Cashless and Thoughtless

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There has been a lot of push from international organizations to make poor societies around the world copy Western institutions, and recently to go cashless. Blind to differences in cultures, these international organizations have hugely over-estimated the organizational capabilities of people in the emerging markets — in the Middle East, South Asia, Central Asia, Africa, and Latin America.

Anyone who has spent a sensible amount of time in emerging markets — not in five-star settings but as a normal person — knows that in these countries, an organization of two people often has one person too many. It is also evident that the two tends to expand into dozens, hundreds, and thousands, either because of the local desire to subsidize more people or because of the need to instigate a Western-style bureaucracy to control the whole thing.

Erroneously assuming that we are all the same, that specific cultures do not matter, and that all that matters is training and incentives, there was a huge push for globalization.

In these culturally very different markets, companies and institutions — Western concepts, which do not transplant well without the underlying European culture and values — can never stay nimble. To maintain control, internal bureaucracies must grow to provide checks and balances, because workers fail in independent thinking, work ethics, honesty, and cooperation. Creativity stays conspicuous by its absence.

Despite seemingly low labor costs — as low as a couple of dollars a day in wages — the costs of keeping such organizations together grows exponentially with size. Growing bureaucracies require additional checks and balances. Without the cleaning mechanism of European values and the control systems they provide, these organizations invariably accumulate dead mass, which keeps growing cancerously until they crumble under their own weight. Organizations that do not have constant blood transfusions and external subsidies tend to disintegrate rather rapidly. The price of keeping them together is extremely high.

In a climate already characterized by political correctness, a certain wisdom that Europeans had accumulated about the colonized world had evaporated by the time the USSR era ended in the late 1980s. Erroneously assuming that we are all the same, that specific cultures do not matter, and that all that matters is training and incentives, there was a huge push for globalization.

German companies moved their factories to Eastern Europe, a region of relative cultural closeness to Germany. But many factories have since moved back. The anticipated cost savings turned out to be the exact opposite. All kinds of configurations of Western corporate investment in emerging markets were tried, with similar results.

The problem is that these emerging markets’ societies are tribal. In such cultures you need the glue of violence, subsidies, and massive bureaucracies to keep organizations in place. The experiments of the past 500 years with colonization and Western education show that it is not easy — when it is even possible — to wean societies away from tribalism. Bigger and bigger organizations were put in place in emerging markets, but they tended to remain poor and in strife. The intervention of Western economic methods created an unnatural gap between the poor and an entrenched elite, rendered more entrenched by the possession of whatever new wealth was produced.

Many factories have since moved back. The anticipated cost savings turned out to be the exact opposite.

There is only one solution: keep organizations in these emerging markets as small as possible, remembering that tribal instincts ironically propel them to make their organizations big. Never subsidize big organizations, for if you do, besides providing services that add value you create operations that are a massive drag on the economy, full of endeavors that consume wealth instead of producing it.

This brings us to the current drive to go cashless.

India has recently attempted to reduce the use of cash, ostensibly to reduce corruption but actually to further centralize the economy by creating a medium of exchange that the government can constantly monitor. Naturally, it is also creating a national ID card system. Both of these are in direct conflict with what India should do as a tribal, medieval society.

Let’s consider the sequence of steps required to operate an online bank account in India.

Start with slow internet connections and frequent interruptions in electricity. Add extremely unwieldy websites, websites that do not open properly. My browser often gets hung up on these sites. My password has a limited validity and must be renewed regularly by using the old password and a one-time password sent to my mobile phone; and a lot goes wrong during this “simple” process. Once inside the account, however, I may need another one-time password and an additional transaction password to complete my business.

Most people actually walk down to their bank branch to do the so-called online transaction — a clear instance of the fact that trying to modernize any system beyond its natural capacity in a tribal society increases the costs and makes it more difficult. This is the persistent irony of modernization.

My Indian banks charge me fees and commissions I never agreed on. They then top it up with taxes on “services” provided. Bank statements are ridden with so many charges that only the rare person has time or patience to sort them out, particularly when the banks are crowded, and getting someone to talk to you on the phone is extremely difficult. When you get through to an agent, he usually knows nothing.

The frustration of the people has been steadily increasing. Instead of easing their lives, the reduction of cash has added significantly to the burden.

It gets worse, especially if you are the so-called common man. I know my way around pretty well, but I frequently get stuck. And here is a country where 25% of the population is officially illiterate and where engineers and doctors choose to apply for jobs as janitors, mostly because their degrees are no more than paper. It is a country where a large proportion of those who claim to be literate struggle to sign their own names, let alone show themselves capable of reading a sentence. Imagine how they would deal with forced digitalization of the currency system. This will end in disaster.

Even now, in the last six months that India has been trying to reduce the usage of cash, the frustration of the people has been steadily increasing. Instead of easing their lives, it has added significantly to the burden.

Notably, however, none of this means that people have gone against the Indian prime minister, Narendra Modi. He is winning election after election, and most people simply love him. When not facing banking problems in real time, they are actively in support of Modi’s attempt to go cashless. One must remind himself that this is a tribal, irrational society. People often cannot connect simple dots that are right in front of them; not even the so-called educated ones can do that. They tend to do exactly more of what created the original problem, which in this case is irrational authority.

Any tribal society contains the impetus to make bigger, and more complex systems of authority. Tribal people want nannies. They feel secure in big structures, despite the fact that such structures actually make them less safe. Tribal people demand free stuff, without any feeling of gratitude to any real source of wealth. Governments meet that emotional need, while doing little else for their subjects.

Any rational leader would make an aggressive attempt to counter a tribal society’s willingness to increase the sizes of its institutions. But tribal societies do not easily produce rational leaders. They operate through expediency, not through rationality or objective moral thinking.

The IMF and the World Bank think that these emerging markets need better institutions. They think these countries need to reduce corruption, which is one of the reasons for the push towards going cashless. Locals in these countries agree. The irony is that these locals haven’t a clue about what corruption means — their tribal worldview means that they do not see corruption from a moral perspective. They merely look at the need to end corruption as a tool of expediency to improve their personal lives. They may think that everyone should stop asking for bribes, but they do not include themselves individually in that equation. Any sane, non-tribal person can see that this does not add up.

Tribal societies do not easily produce rational leaders. They operate through expediency, not through rationality or objective moral thinking.

Contrary to the view of many libertarians, even when privatization does happen, there can only be limited improvements. Indian companies — for they have tribal people as ingredients — are instinctively dishonest. They lack a work ethic and, unconstrained by morals, they rampantly abuse their clients. For example, I used an online Indian travel agency to buy an international ticket. After tens of attempts the money left my bank account — but I never got my ticket. The company said I never paid. No one knows whether it was the bank or the agent that was at fault. Eventually the agent refunded my money to the bank, but then the bank blocked that money. I had to run around the bank, which could not trace that blocked money. I shouted, screamed, and threatened, but in this entangled mess, I don’t really know who was the culprit. I do know that big organizations and forced-from-the-top digital money simply do not work.

Given the low-trust culture, Indians prefer immediate exchange of goods for money and vice versa. If you pay for a later delivery, you undertake huge risks that your goods might never arrive, and if they do arrive it is not unlikely that you might receive substandard goods. If you sell goods for payment at a later date, your money might never come. No wonder 95% of Indian consumer transactions happen in cash, with goods exchanging hands exactly at the same time that cash is paid.

India’s attempts to go cashless will end in a disaster. This will become obvious in a few months, not years. But India is merely an example. The situation with most of the emerging markets is exactly the same (with China, perhaps, as the only exception).

The lesson is that poor countries are poor for a reason, despite all kinds of tools of technology — particularly the internet — that are available to make their economies rapidly converge with that of the West. Western institutions worked in the ex-colonies as long as Europeans ran their institutions. With Europeans long gone and European values no longer underpinning them, the institutions have increasingly become hollow structures — what one sees everywhere in Africa, South Asia, and the Middle East, with the exception of a few small countries. An attempt to go cashless is a tribal attempt to centralize, exactly when their institutions, including the institution of the nation-state, another European import, are imploding.

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