x20AC;&#x201C; an approach very much in line with the â&#x20AC;&#x2DC;plugging the leaksâ&#x20AC;&#x2122; methodology of the New Economics Foundation11, and Economic Renewal program of the Rocky Mountains Institute. Emphasis is also put on socially important companies, and on promoting communal values.

4. Classifying complementary economic systems 4.1. Earlier classification attempts During the work on this paper, it became apparent that literature on the matter lacks clarity: there exist many terms with similar meanings, with overlapping meanings, or even with quite different meanings. For instance, complementary currencies are sometimes referred to as alternative currencies, local currencies or community currencies. Researchers also vary in assigning a particular complement to a certain category, e.g. time banking is sometimes classified as an exchange system, and sometimes as a complementary currency. Another issue is the existence of mixed complements, e.g. LETS using a digitalized complementary currency.

The absence of an agreed classification directly affects availability of the data, and, thus, the ability to conduct thorough and meaningful econometric analysis of economic complements.

There have been several attempts in the literature to address this issue, e.g. by Lietaer & Hallsmith (2006), Blanc (2011), and Brenes (2011). It is important to note that all of these authors focus solely on complementary currencies. For instance, Brenes describes the method developed by the Social Trade Organization Central America (STRO-CA), which was used for labelling local currencies in Brazil, El Salvador, Honduras and other countries of the region.

Three categories of complementary currencies are distinguished: commodity-backed currency, loan-backed currency, and a mixed type. A distinctive feature of this method is the clear focus

11

Please, refer to (Ward & Lewis, 2002).

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on the form of the currency, but it omits complements, which are not represented by money, e.g. LETS or barter exchanges.

Classifications of Lietaer & Hallsmith (2006) and the one by Blanc (2011) both depart from the purpose of the complementary currency use. However, they differ in application of this criterion. Particularly, Blanc distinguishes local currencies (used for territorial projects), community currencies (for community projects), and complementary currencies (economic projects). The approach of Lietaer & Hallsmith is wider in scope, i.e. currencies are split into social and for-profit ones (additional classification by support media and denomination)12, and appears to be more functional. However, both approaches ignore exchange of services and matters relating to the area of complement circulation, and mix tools that are used for ensuring the circulation of the complementary currency and design thereof. Again, their focus is put only on complementary currencies.

4.2. Suggested taxonomy Considering the aforementioned issues of earlier classification attempts, it is possible to build a taxonomy that will, first of all, differ in scope and classify complementary economic systems in general (thus including all economic complements), address issues of area, and have a more detailed classification of design. It will also be flexible to ensure possibility to include new economic complements.

Given this, it suggested that the taxonomy would contain the following classification levels: purpose, items of exchange, designated area, and design features (currency and mechanism used).

The departing point then will be the choice between for-profit and not-for-profit systems: I.

Orientation (purpose) a. Not-for-profit (community projects) b. For-profit (business projects) c. For-profit with social goals (community business projects)

12

Complete classification by Lietaer & Hallsmith (2006) is presented in Annex 2.

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Next level will represent focus of the system, i.e. what items are exchanged therein: II.

Items of exchange a. Goods b. Services c. Information d. Mixed items

Next level is the area, on which the system will operate. The question of the optimal size of a local economy is widely discussed among practitioners of Transition Towns movements, Plugging the Leaks, etc., and is also investigated by the Swedish Centre of Education for Sustainable Development (SWEDESD); it is clearly a questions deserving further analysis. In general, the discussion is centred on defining optimal geographic, social, economic and ecosystem boundaries.

III.

Area

On the level IV practical considerations are described: currency in use, and accounting mechanisms. Its purpose is to define by what means exchange is facilitated.

IV.

Design a. Currency used b. Accounting mechanism

Each of these sublevels can be further divided. In case of currency used, the choice lies between conventional and complementary one. In turn, complementary currencies can be classified according to the way they are supported (pegged to official currency; by commodities or guarantees), and to their denomination (time, goods, other units). a. Currency used: i.

Complementary currency 1. Support type: a. Peg to official currency b. Commodities 18

c. Guarantees 2. Denomination: a. Time b. Goods c. Other units ii.

Conventional currency

Accounting mechanisms can be either paper-based or digital-based. It appears that with the further development of technologies, digital systems will prevail. b. Accounting mechanism: i.

Paper-based registers

ii.

Digital systems

A full version of the suggested taxonomy is provided in Annex 3.

4.3. Example of the taxonomy use Spice time bank in Wales falls into category of not-for-profit systems, where items of exchange are services. The scope of its operation encompasses the whole country of Wales.

Complementary currency (time credits) is used; it is supported by guarantees and has time as its denomination. The accounting mechanism is a digitalized online system.

5. Case study analysis For the purpose of this paper, 33 case studies were analysed. Before classification with the suggested taxonomy, 13 case studies related to interest-free financing, 12 to complementary currencies (4 to time-banking, and 8 to other types of complementary currencies), 8 to exchange systems (3 cases of barter, and 5 of LETS).

Using the criteria of purpose from the suggested taxonomy, the case studies were classified into three categories: For profit: Islamic Banking (5 case studies), JAK bank, Swiss Wirtschafstring, US Corporate barter network 19

Not-for-profit: Interest-free money (3 case-studies), Time banks (4 case studies), Complementary currencies (8 case studies), LETs systems (5 case studies) For-profit with social goals: Grameen Bank, Micro-financing in Bangladesh, Triodos Bank, BancoSol, and Argentinean barter network Case studies are summarized in the table below.

20

##

1.

2.

3.

4.

5.

6.

Period analysed

Case study

FOR-PROFIT COMPLEMENTARY ECONOMIC SYSTEMS Improved macroeconomic performance; More research is needed to provide more general smoother behaviour of money velocity; more conclusions controllable monetary environment

Source(s)

1960-1998

ii

1993-1995

Reduced financial uncertainty.

Failed to decrease the level of inflation.

(Eslamloueyan, 2008)

1990-2000

Better performance in financing real sector; positively contribute to the growth of banking sector in general; higher cost- and revenue efficiency compared to that of conventional banks.

Productivity and technological efficiency decreased compared to conventional banks.

(Savas & Kabir, 2007)

1998-1999

Low operational costs in smaller IFI; very high liquidity ratio in larger institutions; economic viability and fulfilment of existing prudential norms.

Poorest groups are limited in access to credit facilities; larger institutions are not very successful due to lack of education in all levels of management; need of expansion.

(Bagsiraj, 2009)

Not reported.

Principal-agent problem: capital is provided by the bank, but management is fully performed by the entrepreneur. Returns are tied to interest rate in the conventional system.

(Chong & Liu, 2009)

Effective in counterbalancing the â&#x20AC;&#x2DC;centripetalâ&#x20AC;&#x2122; force in financing.

Not reported.

(Carrie, 2001)

Islamic banking in Iran

Interest-free financial institutions vs. conventional iii ones (Turkey)

Islamic financial institutions in India

JAK bank (Sweden)

Limitations/disadvantages

i

Islamic banking in Iran

Islamic banking vs. conventional banking iv (Malaysia)

What worked well

1995-2004

General overview

21

(Darrat, 2000)

7.

8.

9.

10.

11.

12.

Wirtschaftsring (Switzerland)

Corporate barter (USA)

BancoSol (Bolivia) Micro-financing schemes for rural development via Islamic banking in Bangladesh

Triodos bank (Netherlands)

Grameen bank (Bangladesh)

1934-2009

WIR turnover has a clear counter-cyclical nature.

Better performance in terms of macroeconomic stabilization, since the balance is zero. Large membership. A closed-type WIR-system may have small impact on inflation level.

Not reported.

(Stodder, 2009)

1974-1995

Strong counter-cyclical effect; provide more flexible pricing; preservation of foreign currency reserves; credit-creation; strong capacity to grow.

Corruption and fraud are reported.

(Stodder, 1998)

FOR-PROFIT COMPLEMENTARY ECONOMIC SYSTEMS WITH SOCIAL GOALS Financial sustainability achieved soon after 1984-2006 Focus mainly on urban areas. foundation. Quick growth of the client base.

(Schicks, 2007)

1997-2006

Increased welfare of the clients, success in poverty alleviation and addressing needs of the poorest groups of population.

More resources and greater scope of operation is needed. High turnover in banks.

(Parveen, 2009)

1968-2008

Innovative in development of products that are tailored to social challenges and needs; social engagement; adaptability to changing environment.

Not reported.

(Kaufer, 2011)

Hard to define cost-efficiency in pure economic terms. Some researchers claim it has yet to achieve cost-covering operations. Diversification

(Schreiner, 2003)

1982-1997

Low default rate (about 3%); increased household income and self-employment profits for members; positive social effects: growth of school enrolment, womenâ&#x20AC;&#x2122;s empowerment and formal

22

(Schicks, 2007)

demand for healthcare. Possible positive spillover effects – employment etc.

13.

14.

15.

16.

17.

18.

19.

Argentinean Barter Network

Wära experiment – Schwanenkirchen (Germany)

1999-2002

1929-1931

Contributes to employment, particularly for female citizens. Enhances social networks, and favours development of leadership skills. Equity to members.

of lending policy is needed.

(Islam, 2008)

Low male enrolment in stable periods of economic cycle. Risk of mal-use and frauds.

(Pereyra, 2007)

NOT-FOR-PROFIT COMPLEMENTARY ECONOMIC SYSTEMS Quick spread among business, local economy Government intervention put an end to currency revitalized, debts settled, counteracted circulation. Not reported otherwise. deflationary governmental policy.

(Schroeder, 2006) (Fisher, 1933) (Kennedy & Kennedy, 2007)

Money circulation increased, growth of local investment in public works, town rebuilt, new employment opportunities appeared.

Experiment was forbidden by the National Bank of Austria due to the fear of losing its monopoly.

1930s

Interest-free coupons served as an alternative to dollar.

Lack of clarity with the procedures and widespread fraudulence. Complete failure.

(Blanc, 1998)

Ithaca Hours (USA)

General overview

Foster local economic development, preserving employment, lower transaction costs

Higher incentives to spend dollars are needed in order to make the experiment replicable

(Grover, 2006)

Salford Time Bank (UK)

June 2009

Transfer of knowledge fostering wellbeing and other social benefits.

Increase in membership and funding is required for sustainability. Better addressing of socially excluded people is required.

(Warne & Lawrence, 2009)

Wider housing opportunities for homeless people

Cost structure needs optimizing.

(Naughton-Doe,

Wörgl experiment – (Austria)

First US experience with scripstamp money

Spice (Wales)

1932-1933

General

23

(Blanc, 1998)

overview

and better social inclusion thereof.

2011) Justaddspice.org

20.

21.

22.

23.

24.

More effective in providing economic benefits.

Support the beliefs of individuals. Creates connection in labour market.

Low ‘survival ratio’ of similar systems due to lack of personnel in senior and regular positions, insufficient funding and narrow range of services provided.

(Collom, 2008)

2007-2011

Combined benefits of using conventional and complementary currencies; synergy effects produced by different actors.

‘Large’ (estimated at approximately 100.000) number of users needed; lack of civil society organizations support for diffusion of the idea to occur.

(Fare, 2011)

2009-2011

Combined benefits of using conventional and complementary currencies; enriches access to labour market and purchasing power of population; lower interest rates.

Higher transaction costs compared to official currency.

(Place, 2011)

Wider access to health care services; enhancing local social networks

Started losing capacity once state insurance scheme was introduced. Per se worked better for volunteers, who were concerned more with health issues than income.

(Hirota, 2011)

Widespread; high turnover generating more goods and services.

On average, the membership is lower than optimal in order to provide enough variety of goods and services (approx. 200). Hard to achieve access to market. Rösl argues that Regiogeld may lead to a loss in social welfare.

Autumn 2006

Time Bank (US)

The SOL (France)

Backed by 1€ = 10 SOL

Social currencies (Brazil)

Usually backed by Real

Volunteer Labour Bank (Fureai Kippu) – Japan

Backed by Yen

Regiogeld (Germany)

Mixed: some backed by €, some by goods & services.

Also have

1973-2000

2001-2010

24

(Thiel, 2011) (Rösl, 2006)

demurrage stamps.

25.

Cheimgauer project (Germany)

1Ch.= 1€

26.

Eco-Pesa (Kenya)

Backed by Shillings

27.

Lewes Pound (UK)

Transition Currency, Backed by Pound

28.

29.

Transition Currencies UK

Backed by Pound

Hounslow LETS system

(Thiel, 2011)

Biggest in Germany; wide choice of services and goods; support to local community; stimulating business cycle; turnover increase.

Free-rider problem; ‘vicious circle’: companies want more people to participate, and vice versa.

MayNovember, 2010

High velocity of the CC, 22% increase in net incomes of companies participating; cost-efficient for some kinds of operations. Supported by local government.

Initially, high fee for exchanging CC into Shillings.

May, 2009

Growth of local wealth, decrease in vulnerability to external shocks.

Unclear how this type of initiative would work on a larger scale. Further research is required.

2003-2010

(Gelleri, 2009) Chiemgauer.eu,

(Ruddick, 2011)

(Graugaard, 2009) Lewespound.org

2006-2010

Introduction of electronic system of payments has potential in resolving issues with infrastructure and financial stability. Possibility of combining with other systems, e.g. time-based currencies.

Dependence on incentives, which lie beyond economy: beliefs, culture etc. Support for poor people in recession is at question, since no extra liquidity is created. Basic absence of remuneration threatens financial stability. Lack of proper infrastructure.

(Ryan-Collins, 2011)

1998-1999

May be effective in poverty alleviation due to empowering the poor to take action. Proved to be most effective in small middle-class regions.

Perform small role in economy of the community; participation is skewed towards a core of participants. Required significant financial and organizational resources.

(Aldridge & Patterson A., 2002)

25

30.

31.

32.

33.

LETS systems in Norway

1995

Majority of members were women 21-40 with stable income and full-time job.

Members of LETS systems analysed are not a representative sample of society. “Green” bias is present.

(Gran, 1998)

LETS systems in the UK

1999

Most effective for entrepreneurs. Ambiguous effect on employment opportunities, further research needed.

Low awareness of people, causing several negative effects; little geographical coverage.

(Williams et al., 2001)

1990-1996

Wider access to credit, goods and services. CSOs play important role in fostering LETS operation.

Possible conflict with state financial system – need for reconciliation and regulation.

Economically insignificant on national level.

Cannot be properly grasped by traditional metrics, e.g. share of GDP etc.

(Pacione, 1997)

1990s

Certain benefits for unemployed, if time spent in LETS is not deducted from benefit payments.

Integrating unemployed into community.

Constraint on growth. Not all the demands are met.

(Peacock, 2000)

LETS Glasgow (Scotland)

LETS (General overview)

26

6. Discussion 6.1. Results from the case studies 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 countercyclical 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 â&#x20AC;&#x2DC;principal-agentâ&#x20AC;&#x2122; 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.

27

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.

6.2. Local authorities participation Analysis of the case studies revealed several issues relating to the performance of complementary economic systems, namely: â&#x20AC;&#x2DC;principal-agentâ&#x20AC;&#x2122; 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 complementsâ&#x20AC;&#x2122; use, and standards for data collection and dissemination.

28

7. Conclusions This paper has analysed international experience of using complementary economic systems in addressing various macroeconomic issues. A case-study approach was used to consider exchange networks, complementary currencies, time banks and interest-free financial institutions with regard to this. Analysis suggests that these systems yield positive effects, both economically and socially.

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 the fact that it is wide in scope.

As the result of the work, it possible to conclude the following: Complementary economic systems are widely used around the world, and more systems appear every year Majority of complementary address issues of employment, welfare, and access to credit facilities. Some systems have anti-inflationary effect, and evidence from case studies indicates the ability of complementary systems to foster-business cycle development Local authorities have a scope for contributing to successful performance of the complementary economic systems, e.g. by coordination, safe-guarding, linking agents etc.

There is a need for international cooperation in the form of sharing best practices, developing guidelines and data dissemination There is a lack of clarity on the subject, which leads to different interpretations and prevents data collection and performance of the econometric research Several suggestions for further research may be given. Firstly, one should have narrower focus and consider one type of complementary economic systems. Secondly, empirical analysis is needed. It will be particularly interesting to see, how systems perform in various settings.

29

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34

Annexes Annex 1: LETS development in some European countries Year

Number of LETS systems

Source

1992

5

Aldridge & Patterson, 2002

1995

300

Aldridge & Patterson, 2002

1998

450

Aldridge & Patterson, 2002

2001

281

Taris, 2001

2002

303

Aldridge & Patterson, 2002

Year

Number of LETS systems

Source

2001

226

Taris, 2001

2005

254

Schroeder, 2006

2007

280

Tauschringe.org

Year

Number of LETS systems

Source

1994

30

Williams (1996)

2001

54

Taris (2001)

2011

29

LETS-linkup (2011)

Year

Number of LETS systems

Source

1994

171

Williams (1996)

2001

93

Taris (2001)

2011

59

Own Calculations

Germany (2001-2007)

New Zealand

Australia

35

Annex 2: Classification of complementary currencies by Lietaer & Hallsmith (2006) I.

Needs-based classification: o Social currencies: accent on acute social issues o For-profit currencies: 

Business-to-business: fostering exchanges with suppliers



Business-to-consumer: stimulating client’s loyalty



Consumer-to-consumer: transactions between individuals



Consumer-to-business: using currency to stimulate community decisionmaking in business



Combination: e.g. WIR is issued by business, but also used by community in general

II.

Classification by support media: o Commodity o Paper- and coins-based o Electronic

III.

Classification by denomination: o Tied to existing currency o Nominated in time o Nominated in goods

36

Annex 3: Suggested taxonomy of complementary economic systems V.

Orientation (purpose) a. Not-for-profit (community projects) b. For-profit (business projects) c. For-profit with social goals (community business projects)

VI.

Items of exchange a. Goods b. Services c. Information d. Mixed items

VII.

Area

VIII.

Design a. Currency used: i.

Complementary currency 1. Support type: a. Peg to official currency b. Commodities c. Guarantees 2. Denomination: a. Time b. Goods c. Other units

ii.

Conventional currency

b. Accounting mechanism: i.

Paper-based registers

ii.

Digital systems

37

Endnotes i

Cointegration and error-correction model is used. First, non-stationarity of interest-free money stock, interestbased money stock and the monetary base is checked. Phillips-Perron unit root test suggests all three variables to be non-stationary in logarithmic levels. Afterwards, Johensen cointegration test is used. ii

GARCH model is used to test effects of interest-free banking system on level and volatility of inflation in the country. iii

Data envelope analysis type Malmquist Index and ANOVA are used.

iv

Bivariate Granger causality test,Augmented Dickey Fuller and Philips Perron procedures, and Johensen cointegration test were employed. Various types of deposits with different maturity were used.

38