Classical economic theory teaches it doesn’t matter how money changes hands, it’s all the same. In the real world though researchers have found better payment systems stimulate trade and the researchers of the paper highlighted today note “By reducing the frictions of physical exchange, cashless systems raise market participation and money velocity, and electronic payments are positively associated with GDP growth..”
Huaxi Zhang, Xinyu Sun and Ye Zhang of the Nankai and Tsinghua universities wanted to take a closer look at exactly how this process operates and in China they found micro economic and transaction data for 31-provinces which made a deeper dive possible.
They conducted a study from 2017 to 2023 which was useful in that the disruptive COVID period was captured in their analysis. They found a widespread correlation between the move to cashless transactions and economic growth. As an interesting aside the move to cashless didn’t always displace, one for one, cash based transactions where a province was undergoing simultaneous rapid economic development.
In all cases though the effect of cashless payment was, a) to lubricate an increase in transaction volume and, b) an effect particularly noticeable in less developed provinces, to allow for faster financial inclusion than has been associated with getting the unbanked into banks.
The paper closes noting the implications for other economies, especially developing ones where the issue of financial inclusion has historically been a problem. Although, as they note in China’s case a robust and trustworthy financial-infrastructure-core has been essential for development there.
You can read the paper in full via the following link The Real Effects of Going Cashless.
Happy Sunday.