Though I have not read any legal textbooks, I know that the activity of black market currency conversion is illegal and that those people are running foreign currency shops are breaking the law. But is that a complete picture of the reality on the ground? What about businesses and hotels charging in dollars? Are they also breaking the law and ought they be reported to the police?
 

Though it may appear morally indefensible, I am going to raise an argument in favour of either licensing moneychangers to operate legally or turning a blind eye to the "black market".
 

A black market is a reflection of a command economy. As economist Thomas M. Leonard writes, "a vibrant and flourishing black-market economy can also be a symptom of dysfunctional domestic polices. Frequently, the presence of a prosperous underground economy is a consequence of existing economic policies, such as tax or regulatory regimes, that are overly burdensome or oppressive or that just fail to properly address economy reality."
 

In plain language, if the people can not find what they want from the state or by legitimate means, they will be prepared to pay extra to get it through the black market. The underground market is thus a symptom of a misguided economy not a cause of it. In fact, the problem is that no other country has ever succeeded in eradicating the black market economy by raiding it. Not even the mighty Soviet Union with its KGB spying network, nor China, with its brutal Red Army, could stop the black market.
 

But nations can beat black markets by liberalising the currency market. As the saying goes, 'if you cannot beat them, join them'. When carrying dollars was dangerous, Russians used to barter with American textiles and ceramics. This was a lucrative business for Ethiopian students in the Soviet Union and the Eastern bloc.
 

The dollar is exchanged very openly in several places in the capital, for example around Gandhi Hospital, where young boys overtly call on passerbys to change their dollars. Over the last two decades, it has never really been considered a crime, particuarly in the last years of Colonel Mengistu. It was as open as it could be and selling currency was not considered different from selling cappuccino and cake. There was a great deal of tolerance by the governement, with some of its officials even describing the blackmarket as 'a parallel market'. So, what has changed now?
 

Contrary to what has been claimed, these unofficial traders are the benefactors of a troubled economy. When I visited Ethiopia three years ago, the difference between the banks and the "parallel market" was insignificant; I believe that, for the most part, this is still the case. This happens when money is exchanged openly and there is no special incentive to go to the black market. I changed most of my cash at the Dashen Banks and at the Hilton Hotel rather than going into the open market near Gandhi Hospital.
 

In fact, I was pleased to know that I could use my credit cards to take cash from Dashen Bank. On my last trip to Ethiopia, I did not carry a lot of cash with me since I knew I could get it by using my card when I wanted to get Birr. I did it because I did not feel that I was getting a bad deal compared to the open market's exchange rate. Actually, I did not spend as much on my last trip because I was not obligated to take more cash out just in case I would end up spending it all or giving it away.
 

The presence of dollars in small shops around town is very useful for the government in stabilising the market and in reassuring visitors that they are not being ripped off by the artificially-fixed official exchange rate. If the government becomes heavy-handed in trying to arrest each and every black market trader, I feel sure there will be just as many underground exchanges but at a much higher value than just the small difference that has tended to exist between the open market and government banks.
 

Probably in a few days, the blackmarket value of dollar will go up sharply as the trade goes underground and when the element of risk is factored into the exchange. In a month or two, I would not be surprised if a dollar is being exchanged at least 50pc more than the official exchange rate. Of course this will push more people into underground world. It is a basic human psychology.
 

What has happened may create a sense of scarcity for the people who stock dollars, just in case they need them or they intend to use every available opportunity to go to the bank under various legal travel plans to buy dollars and then sell them on the black market. That was exactly what was happening in the early days of Colonel Mengistu. The harsh penalty has never stopped people from bringing dollar into the country and selling them at a much higher value.
 

This sudden raid of the most important market is going to hurt the economy as much as the traders. Of course, those who were caught with large sums of money are going to feel the pain while but the underground world in general will reap the benefits. It is a misguided measure undertaken by officials with no understanding of the role of a black market for the stability of an economy. The black market can actually be an important part of economic stability and progress.
 

For example, the United States and European countries benefit tremendously from black market labour. They know there are millions of Mexicans, Africans, and Asians working on their farms and in their factories for very low wages but they turn a blind eye in order to keep labour costs down and maintain competitivness on the global market. California loses between 60 billion to 140 billion dollars in black market labour, but the state government does not do much to stop the millions of illegal Mexican farm workers. After all, about two thirds of their income is earned in the shadow economy and it is then immediately spent in the official economy. Of course, this results in a positive effect on the official economy.
 

The sensible solution for Ethiopia is to license foreign exchange spots so that people can freely exchange foreign currencies at market value, whilst also paying tax. If the whole foreign exchange market shuts down thousands of people who have to travel abroad for medical treatment, education, tradefairs, holidays, or other small-scale business ventures will have to queue at the commercial banks demanding foreign currencies. Can the state deliever it all? I doubt it.
 

Whether the government likes it or not, it will be a burden to provide foreign currencies to all the people who travel abroad, draining the nation's foreign exchange reserves. Certainly, this will be an unintended consequence of the raid last week.