Business in Emerging Markets: Reasons Behind Failure of Nations

Improvements in cryptography and computer science have founded new currencies across the globe (Wonglimpiyarat, 2017). Perhaps, one of the most used and widely adopted cryptocurrencies to date is the Bitcoin blockchain (Nian & Chen, 2015). By offering faster, cheaper transactions and completely anonymous addresses for users, Bitcoin has become the leading cryptocurrency, and is ultimately disrupting institutions across the globe. A considerable amount of research surrounding how Bitcoin disrupts institutions has focused on the institutions of developed countries. However, the concentration of this paper will be on how newfound cryptocurrencies, and more specifically Bitcoin, are disturbing institutions within the developing world that have been exploiting their citizens for years. It will be argued that Bitcoin can assist citizens gain power and financial autonomy. To do this, this paper will explore numerous benefits that Bitcoin can bring to developing nations including: the ease of investment and humanitarian aid, banking the unbanked and empowering women. Additionally, this paper will explore the negative implications that Bitcoin can bring to the societies of the developing world. Absence of a central authority, an instable currency and a complete reliance on Bitcoin could potentially do more harm than good for the societies. Finally, this paper will analyse the given benefits and weaknesses of Bitcoin to determine its future within the developing world. The outcomes highly depend on ease of internet access and also the developed world using more Bitcoin to create a more constant currency. To begin, this paper will introduce certain concepts that are discussed throughout discussed throughout: Fintech, Bitcoin and developing countries.

Mobile banking and the Bitcoin blockchain are forms of financial technology, or better-known as fintech (Antonopoulos, 2014). Fintech is an industry encircling technological developments within financial services. Companies that provide financial services through software, and use a crypotcurreny or mobile payment are also forms of fintech. Fintech has been revolutionary to how people access their finances by disrupting traditional banking industries. Thus, it poses a threat to institutions across the globe (Vigna & Casey, 2015). Well-known forms of Fintech include M-Pesa, a mobile-phone based money transfer, financing and microfinancing service (Mbiti & Weil, 2011). M-Pesa allows people to send money through text message on inexpensive mobile phones, ultimately making it easier for people to save and move money (Ibid, 2011). While Vodaphone’s M-Pesa creation has been revolutionary to the economy, this paper will focus on the cryptocurrency, Bitcoin, to provide a clearer understanding of how new financial technologies can disrupt economic institutions and their implications on the developing world.

Previously, trusted third-party intermediaries were a prerequisite for all online transactions (Vigna & Casey, 2015). This was always needed to address a double-spending issue, whereby people could duplicate money by both sending and spending (Bitcoin, 2014). Until 2009, when an anonymous programmer, Satoshi Nakamoto, designed a new peer-to-peer network that did not require a third-party (Nian & Chuen, 2015; Brito & Castillo, 2013). This revolutionary technology, Bitcoin, therefore overcomes the double-spending problem. Transactions on Bitcoin are not denominated in any real-life currency, but instead, denominated in Bitcoins through a ‘wallet’ (Nakamoto, 2008: 1). Thus, creating an electric currency, as well as a decentralised payment system (Nian & Chuen, 2015). Unlike all other currencies across the globe, Bitcoins are not derived from gold or government authorisation, but from the value that individuals assign to it. The dollar value of a bitcoin is determined on an open market, similar to the exchange rate between different world currencies is (Donovan, 2012).

Global inequality has been thoroughly explored, with concepts and ideas comparing the macroclimate, culture and topography within developed and developing nations. Contrarily to this research, Acemoglu and Robinson (2012) propose that extractive institutions result in financial unproductivity within countries. Extractive institutions are defined as institutions with a ruling body, that uses its powers to exploit its citizens (Ibid, 2012). Acemoglu and Robinson (2012) further state that inclusive economic institutions provide a degree of infrastructure that is a prerequisite for economic growth. This highlights a key difference between the developed and developing countries institutions.

Unlike the developing world, developed nations have central banks which are generally trusted, for example, United Kingdom (UK) inhabitants do not anticipate the bank to devalue their currency. Many developed countries undertake measures to gain this trust in its citizens; the United States (US), for example, disconnect the central bank from political groups in an attempt to increase trust from US inhabitants (Vigna & Casey, 2015). However, this is not the case for the developing world. There remains a lack of established financial institutions and continue to have extractive foundations (Acemoglu & Robinson, 2012). Extractive nations contain either poor, or completely neglected, economic measures. Inhabitants living amongst these institutions deal with high-risk financial engagements and money transfers, as well as inflationary currencies (Brito & Castillo, 2013). Thus, a de-centralised currency that undergoes governmental and financial institutions could potentially put power in the hands of these societies. The subsequent segments to this essay will explore how Bitcoin can aid this to better the lives of societies within the developing world.

Problems arise when international investment and humanitarian aid are being transferred in and out of countries. The current international financial system brings a lot of inefficiencies when transferring money (Vigna & Casey, 2015). For example, fees affixed on transfers out of the US can reach up to ten percent, while other countries have fees of up to twenty percent (Ibid, 2015). Once exchange rate costs are added, the loss though transaction can potentially equal up to thirty percent (Ibid, 2015; Li & Wang, 2017). This injects friction into the international aid and remittance systems on which many countries rely on. However, Bitcoin can be used to transfer aid to any country across the world without the added costs.

Though, using Bitcoin as a mechanism only for transfer does not fully utilise its potential. If Bitcoin develops to not only transfer humanitarian aid, but to regulate it, the donated money could go further in actually impacting societies. It is also possible for the Bitcoin blockchain to regulate aid agencies to determine where money is being spent (Brito & Castillo, 2013). If an agency makes its Bitcoin address public, the entire globe could view it’s in and outflows. This provides an opportunity to decrease corruption and pilfering throughout extractive institutions.

Moreover, it is estimated that around 2.5 billion adults across the globe do not have access to a banking system (Vigna & Casey, 2015), thus, are completely secluded from the benefits that financial facilities offer. Without these services it is impossible to develop a savings account or use a credit card, as well as the access to financial systems that have ultimately led to investment within developed nations. 64 percent of individuals within developing nations use cash, materials and other possessions as their only value (Ibid, 2015), which greatly decreases the ease of transfer. The foremost cause that people within developing countries do not have access to a bank account is because they do not have certification ID or the security to open an account (Ibid, 2015). These features are not of importance for Bitcoin, thus, anyone is able to access it. Several start-ups within developing nations have begun using Bitcoin transactions through mobile phones, which have become ubiquitous in countries where most of the population lacks access to even the most basic financial products (Ibid, 2015).

The Bitcoin blockchain can also encourage international transactions. In having these resources, Bitcoin creates a network in which people can directly donate to those individuals who are most in need (Allen, 2018). Such a network enables international humanitarian aid to be much more personal and the benefits much more observable. Widespread use of Bitcoin has the potential to break down barriers between the rich and the poor and completely reform how aid and investment is conducted on an international scale.

As only 42 percent of women within the developing world have bank accounts (Allen, 2018), it is unsurprising that the same women are less expected to have an official ID than their male counterparts (World Bank, 2015). This further adds to the challenges of cultural norms and financial limitations that face women across the developing world (Ibid, 2018; Papadopoulos, 2015). Cryptocurrencies such as Bitcoin can work as a transformative instrument in boosting the economic opportunities of women.

Women can use Bitcoin’s capacity to hold certification documents in a safe and cost-efficient manner (Allen, 2018). They can also use the facility to hold contracts and protect property ownership. In doing so, neither the government or male counterparts can repudiate that a contested piece of land belongs to a woman if the contract is recognised within the blockchain (Allen, 2018). Moreover, many women across the developing world are not granted privacy. By having a Bitcoin wallet, women are able to have the confidentiality they may need to flee oppressive spouses, or undergo controversial health services that their partners, family or the law may reject. Thus, Bitcoin can offer privacy to women in the societies of the developing world that has conventionally been offered through cash. Despite the progressive implications that Bitcoin can have on societies across the developing world, it also has its hindrances. A lack of security, an unstable currency and consistent undermining of governments are of concern.

The absence of security on the Bitcoin blockchain is of apprehension. Although corrupt institutions decrease the amount of trust in its citizens, it does take accountability from each individual user. The transfers that are made using Bitcoin are permanent and cannot be undone. Ultimately, this can result in hackers taking control and Bitcoins being lost with no way to retrieve them (Raymaekers, 2014). Bitcoin tries to overcome this by offering an offline option to users, but again, this involves more complications such as lost accounts on hard drives containing Bitcoins.

Perhaps, the biggest problem for societies within the developing world is the price instability of the Bitcoin (Dwyer, 2015; Samid, 2015). Over three months in 2018, Bitcoin’s value was up 800 percent, to then fall by 50 percent just a month later (Vigna & Casey, 2015). Realistically, this price instability will continue in the forthcoming years. This is problematic to Bitcoin users within the developing world as they do not have the flexibility of money that those in the developed world have. It is argued that this is merely a transitional stage for Bitcoin, with others further arguing that stability can be constructive within early years of creation (Vigna & Casey, 2015).

The government’s role in aspects of everyday life are certain; education, infrastructure, social-welfare, regulation of commerce and security and defence. To make it possible to provide these services, inhabitants must pay taxes and abide by the laws of the country. Thus, a problem arises as Bitcoin adoption undermines the government’s ability to provide critical services to its citizens. While developed countries are prospective in bringing Bitcoin into the folds of financial regulation and are able to tax the currency, developing countries may find this more difficult (Vigna & Casey, 2015). Thus, highlighting a detrimental threat that Bitcoin brings to governments; further encouraging Bitcoin exclusion within nations. Acemoglu and Robinson (2012) proclaim that nations fail economically because they are extractive and exploit their citizens. In this case, citizens use all possibilities available to avoid their governments and financial institutions. However, economic prosperity cannot be so unpretentious.

By abandoning government institutions their credibility and positive contributions are further undermined. Ultimately, developing countries need to see the implementation of inclusive government intuitions, not the exclusion of governments entirely (Acemoglu & Robinson, 2012). Bitcoin can be used to break this cycle, as it can foster short-term economic prosperity that will filter through all levels of society, from the rich to poor. At the same time, it could undermine the established governments and potentially make way for a new system that realises the power of people to operate impenitently of the government.

Moreover, an economy that solely relies on Bitcoin could result in further economic downturn. While many countries carry out irresponsible monetary and fiscal policy, in times of crisis this is often the only avenue to stimulate the economy (Popper, 2015). Governments will still have control over its fiat currency and can expand the money supply to drive down interest rates and engage in fiscal stimulus (Donovan, 2012). However, if the majority of the country’s economy is operating outside of the fiat currency, then the impacts of these policies would be much smaller (Ibid, 2017). Economic downturn credit would dry up and it would be difficult for the central bank to lend money to an economy that operates fundamentally on Bitcoin.

The future of Bitcoin within developing countries is uncertain. While it is clear that new financial technologies can be used as a method of avoiding extractive institutions, it is clear that difficulties remain in Bitcoin becoming the complete end to them. Internet penetration is lacking within parts of the developing world. These areas are the places in particular that could benefit most from the technological advances. However, as aforementioned, there are new technologies such as M-Pesa that do not require internet connection to gain the benefits, just an inexpensive mobile phone (Asongu, 2013). Thus, the issue of technological advances make it unlikely that internet access will remain the most significant obstacle to the implementation of Bitcoin in the approaching ages.

Alternative obstacles are concerned with government regulation and unpredictability. Developed countries use Bitcoin as a way of simplifying dealings. An increase of large developed countries, such as the US and UK, using Bitcoin could be enough demand to stabilise the currency (Bitcoin, 2014; Vigna & Casey, 2015). This would ultimately make it more feasible for the developing nations to use.

By abandoning government institutions their credibility and positive contributions are further undermined. Ultimately, developing countries need to see the implementation of inclusive government intuitions, not the exclusion of governments entirely (Acemoglu & Robinson, 2012). Bitcoin can be used to break this cycle, as it can foster short-term economic prosperity that will filter through all levels of society, from the rich to poor. At the same time, it could undermine the established governments and potentially make way for a new system that realises the power of people to operate impenitently of the government.

To conclude, the future of Bitcoin as a currency is uncertain. It’s success or failure depends on whether it can reach a critical mass to eliminate volatility and reaching this critical mass is uncertain. A significant challenge posed to bitcoin is advancement in current payment technologies. While the developed world has credit cards and availability to pay with mobile phones, the developing world still lacks the resources needed to do this. The disparity in accessible resources provoke a race to include everyone within these financial systems. The developing world will soon be technologically ready for mobile payment and banking, thus, the benefits are ready to be given to the developing world. Developing nations that have extractive political and economic institutions are implementing Bitcoin. This poses a promising system and demonstrates that citizens of these nations are realising the benefits. Until the price of Bitcoin becomes stable (Samid, 2015), which can be done by developed countries using it more, it is unlikely that citizens of developing countries will place the limited money they have into such a volatile system. However, it must be repeated that while Bitcoin can potentialy foster some sort of growth and give power to societies of the developing world, it will not overcome extractive institutions completely. The works of Acemoglu and Robinson (2012) highlight that completely abandoning institutions further adds to economic downfall. In order to break the extractive cycle developing countries need to see the implementation of inclusive government institutions. Bitcoin can aid this by breaking the cycle and fostering short-term economic growth, or by undermining established governments and making way for a new system that realises the power of people to operate impenitently of its government.