Wednesday, June 10, 2015

How the Black Market Runs the Developing World

It has been called the black market for far too long.  It happens to be the natural market and it is normally informal.  The best role of government is to ensure it is protected from illegal taxation by extortion through a rigorous rule of law.

After that is done, it is critical to ensure a ready supply of credit.  Micro finance does this very well and this needs to be encouraged and exploiters driven from the market.  Again governments can facilitate this and devolve actual oversight onto the market councils.
These markets can all do better and with these types of arrangements can grow vigorously.

 In the end all such arrangements will evolve into the ordered  arrangements of the developed world, but they can be easily ordered now..

How the Black Market Runs the Developing World

The informal economy is bigger than you think

In French, a man (or woman) who is particularly resourceful is called a débrouillard (débrouillarde). In the former French colonies of West Africa, people have used this word to form a phrase, “l’economie de la débrouillardise” which refers to the vast network of “inventive, self-starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes.” Systeme D for short.

The concept and the quote are from a nifty and fairly new book I’m reading just now, Stealth of Nations by Robert Neuwirth. He claims that the worldwide Systeme D economy would, if aggregated, amount to more than any other nation’s economy save the United States. The claim may be exaggerated, but he leaves no doubt that in most of the developing world, it is a major factor in the flow of goods and services.

He cleverly begins each chapter with a quote from Adam Smith’s “Wealth of Nations” and gives accounts, mostly first-hand, of how the Systeme D economy, or the informal economy or the black market if you will, works in various countries.

The participants in this economy sometimes operate entirely outside the law and sometimes with one foot in and one foot out. They seldom count on the police or the courts for protection or redress. Yet informal systems of protection of life and property spring up and seem to work pretty well.

Take the bustling street market that operates along the Rua Vinte e Cinco de Março (Avenue of March 25) in São Paulo, Brazil.

The daily routine begins at 3:30 AM when vendors of pirated CDs and DVDs set up their stands. One vendor has done well enough buying movies for 50 centavos and selling them for double that, that he has moved into the middle class. He and his wife own an apartment and a rental house.

At 4:30 a woman parks her truck and opens the back, where she offers homemade cakes and bread for sale. Everyone respects her “ownership” of that particular parking space.

At 6 AM come the vendors of clothing, sunglasses, pirated NY Yankees baseball caps, you name it.

At 8:30, Paulo shows up and spends the next seven hours tossing plastic spider-men against a wall, watching them rappel down the wall. They are made in China, trucked to Paraguay, and smuggled across the border into Brazil. Paulo buys them for 80 centavos and sells them for about triple that.

So it goes, all day long. By late evening, all the stands and stalls are packed away, ready for the daily cycle to begin anew.

The rules are simple: “Vendors pay no rent to occupy the curbside, and there’s no protection money, taxes, or other fees … You simply ask, ‘Can I set up next to you?’ and if the answer is no and you do it anyway, you have a fight on your hands.”

What’s the volume of business on the Rua? An estimated 400,000 people (!) per day and up to a million on major holidays, most of whom come to buy. Annual turnover for this one street market, with its estimated 8,000 vendors, mostly unregistered, is estimated at US$10 billion. If that figure is anywhere near correct, this one market would rank with Brazil’s five largest corporations.

The description of the Systeme D economy of Lagos, Nigeria is particularly fascinating. This is a huge city that lacks most of what we would consider basic public services, even sewers and running water. Yet thanks largely to Systeme D, it works, after a fashion.

Author Neuwirth does not gloss over the problems of the world’s Systeme D economies. There is fraud and sometimes violence, but not necessarily any worse than that of the above-ground regulated economy. There is wide-open pirating of software, games, music and movies.

The bizarre private bus system of Lagos, though it works for the Nigerians after a fashion, is not something any of us in the developed world would be happy with. Most of us are happy with our clean, well-lighted supermarkets (see my article “Sardines at Midnight.”)

Yet there is a lesson we can take from the Systeme D economies. Our economy is becoming increasingly hog-tied with regulations. We could make a big dent in unemployment if the politicians and bureaucrats would lighten up a bit and allow the “informal economy” to grow. Yes, the politicians and bureaucrats and lawyers are to blame but they take their cues from consumers who demand near-perfection in product offerings and unlimited product liability.

I highly recommend Stealth of Nations as a light but informative summer reading. Read it for the stories, and pay no attention to occasional stumbles into bizarre generalities like, “There’s nothing natural about the free market. It’s a fiction, an artificial construct created and held together with the connivance of government.”

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