Why Forex Is Inefficient and Destroys Developing Countries

Updated on November 8, 2017
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Tessa Schlesinger learnt about foreign exchange during her days in the hotel industry as guests exchanged one currency for another...

The profit made through currency exchange benefits some greatly, but does so at the expense of others.
The profit made through currency exchange benefits some greatly, but does so at the expense of others.

Why the Foreign Exchange Market is Inefficient and Destroys Developing Economies

The foreign exchange market, also called Forex, FX, or currency market, is the single largest trading market in the world. Enormous profits are made by banks and traders in the differences of the said worth between the currency of one country and the other. Most of the profits are made by the bank, with the market being worth somewhere in the vicinity of $2 and $5 trillion per day. The market continues to grow with governments and other interested parties

How many currencies are there in the world?

There are 180 currencies in the world, and some are more equal than others.
There are 180 currencies in the world, and some are more equal than others.

The Complexities of Forex

It’s not easy to understand, and when something is not easy to understand, it can be taken advantage of by unscrupulous people. FX is made even more mysterious by the fact that only a limited number of people know the exact workings of setting the price. These are the largest and most powerful banks and dealers (traders).

Basics of Foreign Exchange Speculation

Free Market Trading of Currencies

There is a long history of the laws governing foreign exchange. Suffice to say that, since 1973, the price of currencies are no longer set by governments. This has resulted in increased speculation, with some countries winning and most other countries losing.

Degree of activity by top ten speculators in terms of foreign exchange.
Degree of activity by top ten speculators in terms of foreign exchange.

Knowledge is Power

Insider trading happens when some people know beforehand what is going to happen and take advantage of that information. As Martha Stewart famously said before she was jailed, “But everybody is doing it.” It is not inconceivable that those who make the most profits do so because they are aware of information that is not available to lesser beings.

Should a more fair world be everbody's goal?

Creating a more equitable currency exchange rate will reap huge benefits for all.

Original Purpose of Currency Exchange

Exchanging money between countries was originally intended to facilitate trade. It originated as early as biblical times with Talmudic (Jewish) money changers. The practice has evolved with different practices until the present day. However, until recently, it was not a tool of speculation, with speculation being the more dominant part of the practice.

What is Worth?

The dictionary defines worth as “the level at which someone or something deserves to be valued or rated.” The operative word here is ‘deserves,’ and whether someone deserves something or not is dependent upon the view of the person who decides what that worth is. Worth, therefore, is subjective, and that becomes a problem when two people producing the same product with the same materials to the same quality standard are paid different amounts as a result of foreign exchange.

This ‘weakness of currency’ is partially responsible for the 1st world buying from less developed countries. However, by exchanging fewer dollars/pounds/euros/yen for a less desirable currency, the country (and its workers) receives even less money from the first world, regardless of the quality of their work and goods.

Despite the contention by UNICEF that as a result of trade, the under-developed world is becoming richer, moving from $1.99 a day to $2.00 a day is hardly an increase in wealth, especially considering inflation. As Ian Fletcher and Jeff Ferry from the Coalition for a Prosperous America state “But having more affluent people in the Third World is not the same as the Third World as a whole nearing the living standards of the First.”

Foreign Exchange Equates Unequal World

A doctor who earns R60,000 per month in South Africa might compare well to a doctor in the UK earning £10,000 per month in terms of purchasing a house and food. However, when it comes to travel or to buying something on the web, all resemblance stops. As a result of the exchange rate, the South African doctor pays R15 for each pound (£) and is therefore paying proportionally more for a stay in a hotel in London. To explain that further, the hotel in London might cost £200 a night. For the doctor in London, that is 2% of his salary. For a South African doctor, that would be 5% of his salary.

The idea that people in third world countries may be able to buy television sets, smart phones, and computers cheaper than they would be able to manufacture them becomes moot when you realize that the same amount of work does not enable a worker to buy the goods at the same price someone else in the first world would.

So, for instance, if a sales associate in the USA earns $2000 per month, they may be able to buy a small, particular brand of television (imported) for $100, equivalent to 5% of their salary. A sales associate in South Africa might earn R5000 per month, but can only buy the same (imported) television set for R600. This would be 11% of his salary.

In other words, the unequal worth attributed to less powerful countries keeps the people of those countries poor.

Arguments Against a Humane Rate of Exchange

A trader might argue that if a country were to go bankrupt, then those who ‘invested’ in that currency would lose their investment. This, however, only applies to speculation. For those who buy goods from a less developed country, the goods themselves are of value.

There is also the question of credit. While it is a risk if one is dealing with a country that may be facing difficult times, the purchaser’s hand isn’t being forced to buy anything from that country. She can refrain from doing so. The continual underpayment of goods to third world countries is not making those countries richer. For the most part, most of the population either remains poor or are pushed into further poverty.

Currencies should not be used for speculation. It is unethical because it harms a great many people in the under-developed world.

There are two ways that foreign exchange can be administered that would be more beneficial to everybody.
There are two ways that foreign exchange can be administered that would be more beneficial to everybody.

How the Problem Can Be Solved?

There are two possible solutions to the issue.

The first is that there is a one world currency, and the second is that currency exchange is set according to the salaries and wages of the people in the country. In other words, if a doctor earns R60,000 per month in one country and £10,000 per month in another country, the rate of exchange would be R6.00 for £1.00.

Would you object to a more humane exchange system if you no longer benefited from cheap labour in third world currencies?

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Outcmes of a More Fair Foreign Exchange System

There would be several outcomes, all of them beneficial to the developing world, and by extension to the first world.

  1. People in the ‘lesser’ world would immediately be able to upgrade their standard of living and quality of life. This would lift them out of poverty to a greater degree than any handout from any country.
  2. There would be less international trade as countries realized that there was no more point in importing from other countries as they could manufacture for the same price in their home countries. This would provide work for locals as well as stop the damaging fossil fuel build up (aggravating climate change further) as a result of shipping goods internationally.
  3. Much of the political turmoil is caused by the objection of most of the world’s population to extreme poverty. Lifting people out of poverty is not only the wise and humane thing to do, but it will enable warmongering budgets to be more focused on peace producing policies.
  4. The hope exists that with a more equal world, energy will be focused on more creative problem solving and moving the world into a much higher evolution in terms of science, technology, and providing well being to all people.
  5. The speculators of the world will not have so much to speculate about. They will become poorer and slip from a few billion in the bank to maybe one billion or 99 million. This is not a problem for most of us.

All in all, it is time that people woke up to the damage that speculation on currency is doing to a great many countries and people. Change can only begin when people are aware, and it is with that in mind, that I have put these ideas forward.

© 2017 Tessa Schlesinger

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