In praise of the cash economy

Young Foundation Fellow Sean Carey argues that some

Mauritius has changed. Long feted by economists and political scientists as an example to other African states with its open economy and multi-party democracy, the palm-fringed Indian Ocean island which lies some 600 miles east of Madagascar, has become a victim of its own success and is now officially classified as a "Middle Income" country.

With GDP per capita expected soon to reach $6000 Mauritius, with its population of 1.2 million, finds that it is no longer eligible for the sort of aid provided to the world’s poorest countries. And with guaranteed prices from sugar exports to the EU also about to end there is an urgent need to raise revenue.

All sorts of new taxes have been introduced and Prime Minister Navin Ramgoolam has brought in personnel from abroad to beef up the tax and customs services.

Amongst other things this has resulted in a clampdown on tax avoidance. Even the street vendors who sell snacks from the roadside, bus stations, busy market areas and beaches are feeling the pinch.

In Mauritius snacks are something of a cultural institution and bought by locals from all the island’s ethnic groups of diverse origins - north and south Indian Hindus, Gujarati Muslims, Chinese, French and ethnically mixed Creoles - and more adventurous tourists.

They include samosas, pakora, and gateaux piment, the small marble-sized balls of crushed dal, spring onions and herbs including a good amount of fresh, green chilli which are deep fried and have a wonderful, crunchy texture.

But no list of snacks would be complete without the inclusion of the dholl puri, an Indian-inspired soft, flat bread made from wheat flour, crushed yellow lentils, oil and water which is then wrapped around a dollop of chutney or vegetable curry. It is a Mauritian favourite, the country’s original fast-food.

The street vendors, mainly older men, hail predominantly from the Indian Hindu and Muslim communities and they are not happy.

According to one local commentator Saoud Baccus writing in L’Express, however, if expatriate personnel increase the amount of tax revenue and decrease the level of corruption in the customs service then this is an unreservedly good thing.

Furthermore, the considerable salaries of these new recruits are small when compared to the financial benefits, revenues and sound practices they deliver. "They are doing a wonderful job for the country ... for which we should be grateful", he writes.

It all sounds very plausible. If officers demand to be paid extra from private individuals or companies for clearing and checking goods, or bending the rules in some way, it is not advantageous to anyone -except, of course, themselves and the immediate beneficiaries of their activities.

We can all agree that customs regulation in particular should be a clean, honest and transparent endeavour.

And it is especially important in controlling the importation of illegal supplies of drugs and alcohol.

Comparative evidence suggests that the low cost and easy availability of such substances - particularly as part of an illegal trade - has a disproportionately negative effect on the behaviour and attitudes of members of the poorest sections in society.

It also has a massively adverse impact on their take up of educational and mainstream employment opportunities. This pattern is as true of paradise island Mauritius, which has a small but significant hard drug and alcohol problem among its urban and rural poor, as any other country with an open economy.

However, the issue of taxation is slightly different. Some Mauritian commentators argue that all responsible citizens should pay their fair share of taxes but I am not so sure.

Or rather I am in the case of billionaires and millionaires who, in any case, tend to employ a small army of very good accountants and lawyers to exploit the many and varied loopholes in the taxation system. So I don't feel too sorry for them - they are undoubtedly fair game and play their own game very well.

But I am concerned when the state wants to extend the reach of the bureaucrats to the people like street vendors and others like vegetable and egg sellers who have small cottage industries which supplement other forms of income and who are not rich by any stretch of imagination.

Put simply, I want to defend the little people who probably haven't had the social and educational advantages of the government functionaries who are busily pursuing them but wouldn’t mind securing the futures of their children or grandchildren.

In fact, I am a great admirer of the cash economy. Indeed, I have conducted research and seen at first hand its positive effect in certain sections of the catering sector in London.

The posh restaurants at the top end of the booming London market aren't really part of the cash (notes and coins) economy at all.

These include the Michelin-starred restaurants run by famous British restaurateurs including Gordon Ramsay, Gary Rhodes and Marco Pierre White as well as British-based ethnic minority ones like Vineet Bhatia, Atul Kochhar and Alan Yau.

Nearly all the transactions in these businesses are done by credit card and other forms of electronic payment. These enterprises undoubtedly pay their taxes and make a significant contribution to the advanced service sector of the UK and, thus, to the general welfare of society.

The phenomenal success of these restaurant groups led by celebrity chefs has even meant the appearance of gastronomic outposts in the last four or five years at some of the top-end hotels catering for the well-heeled tourists who visit Mauritius (and comparable destinations around the world).

A particularly good example is provided by Vineet Bhatia who was head chef at Zaika, the first Indian restaurant to win a Michelin star in London (or anywhere else) in 2001. He now owns his own Michelin-starred establishment, Rasoi Vineet Bhatia, in London's Sloane Square and also set up the highly acclaimed Safran restaurant (now run by fellow Indian chef, Atul Kocchar) at Le Touessrok, one of Mauritius' finest hotels.

However, the story is quite different at the other end of the catering sector in London. For example, it would not be possible to keep open all of the restaurants, cafes and take-aways in the ethnic enclaves of inner London and those that punctuate high street locations elsewhere in the capital if everything that was done was legitimate and above board.

These small catering establishments simply couldn’t continue to attract the hungry hordes of locals and tourists who turn up every day if they weren't involved in some creative fiddling, financial and otherwise.

Apart from anything else, the fixed business costs are often too high. Without cash payments to staff (thus avoiding the constraints imposed by the minimum wage) and tax avoidance, huge numbers of cafes and restaurants in the London area (and across the UK) would be forced out of business. And this would undoubtedly have massive and deleterious effects on members of the diverse local communities in the UK’s capital who often depend on the catering trade for work.

Let me be clear, these people really don’t have a choice of jobs. The vast majority come from poorly educated ethnic minority groups who migrated from rural areas unlike, for example, Vineet Bhatia who hails, as he proudly states on his website, from "an educated, middle-class family in Bombay " (although I bet that none of his sons and daughters will be following him into the kitchen).

Don't get me wrong - I don't think tax avoidance is an ideal situation but I don’t think it’s the end of the world either.

The cash economy often creates the social space and momentum for members of migrant and other disadvantaged groups, particularly the younger members, to achieve a degree of upward social mobility that would otherwise be denied to them.

I have long been aware of an interesting social pattern found among some relatively poor ethnic minority communities involved in the UK catering trade whose members have experienced a high level of social mobility.

Part of the economic surplus, legitimate or otherwise, has traditionally been used to pay for extra educational tuition (secular rather than religious) for the children of the family.

More recently, funds have also gone towards the purchase of technologies like the Internet which bring profound educational benefits to the younger (and sometimes to the older) members of the household.

This pattern of consumption is often absent or radically different in socially and economically comparable white families where a much greater emphasis is placed on the fun and leisure aspects of the technology.

An example of exceptional educational and social progress can be found in a section of the British Chinese community, the poor rice farming families who fled Hong Kong’s rice famine in the 1950s and moved into the catering trade.

The parents may still be running the restaurants and take-aways scattered across Britain but most of their children certainly aren’t. They have done very well at school, gone to university and have taken up senior positions from accountancy to law and medicine and all professions in between.

Something similar is beginning to emerge among some of the children in the British Bangladeshi community whose families come from rural Sylhet in the north-east of the country.

The men of the first generation of migrants - fathers and sons - operate around 85 per cent of Britain’s "Indian" restaurants.

Now after a relatively slow start, their children have overtaken Pakistanis in terms of GCSE results and are narrowing the gap with children of Indian origin, the most successful south Asian group whose older members like their Chinese counterparts, are already well represented in the professions.

So the UK can provide Mauritius with a useful lesson: while some areas of a nation's economy, like customs and excise, need a high degree of regulation, other areas are best left alone or very lightly controlled.

Turning a bureaucratic blind eye to financial irregularities in certain areas of the economy is often the smart thing to do and is certainly preferable to some of the possible alternatives - welfare dependency or livelihoods derived from drug, alcohol and prostitution-related crime.

The evidence suggests that too much of the wrong sort of government interference in the lives of a country's citizens stifles enterprise and may well have serious and unintended consequences not envisaged by those who champion the hard-nosed "audit culture".

Of course, another way of addressing these issues would be to reform the tax system so that, instead of focusing on avoidance, it positively encouraged behaviour that tends to generate educational success.

For example, tax relief on computers and fast Internet connections for poor and low income households with direct links to local educational institutions would boost income declaration and promote learning and social mobility in an increasingly information-based, commercial world.

Fleshing out the precise details of such a scheme is another matter and probably best left to financial and educational experts. But the overall direction could certainly be set by politicians - and that lesson is applicable to both Mauritius and the UK.

Now where can I buy a decent dholl puri?

Dr Sean Carey is a Fellow of the Young Foundation

A version of this article first ran in the Mauritius Times

Jeremy Corbyn. Photo: Getty
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Lexit: the EU is a neoliberal project, so let's do something different when we leave it

Brexit affords the British left a historic opportunity for a decisive break with EU market liberalism.

The Brexit vote to leave the European Union has many parents, but "Lexit" – the argument for exiting the EU from the left – remains an orphan. A third of Labour voters backed Leave, but they did so without any significant leadership from the Labour Party. Left-of-centre votes proved decisive in determining the outcome of a referendum that was otherwise framed, shaped, and presented almost exclusively by the right. A proper left discussion of the issues has been, if not entirely absent, then decidedly marginal – part of a more general malaise when it comes to developing left alternatives that has begun to be corrected only recently, under Jeremy Corbyn and John McDonnell.

Ceding Brexit to the right was very nearly the most serious strategic mistake by the British left since the ‘70s. Under successive leaders Labour became so incorporated into the ideology of Europeanism as to preclude any clear-eyed critical analysis of the actually existing EU as a regulatory and trade regime pursuing deep economic integration. The same political journey that carried Labour into its technocratic embrace of the EU also resulted in the abandonment of any form of distinctive economics separate from the orthodoxies of market liberalism.

It’s been astounding to witness so many left-wingers, in meltdown over Brexit, resort to parroting liberal economics. Thus we hear that factor mobility isn’t about labour arbitrage, that public services aren’t under pressure, that we must prioritise foreign direct investment and trade. It’s little wonder Labour became so detached from its base. Such claims do not match the lived experience of ordinary people in regions of the country devastated by deindustrialisation and disinvestment.

Nor should concerns about wage stagnation and bargaining power be met with finger-wagging accusations of racism, as if the manner in which capitalism pits workers against each other hasn’t long been understood. Instead, we should be offering real solutions – including a willingness to rethink capital mobility and trade. This places us in direct conflict with the constitutionalised neoliberalism of the EU.

Only the political savvy of the leadership has enabled Labour to recover from its disastrous positioning post-referendum. Incredibly, what seemed an unbeatable electoral bloc around Theresa May has been deftly prized apart in the course of an extraordinary General Election campaign. To consolidate the political project they have initiated, Corbyn and McDonnell must now follow through with a truly radical economic programme. The place to look for inspiration is precisely the range of instruments and policy options discouraged or outright forbidden by the EU.

A neoliberal project

The fact that right-wing arguments for Leave predominated during the referendum says far more about today’s left than it does about the European Union. There has been a great deal of myth-making concerning the latter –much of it funded, directly or indirectly, by the EU itself.

From its inception, the EU has been a top-down project driven by political and administrative elites, "a protected sphere", in the judgment of the late Peter Mair, "in which policy-making can evade the constraints imposed by representative democracy". To complain about the EU’s "democratic deficit" is to have misunderstood its purpose. The main thrust of European economic policy has been to extend and deepen the market through liberalisation, privatisation, and flexiblisation, subordinating employment and social protection to goals of low inflation, debt reduction, and increased competitiveness.

Prospects for Keynesian reflationary policies, or even for pan-European economic planning – never great – soon gave way to more Hayekian conceptions. Hayek’s original insight, in The Economic Conditions of Interstate Federalism, was that free movement of capital, goods, and labour – a "single market" – among a federation of nations would severely and necessarily restrict the economic policy space available to individual members. Pro-European socialists, whose aim had been to acquire new supranational options for the regulation of capital, found themselves surrendering the tools they already possessed at home. The national road to socialism, or even to social democracy, was closed.

The direction of travel has been singular and unrelenting. To take one example, workers’ rights – a supposed EU strength – are steadily being eroded, as can be seen in landmark judgments by the European Court of Justice (ECJ) in the Viking and Laval cases, among others. In both instances, workers attempting to strike in protest at plans to replace workers from one EU country with lower-wage workers from another, were told their right to strike could not infringe upon the "four freedoms" – free movement of capital, labour, goods, and services – established by the treaties.

More broadly, on trade, financial regulation, state aid, government purchasing, public service delivery, and more, any attempt to create a different kind of economy from inside the EU has largely been forestalled by competition policy or single market regulation.

A new political economy

Given that the UK will soon be escaping the EU, what opportunities might this afford? Three policy directions immediately stand out: public ownership, industrial strategy, and procurement. In each case, EU regulation previously stood in the way of promising left strategies. In each case, the political and economic returns from bold departures from neoliberal orthodoxy after Brexit could be substantial.

While not banned outright by EU law, public ownership is severely discouraged and disadvantaged by it. ECJ interpretation of Article 106 of the Treaty on the Functioning of the European Union (TFEU) has steadily eroded public ownership options. "The ECJ", argues law professor Danny Nicol, "appears to have constructed a one-way street in favour of private-sector provision: nationalised services are prima facie suspect and must be analysed for their necessity". Sure enough, the EU has been a significant driver of privatisation, functioning like a ratchet. It’s much easier for a member state to pursue the liberalisation of sectors than to secure their (re)nationalisation. Article 59 (TFEU) specifically allows the European Council and Parliament to liberalise services. Since the ‘80s, there have been single market programmes in energy, transport, postal services, telecommunications, education, and health.

Britain has long been an extreme outlier on privatisation, responsible for 40 per cent of the total assets privatised across the OECD between 1980 and 1996. Today, however, increasing inequality, poverty, environmental degradation and the general sense of an impoverished public sphere are leading to growing calls for renewed public ownership (albeit in new, more democratic forms). Soon to be free of EU constraints, it’s time to explore an expanded and fundamentally reimagined UK public sector.

Next, Britain’s industrial production has been virtually flat since the late 1990s, with a yawning trade deficit in industrial goods. Any serious industrial strategy to address the structural weaknesses of UK manufacturing will rely on "state aid" – the nurturing of a next generation of companies through grants, interest and tax relief, guarantees, government holdings, and the provision of goods and services on a preferential basis.

Article 107 TFEU allows for state aid only if it is compatible with the internal market and does not distort competition, laying out the specific circumstances in which it could be lawful. Whether or not state aid meets these criteria is at the sole discretion of the Commission – and courts in member states are obligated to enforce the commission’s decisions. The Commission has adopted an approach that considers, among other things, the existence of market failure, the effectiveness of other options, and the impact on the market and competition, thereby allowing state aid only in exceptional circumstances.

For many parts of the UK, the challenges of industrial decline remain starkly present – entire communities are thrown on the scrap heap, with all the associated capital and carbon costs and wasted lives. It’s high time the left returned to the possibilities inherent in a proactive industrial strategy. A true community-sustaining industrial strategy would consist of the deliberate direction of capital to sectors, localities, and regions, so as to balance out market trends and prevent communities from falling into decay, while also ensuring the investment in research and development necessary to maintain a highly productive economy. Policy, in this vision, would function to re-deploy infrastructure, production facilities, and workers left unemployed because of a shutdown or increased automation.

In some cases, this might mean assistance to workers or localities to buy up facilities and keep them running under worker or community ownership. In other cases it might involve re-training workers for new skills and re-fitting facilities. A regional approach might help launch new enterprises that would eventually be spun off as worker or local community-owned firms, supporting the development of strong and vibrant network economies, perhaps on the basis of a Green New Deal. All of this will be possible post-Brexit, under a Corbyn government.

Lastly, there is procurement. Under EU law, explicitly linking public procurement to local entities or social needs is difficult. The ECJ has ruled that, even if there is no specific legislation, procurement activity must "comply with the fundamental rules of the Treaty, in particular the principle of non-discrimination on grounds of nationality". This means that all procurement contracts must be open to all bidders across the EU, and public authorities must advertise contracts widely in other EU countries. In 2004, the European Parliament and Council issued two directives establishing the criteria governing such contracts: "lowest price only" and "most economically advantageous tender".

Unleashed from EU constraints, there are major opportunities for targeting large-scale public procurement to rebuild and transform communities, cities, and regions. The vision behind the celebrated Preston Model of community wealth building – inspired by the work of our own organisation, The Democracy Collaborative, in Cleveland, Ohio – leverages public procurement and the stabilising power of place-based anchor institutions (governments, hospitals, universities) to support rooted, participatory, democratic local economies built around multipliers. In this way, public funds can be made to do "double duty"; anchoring jobs and building community wealth, reversing long-term economic decline. This suggests the viability of a very different economic approach and potential for a winning political coalition, building support for a new socialist economics from the ground up.

With the prospect of a Corbyn government now tantalisingly close, it’s imperative that Labour reconciles its policy objectives in the Brexit negotiations with its plans for a radical economic transformation and redistribution of power and wealth. Only by pursuing strategies capable of re-establishing broad control over the national economy can Labour hope to manage the coming period of pain and dislocation following Brexit. Based on new institutions and approaches and the centrality of ownership and control, democracy, and participation, we should be busy assembling the tools and strategies that will allow departure from the EU to open up new political-economic horizons in Britain and bring about the profound transformation the country so desperately wants and needs.

Joe Guinan is executive director of the Next System Project at The Democracy Collaborative. Thomas M. Hanna is research director at The Democracy Collaborative.

This is an extract from a longer essay which appears in the inaugural edition of the IPPR Progressive Review.