"Africa is, indeed, coming into fashion." - Horace Walpole (1774)

7.19.2010

collective irrationality?

Pop quiz: Which of these is NOT valid currency in the eastern DRC? (Clockwise from upper left: ten-dollar US note, 10 Congolese franc note, one dollar US note, 50 Congolese franc note)

Here's a hint: the largest denomination of Congolese currency is the 500 franc note. It's currently worth about 55 cents. US Dollars are used for larger purchases.

Give up? It's the ten dollar bill.

But why?

Still not sure what's up? This is a legitimate, non-counterfeited ten dollar bill. But that miniscule tear in the upper right-hand corner of the note (just above the "0" in "10") makes it completely useless. It would also be invalid if it were a pre-2001 series note, or if it had any other markings or tears.

Why? Your guess is as good as mine. No one involved in a transaction in the DRC will take this note in exchange for $10 worth of goods or services. This is a phenomenon that extends across most of eastern and central Africa, albeit with some variation across space (in south Sudan, for example, you need post-2006 series notes nowadays). Meanwhile, no matter how tattered, torn, and utterly filthy the Congolese francs might be, as long as the pieces are held together one way or another, they're valid.

If you ask any Congolese merchant or forex dealer why they won't take perfectly good money, the answer is generally the same: because "they" won't take it. Who is "they"? "They" is everybody. And they are correct. No one around here will take torn dollars. They're barely worth the paper on which the bills are printed, although usually the black market dealers will trade the notes at reduced and very unfavorable exchange rates.

The interesting thing is that almost everyone realizes this is absurd. Last week my driver asked me if things worked this way in the U.S. "No!" I replied, "This is crazy." He agreed, and noted his frustration with the system the way it is.

This is a serious problem for the citizens of this region. If I get stuck with a $10 bill with a miniscule tear in one corner, it's no big deal. I'll hang onto it and use it to buy a bottle of water the next time Delta strands me at Newark. But for the Congolese - especially those who don't have the means to travel beyond their hometowns - it's different. If the normal wear-and-tear that happens to currency just happen to happen while that currency is in one's possession, he or she could lose his savings, the money to pay her children's school fees, or the dollar that would have purchased that day's meal. It hinders economic development and makes the economy function poorly.

It's an interesting collective action dilemma. How do you overcome a norm that everyone knows to be ridiculous, but can do nothing about? It strikes outsiders - especially outsiders who are used to currency systems that regularly rotate out used bills - as completely irrational behavior on the part of millions of people.

Those millions include me. Every time I travel to the DRC, I have to go to the bank, explain the situation, convince them I'm not a drug dealer or human trafficker, and take out cash in unmarked, pristine condition bills in a variety of denominations. When I engage in a transaction here, I check the notes I receive very carefully before agreeing to accept them, and I hand back any that don't meet the standard.

What else can we do?

23 Comments:

Anonymous Benjamin Geer said...

In Egypt there's something similar, though it's not usually quite that extreme. Many small businesses refuse to accept badly torn Egyptian banknotes, but you can use them on public transportation and in larger stores. When you buy tickets for the sleeping carriages on the Egyptian railways, the ticket office only takes dollars or euros, and that's the only situation where I've had currency refused because of the tiniest tear.

I wonder if there's a connection between the phobia about torn currency and the severe shortage of change in Egypt. Generally when you buy anything, you need to have exact change or nearly so, because merchants are often unable to make change. I've tried in vain to tell them that (a) torn banknotes are still legal currency and banks should dispose of worn-out notes, and (b) they should go to the bank every day to get enough change for the day's business. Their reactions seem to suggest that their relations with banks are very distant and not conducive to such frequent interaction.

So maybe the solution would be a public awareness campaign about worn banknotes, plus initiatives to improve relations between merchants and banks.

Monday, July 19, 2010 2:10:00 AM

 
Anonymous Michael Keizer said...

You could look at it from the other way: isn't it strange that we all attach value to a piece of printed paper that is not guaranteed any more by any underlying value? Banknotes' value anywhere is what we ascribe to them; if that is less if there is a tear in it, then that is no more irrational than that we value it in the first place.

Monday, July 19, 2010 2:30:00 AM

 
Anonymous Matt said...

I'm pretty doubtful about public awareness campaigns.

The only way to break the cycle is to get an institution, a bank, a large NGO, etc, that has solid outside connection. Get them to step up and guarantee that they will always take battered bills as currency, anytime, anywhere.

First you're going to have a rush to exchange bills, but eventually, if everyone knows that a bill can always be exchanged for "fresh" currency, then they will be more willing to take that currency.

Even better, get the government to do it, although I don't see them embracing a foreign currency.

Monday, July 19, 2010 2:32:00 AM

 
Anonymous Justin Schon said...

Very interesting post! I am in Mombasa, Kenya, currently and I have not come across this problem. Then again, I have not tried to use dollars here. I will have to keep this issue in mind.

Monday, July 19, 2010 2:35:00 AM

 
OpenID Meg said...

I thought this problem was unique to Cambodia! US currency is used all the time here (although a fluctuating exchange rate means it's better to use the local riel) but the tiniest tear makes the bill useless.

Sometimes it's possible to slip a slightly worn $1 bill through without a problem, but if the bill is a $5 or larger, sellers will examine them carefully. Some banks will change them, some won't, but I always hate getting stuck with a ripped bill - it floats around my wallet for months before I can find a way to use or change it.

I had never thought about the implications of this for the poor who are unable to change their bills before. I imagine here in Cambodia it's an infrequent problem though. Most poor people do not use USD since small transactions are almost entirely in riel.

Monday, July 19, 2010 3:02:00 AM

 
OpenID findwhatworks said...

It looks like a classic low-level equilibrium from game theory or political science. I agree with Matt: the best way out of it is for some agency with enough weight to make a guarantee. Adding to his list, other possible actors to accomplish this would be a business or merchant's association, or a large supplier to the region (which would benefit from the increase in trade, and could use the tattered dollars elsewhere).

After a while, you won't even need the guarantee. It would make an interesting experiment to see how long that actually takes.

Monday, July 19, 2010 3:06:00 AM

 
Anonymous Philip said...

Same goes for Myanmar. But there they won't even take $1 notes. When I visited the Shwedagon Pagoda, Myanmar's top site, I offered the staff a selection of about 20 notes to cover the $5 admission fee, but they couldn't find 5 that were good enough for them. I explained that if they didn't like the notes they could just give them back to other tourists in change, but to no avail. In the end, after a sit-down in the manager's office, they decided to let us in free of charge rather than take the notes.

In Myanmar the problem is apparently the banks, who refuse to accept the notes from merchants. So it's more or less rational (if we ignore the velocity of money factor) for them to refuse old notes (even folded notes, actually - I ended up using a book as my wallet). If the banks changed their tune, I'm sure the situation would change quickly enough.

On a tangential note (pun intended), why are US notes so much more prone to damage than other currencies? Why can't they be better coated? Countries that have impressive quality banks notes despite unfavourable climates include Thailand, Israel, Australia, Turkey and the Eurozone. The Fed has some catching up to do...

Monday, July 19, 2010 3:21:00 AM

 
Blogger texasinafrica said...

Thanks for all these comments, everyone. Really fascinating to learn that the same problem exists all over the developing world. I wonder what the relationship between this phenomenon and the idea that dollars are "more valuable" than other currencies is. The dollar is stronger than just about every currency mentioned here. Do you think populations might be reacting to that fact in a very tangible way?

@findwhatworks Yes, exactly. This would make a very useful example in teaching introductory game theory, come to think.

Monday, July 19, 2010 4:47:00 AM

 
Anonymous Melanie said...

It infuriated me when I was in Goma, at least at the beginning. I once gave a large tip to a tailor and he returned my note the following day saying he hadn't see that it was "torn" (same as on your 10$note above, barely visible). Was about to post similar pictures on my blog, because as you've shown, the contrast with the dirty, completely and truly torn Congolese franc is quite astounding!
I don't think there is anything to do, at least not coming from foreigners. It is for the Congolese state to take action, beginning with strengthening their own currency.

Monday, July 19, 2010 4:51:00 AM

 
Blogger Ben Everard said...

Odd, I've found that in Goma I can get rid of USD that I can't use in other countries - the black market guys will take most things if you argue long enough.

In Cambodia I had two notes, both $20, one obviously forged, one genuine (I think). The obviously forged one (the print was about 5 degrees out of line) was pristine and I had no problems getting rif of it, the genuine one was a bit rough around the edges and I ended up having to bring it home.

In Tanzania the situation is odd because it depends what part of the country you are in. Local notes that are beaten up are perfectly acceptable in the villages but people won't touch them in the cities. Everytime I'm in Dar es Salaam I always find I gradually collect notes that I can't use until I return to the countryside.

Monday, July 19, 2010 7:47:00 AM

 
Anonymous linda said...

I've had this problem too when traveling.

However, in a completely unrelated lunchtime conversation with Cameroonian colleagues last week, I discovered that women are the root of the ruined bills problem.

See, men carry money in reasonable places like wallets or folded neatly into back pockets. Women on the other hand, put money in between their breasts, under their arms and inside their bras to avoid being robbed. They sew it into clothing and the bottoms of shoes and build elaborate hair-do's around it to avoid it being detected when they cross borders. They hide it in mattresses and other strange places so their husbands don't know they have it. They wad it up and stuff it into tiny change purses.

So this is a behavior change campaign that needs to be initiated at the level of women.... or men need to stop begging, borrowing and stealing from women so that they can respect the bill. :-)

Monday, July 19, 2010 11:27:00 AM

 
Anonymous Sean Murphy said...

Laura, this is a fascinating subject, and something I have been meaning to research in more depth for some time. I would love to see someone write an extensive paper on the origins and consequences of these seemingly arbitrary - but not quite so - values placed on various US dollar notes depending on their perceived state of wear and tear and date of issue.

Apparently, this predominantly central African phenomenon came about because of unfounded fears that counterfeit $5 and $10 bills were flooding the black markets of these countries in the late 90s. Also, when new bills were introduced in the US in 2000 and 2003 local FX dealers started to publish different rates for "new" and "old" notes.

In many respects Uganda is worse than DRC and Sudan for this. Many years ago very few merchants, taxi drivers, tour operators, etc. were willing to accept dollar notes issued before the 2000. Now the cut off date seems to have moved to 2003.

What's more, foreign exchange bureaus offer different exchange rates for different denominations. This is not a case of better rates being offered when a person wishes to change a larger amount of currency. No sir. If I wish to change 500 USD to UGX, I get a better rate if I hand the teller 5 crisp 100 dollar bills than I do if I give him/her 25 x 20 USD bills.

The system is designed perfectly to screw the majority of the customers. It's so unfortunate that local small business operators and consumers just shrug their shoulders and take an "it is what it is" attitude to this insane situation.

Who are the winners and losers of this anomaly? Well the foreign currency dealers are one set of winners obviously. The more artificial impediments they put in place to increase their margins the healthier their bottom lines. And what happens to those "damaged" or "outdated" 20 dollar bills that many are forced to exchange on the so called black market for rates often 15 - 30 % lower than official FX dealers? They end up making their way back to those very same FX dealers who refused to accept them officially. Many of the black market money exchangers are simply agents for the white market ones. From there the dollars often end up in Dubai where they are exchanged for EUR or gold at standard rates.

What about the local Ugandan banks? Are they complicit, dependent or a mixture of both? The Finance Ministries? Do they care that this BS is reducing local currency spending power or are they just happy that their facilitation of this exchange rate food chain means they pay less for the foreign currency they need to pay off the accumulated interest on their USD loans.

Monday, July 19, 2010 1:39:00 PM

 
Anonymous Sean Murphy said...

This comment has been removed by a blog administrator.

Monday, July 19, 2010 1:43:00 PM

 
Anonymous Sean Murphy said...

Continued from my previous comment...

Who are the winners and losers of this anomaly? Well the foreign currency dealers are one set of winners obviously. The more artificial impediments they put in place to increase their margins the healthier their bottom lines. And what happens to those "damaged" or "outdated" 20 dollar bills that many are forced to exchange on the so called black market for rates often 15 - 30 % lower than official FX dealers? They end up making their way back to those very same FX dealers who refused to accept them officially. Many of the black market money exchangers are simply agents for the white market ones. From there the dollars often end up in Dubai where they are exchanged for EUR or gold at standard rates.

What about the local Ugandan banks? Are they complicit, dependent or a mixture of both? The Finance Ministries? Do they care that this BS is reducing local currency spending power or are they just happy that their facilitation of this exchange rate food chain means they pay less for the foreign currency they need to pay off the accumulated interest on their USD loans.

Monday, July 19, 2010 1:45:00 PM

 
Blogger killsonjatrauss said...

Based on what you said here, "If I get stuck with a $10 bill with a minuscule tear in one corner, it's no big deal. I'll hang onto it and use it to buy a bottle of water the next time Delta strands me at Newark."

This: "When I engage in a transaction here, I check the notes I receive very carefully before agreeing to accept them, and I hand back any that don't meet the standard." Seems very cruel.

Monday, July 19, 2010 7:04:00 PM

 
Blogger Rachel said...

Someone gave me a plausible-sounding explanation for this once, which was something to do with the Lebanese. And their Goma businesses. Can't for the life of me remember the details of the explanation, though.

When I left, all my friends and colleagues traded me new money for their and our organisation's old bills, so I have been using the rattiest, dirtiest money here in the States for the past 2 weeks. EVERYONE comments.

Tuesday, July 20, 2010 7:40:00 AM

 
Blogger texasinafrica said...

It seems cruel? The point of this post was that I engage in the exact same behavior in which the Congolese engage because of the existing norm, yet, while I have an escape route (see Rachel's note about everyone trading out their "bad" money), most Congolese do not. What's cruel about making that point?

Tuesday, July 20, 2010 8:40:00 AM

 
Blogger Gary Snowden said...

The problem is not unique to Africa or Asia as some commenters have also mentioned. It extends to Latin America as well--at least several countries in which I've traveled in Central and South America. There it's not just torn bills but bills that have been written or marked on as well.

Tuesday, July 20, 2010 2:32:00 PM

 
Blogger killsonjatrauss said...

Since you have an escape route, why don't you take the imperfect money?

Tuesday, July 20, 2010 9:30:00 PM

 
Blogger texasinafrica said...

Who said I didn't?

Wednesday, July 21, 2010 3:12:00 AM

 
Blogger killsonjatrauss said...

uhhh, the second to last sentence of the post reads, "When I engage in a transaction here, I check the notes I receive very carefully before agreeing to accept them, and I hand back any that don't meet the standard."

Sunday, July 25, 2010 8:48:00 AM

 
Anonymous Anonymous said...

Great blog on a very irritating subject.
The problem lies in the simple fact that all paper currency is a fidiciary issue: ie, it relies entirely on the recipient of the cash (in whatever denomination or currency) believing in the intrinsic value of the paper. Here we have a wonderful example of crude market forces at work. This fidiciary value or belief system is based on the underlying economic and political stability of the nation behind the issuing central bank. Dollars for their part have a two tier value in so far as there is a different value for the "Greenback" within and without the USA. As you have clearly demonstrated, there is a third value based on local market prejudice - that a torn note or a note printed before a certain date is of no value. The date of issue might by a valid concern if for example, it was a means of protecting the currency against counterfeiting. In the absence of note scanners cautious local dealers have adopted the rather draconian method of accept nothing after a certain date. This is the only way the market has in Central Africa to withdraw older notes. How many local traders would believe that in law, the dollar is a form of federal promissary note inviting the user to believe in the implied and printed value?
The answer is that we are all going to be buying a lot of water at transit airports to revalue the worthless - maybe we should save up more of our tattered friends and buy something of real value like a decent single malt - Cheers!

Friday, July 30, 2010 5:13:00 AM

 
Anonymous Anonymous said...

Great blog on a very irritating subject.
The problem lies in the simple fact that all paper currency is a fidiciary issue: ie, it relies entirely on the recipient of the cash (in whatever denomination or currency) believing in the intrinsic value of the paper. Here we have a wonderful example of crude market forces at work. This fidiciary value or belief system is based on the underlying economic and political stability of the nation behind the issuing central bank. Dollars for their part have a two tier value in so far as there is a different value for the "Greenback" within and without the USA. As you have clearly demonstrated, there is a third value based on local market prejudice - that a torn note or a note printed before a certain date is of no value. The date of issue might by a valid concern if for example, it was a means of protecting the currency against counterfeiting. In the absence of note scanners cautious local dealers have adopted the rather draconian method of accept nothing after a certain date. This is the only way the market has in Central Africa to withdraw older notes. How many local traders would believe that in law, the dollar is a form of federal promissary note inviting the user to believe in the implied and printed value?
The answer is that we are all going to be buying a lot of water at transit airports to revalue the worthless - maybe we should save up more of our tattered friends and buy something of real value like a decent single malt - Cheers!

Friday, July 30, 2010 5:13:00 AM

 

Post a Comment

<< Home