Feature: Taking Africa Seriously: A Case for Enhanced Resource Flow to Facilitate Development and Reduce Poverty

Feature: Taking Africa Seriously: A Case for Enhanced Resource Flow to Facilitate Development and Reduce Poverty

Author: 
Aryeetey, Ernest
Place: 
Oxford
Publisher: 
Oxford University Press
Date published: 
2002
Record type: 
Region: 
Journal Title: 
Journal of African Economies
Source: 
Journal of African Economies Volume 11 Issue 2 June 2002 pp. 282-307
Abstract: 

Since the collapse of the state in 1991 and the subsequent crash of the domestic currency, the Somali economy starved for liquidity to facilitate economic recovery and means to replace ageing banknotes. In the long absence of effective state authority, forged banknotes from factions competed to fill the void and became accepted. In much the way that Milton Friedman predicted, the consequent unregulated private supply of money seeking to capture seignoirage income soon raised prices, destabilised domestic markets, eroded the market value of Somali shilling banknotes and reduced it to pure commodity money. However, the experience did not lead to an infinite price level simply because the money issuers were unwilling to add zeros to denominations in fear that the public will not accept them. Rather, as the marginal cost of importing and injecting new reprints on existing highest denomination neared its exchange value, the incentive to import more banknotes subsided, and domestic prices started to stabilise. Incredibly, at this very low exchange value, the Somali currency survives and retains its service value, and real cash balances have actually increased.

Language: 

CITATION: Aryeetey, Ernest. Feature: Taking Africa Seriously: A Case for Enhanced Resource Flow to Facilitate Development and Reduce Poverty . Oxford : Oxford University Press , 2002. Journal of African Economies Volume 11 Issue 2 June 2002 pp. 282-307 - Available at: https://library.au.int/feature-taking-africa-seriously-case-enhanced-resource-flow-facilitate-development-and-reduce