It should be blindingly obvious from recent
experience let alone historical experience that banking must be limited on a
geographical basis and heavily supported by its local government and its
people. I will go further and state that
the more local and geographic the better.
For that reason it also needs to operate under public model or at worst
a public private model.
Costa reason demonstrates another such history
and its outright success and the assault of manipulation and pressure to
abandon that successful model. What ever
happened to ‘ if it is not broken do not fix’
What this continues to show is the difficulties
faced by ill prepared politicians to stand against banking pressure. That is why driving micro finance into the
public realm is likely a sound idea as it is unattractive to the wolves.
Public Banking in Costa Rica: A Remarkable,
Little-Known Model
Tuesday, 12 November 2013
09:11
In Costa Rica, publicly-owned banks have been
available for so long and work so well that people take for granted that any
country that knows how to run an economy has a public banking option. Costa
Ricans are amazed to hear there is only one public depository bank in the
United States (the Bank of North Dakota), and few people have private access to
it.
So says political activist Scott Bidstrup,
who writes:
For the last decade, I have resided
in Costa Rica, where we have had a “Public Option” for the last 64
years.
There are 29 licensed banks, mutual
associations and credit unions in Costa Rica, of which four were
established as national, publicly-owned banks in 1949. They have remained open
and in public hands ever since—in spite
of enormous pressure by the I.M.F. [International Monetary Fund] and the U.S.
to privatize them along with other public assets.
The Costa Ricans have resisted that pressure—because the value of a
public banking option has become abundantly clear to everyone in this country.
During the last three decades, countless
private banks, mutual associations (a kind of Savings and Loan) and credit
unions have come and gone, and depositors in them have inevitably lost most of
the value of their accounts.
But the four state banks, which compete
fiercely with each other, just go on and on. Because they are stable and none
have failed in 31 years, most Costa Ricans have moved the bulk of their money
into them. Those four banks now account for fully 80% of all retail deposits
in Costa Rica, and the 25 private institutions share among themselves the rest.
According to a 2003 report by the World Bank, the public sector banks dominating Costa
Rica’s onshore banking system include three state-owned commercial banks (Banco
Nacional, Banco de Costa Rica, and Banco Crédito Agrícola de Cartago) and a
special-charter bank called Banco Popular, which in principle is owned by
all Costa Rican workers. These banks accounted for 75 percent of total banking
deposits in 2003.
In Competition Policies in Emerging Economies: Lessons and Challenges
from Central America and Mexico (2008), Claudia
Schatan writes that Costa Rica nationalized all of its banks and imposed a
monopoly on deposits in 1949. Effectively, only state-owned banks existed in
the country after. The monopoly was loosened in the 1980s and was eliminated in
1995. But the extensive network of branches developed by the public banks and
the existence of an unlimited state guarantee on their deposits has made Costa
Rica the only country in the region in which public banking clearly
predominates.
Scott Bidstrup comments:
By 1980, the Costa Rican economy
had grown to the point where it was by far the richest nation in Latin America
in per-capita terms. It was so much richer than its neighbors that Latin
American economic statistics were routinely quoted with and without Costa Rica
included. Growth rates were in the double digits for a generation and a half.
And the prosperity was broadly shared. Costa Rica’s middle class –
nonexistent before 1949 – became the dominant part of the economy during this
period. Poverty was all but abolished, favelas [shanty towns]
disappeared, and the economy was booming.
This was not because Costa Rica had natural
resources or other natural advantages over its neighbors. To the contrary, says
Bidstrup:
At the conclusion of the civil war of 1948
(which was brought on by the desperate social conditions of the
masses), Costa Rica was desperately poor, the poorest nation in the
hemisphere, as it had been since the Spanish Conquest.
The winner of the 1948 civil war, José “Pepe”
Figueres, now a national hero, realized that it would happen again if nothing
was done to relieve the crushing poverty and deprivation of the rural
population. He formulated a plan in which the public sector would be
financed by profits from state-owned enterprises, and the private sector would
be financed by state banking.
A large number of state-owned capitalist
enterprises were founded. Their profits were returned to the national treasury,
and they financed dozens of major infrastructure projects. At one point,
more than 240 state-owned corporations were providing so much money
that Costa Rica was building infrastructure like mad and
financing it largely with cash. Yet it still had the lowest taxes in the
region, and it could still afford to spend 30% of its national income on health
and education.
A provision of the Figueres constitution
guaranteed a job to anyone who wanted one. At one point, 42% of the working
population of Costa Rica was working for the government directly
or in one of the state-owned corporations. Most of the rest of the
economy not involved in the coffee trade was working for small mom-and-pop
companies that were suppliers to the larger state-owned firms—and it was state
banking, offering credit on favorable terms, that made the founding and growth
of those small firms possible. Had they been forced to rely on
private-sector banking, few of them would have been able to obtain the
financing needed to become established and prosperous. State banking was
key to the private sector growth. Lending policy was government policy and was
designed to facilitate national development, not bankers’ wallets.
Virtually everything the country needed was locally produced.
Toilets, window glass, cement, rebar, roofing materials, window and door
joinery, wire and cable, all were made by state-owned capitalist enterprises,
most of them quite profitable. Costa Rica was the dominant player
regionally in most consumer products and was on the move internationally.
Needless to say, this good example did not
sit well with foreign business interests. It earned Figueres two coup attempts
and one attempted assassination. He responded by abolishing the military
(except for the Coast Guard), leaving even more revenues for social services
and infrastructure.
When attempted coups and assassination
failed, says Bidstrup, Costa Rica was brought down with a form of economic
warfare called the “currency crisis” of 1982. Over just a few months, the cost
of financing its external debt went from 3% to extremely high variable rates
(27% at one point). As a result, along with every other Latin American
country, Costa Rica was facing default. Bidstrup writes:
That’s when the IMF and World Bank came to
town.
Privatize everything in sight, we were told.
We had little choice, so we did. End your employment guarantee, we
were told. So we did. Open your markets to foreign competition, we
were told. So we did. Most of the former state-owned firms were
sold off, mostly to foreign corporations. Many ended up shut down in a
short time by foreigners who didn’t know how to run them, and unemployment
appeared (and with it, poverty and crime) for the first time in a decade.
Many of the local firms went broke or sold out quickly in the face of
ruinous foreign competition. Very little of Costa Rica’s
manufacturing economy is still locally owned. And so now, instead of earning
forex [foreign exchange] through exporting locally produced goods and retaining
profits locally, these firms are now forex liabilities, expatriating their
profits and earning relatively little through exports. Costa Ricans
now darkly joke that their economy is a wholly-owned subsidiary of the United
States.
The dire effects of the IMF’s austerity
measures were confirmed in a 1993 book excerpt by Karen Hansen-Kuhn
titled “Structural
Adjustment in Costa Rica: Sapping the Economy.” She noted that
Costa Rica stood out in Central America because of its near half-century
history of stable democracy and well-functioning government, featuring the
region’s largest middle class and the absence of both an army and a guerrilla
movement. Eliminating the military allowed the government to support a
Scandinavian-type social-welfare system that still provides free health care
and education, and has helped produce the lowest infant mortality rate and
highest average life expectancy in all of Central America.
In the 1970s, however, the country fell into
debt when coffee and other commodity prices suddenly fell, and oil prices shot
up. To get the dollars to buy oil, Costa Rica had to resort to foreign
borrowing; and in 1980, the U.S. Federal Reserve under Paul Volcker raised
interest rates to unprecedented levels.
In The Gods of Money (2009), William Engdahl fills in the back
story. In 1971, Richard Nixon took the U.S. dollar off the gold standard,
causing it to drop precipitously in international markets. In 1972, US
Secretary of State Henry Kissinger and President Nixon had a clandestine
meeting with the Shah of Iran. In 1973, a group of powerful financiers and
politicians met secretly in Sweden and discussed effectively “backing” the
dollar with oil. An arrangement was then finalized in which the oil-producing
countries of OPEC would sell their oil only in U.S. dollars. The quid pro
quo was military protection and a strategic boost in oil prices. The
dollars would wind up in Wall Street and London banks, where they would fund
the burgeoning U.S. debt. In 1974, an oil embargo conveniently caused the price
of oil to quadruple. Countries without sufficient dollar reserves had to
borrow from Wall Street and London banks to buy the oil they needed.
Increased costs then drove up prices worldwide.
By late 1981, says Hansen-Kuhn, Costa Rica
had one of the world’s highest levels of debt per capita, with debt-service
payments amounting to 60 percent of export earnings. When the government had to
choose between defending its stellar social-service system or bowing to its
creditors, it chose the social services. It suspended debt payments to nearly
all its creditors, predominately commercial banks. But that left it without
foreign exchange. That was when it resorted to borrowing from the World Bank
and IMF, which imposed “austerity measures” as a required condition. The result
was to increase poverty levels dramatically.
Bidstrup writes of subsequent developments:
Indebted to the IMF, the Costa Rican
government had to sell off its state-owned enterprises, depriving it of most of
its revenue, and the country has since been forced to eat its seed corn. No
major infrastructure projects have been conceived and built to completion out
of tax revenues, and maintenance of existing infrastructure built during that
era must wait in line for funding, with predictable results.
About every year, there has been a closure of
one of the private banks or major savings coöps. In every case, there has
been a corruption or embezzlement scandal, proving the old saying that the best
way to rob a bank is to own one. This is why about 80% of retail deposits
in Costa Rica are now held by the four state banks.
They’re trusted.
Costa Rica still has a robust economy,
and is much less affected by the vicissitudes of rising and falling
international economic tides than enterprises in neighboring countries, because
local businesses can get money when they need it. During the credit
freezeup of 2009, things went on in Costa Rica pretty much as
normal. Yes, there was a contraction in the economy, mostly as a result of a
huge drop in foreign tourism, but it would have been far worse if local
business had not been able to obtain financing when it was needed. It was
available because most lending activity is set by government policy, not by a
local banker’s fear index.
Stability of the local economy is one of the
reasons that Costa Rica has never had much difficulty in
attracting direct foreign investment, and is still the leader in the region in
that regard. And it is clear to me that state banking is one of the
principal reasons why.
The value and importance of a public banking
sector to the overall stability and health of an economy has been well proven
by the Costa Rican experience. Meanwhile, our neighbors, with their fully
privatized banking systems have, de facto, encouraged people to keep their
money in Mattress First National, and as a result, the financial sectors in
neighboring countries have not prospered. Here, they have—because most
money is kept in banks that carry the full faith and credit of the Republic of
Costa Rica, so the money is in the banks and available for lending. While
our neighbors’ financial systems lurch from crisis to crisis, and suffer
frequent resulting bank failures, the Costa Rican public system just keeps
chugging along. And so does the Costa Rican economy.
He concludes:
My dream scenario for any third world country
wishing to develop, is to do exactly what Costa Rica did so
successfully for so many years. Invest in the Holy Trinity of national
development—health, education and infrastructure. Pay for it with the
earnings of state capitalist enterprises that are profitable because they are
protected from ruinous foreign competition; and help out local private
enterprise get started and grow, and become major exporters, with stable
state-owned banks that prioritize national development over making bankers
rich. It worked well for Costa Rica for a generation and a
half. It can work for any other country as well. Including the
United States.
The new Happy Planet Index, which rates countries based on how many long and happy
lives they produce per unit of environmental output, has ranked Costa Rica #1
globally. The Costa Rican model is particularly instructive at a time
when US citizens are groaning under the twin burdens of taxes and increased
health insurance costs. Like the Costa Ricans, we could reduce taxes while
increasing social services and rebuilding infrastructure, if we were to allow
the government to make some money itself; and a giant first step would be for
it to establish some publicly-owned banks.
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