The Shadow Superpower

November 2, 2011 10:28 PM

The Shadow Superpower: a survey of globalized black market trade, and the size of the informal economy.

Also accompanied by a slideshow, the article is an excerpt from Stealth of Nations, by Robert Neuwirth, reviewed here.

posted by StrikeTheViol (25 comments total)

I finally got round to buying Misha Glenny's McMafia this summer (which looks at the more out-and-out criminal rather than merely black market end of things), and he gives a figure for the shadow economy of 15 to 20 percent of global GDP. Another key point that comes through is how far ahead of any regulatory authorities or law enforcement the international networks of smugglers and what have you have been is this vast expansion of global trade, making various democratic compromises achieved within this or that nation state nigh on unenforceable. Batters down all Chinese walls.
posted by Abiezer at 11:09 PM on November 2, 2011 [2 favorites]

"We're bigger than U.S. Steel" -- Meyer Lansky
posted by chrchr at 11:22 PM on November 2, 2011 [1 favorite]

Stealth of Nations blog (which I just realized I've been following for at least 3 years and never knew it was about a book )

my work looking at financial management and business models in the informal economy 2009-2010 - there's a couple of recent infographics posted that may help visualizing the scale and scope of the informal economy and the prevalence of the 'prepaid' or pay as you go business model

I don't conflate all of the informal economy = black market or criminal activity neither does Robert Neuwirth, its the slant that is always put on this topic. A roadside banana seller is not = smuggling trade, McMafia style crime.

There's more here but I want go through all the materials, and wake up, have another coffee and brush my teeth before coming back to write a better comment.
posted by infini at 12:06 AM on November 3, 2011 [3 favorites]

One of the most compelling reads on informal economies is "The Mystery of Capital", authored by the brilliant Peruvian economist, Hernando de Soto; he should win a Nobel for his work. Not only is the book chock full of facts and seminal ideas, but it is even somewhat of a page-turner for those interested in such things. It's one of the best books I've read on economic and social development, ever.
posted by Vibrissae at 12:19 AM on November 3, 2011 [5 favorites]

Neither does Glenny, infini, and sorry if I gave that impression, it's clearly more complex; I mostly wanted to quote him as he had an estimate of the percentage of global GDP.
There are though, numerous intersections, particularly where the international movement of goods and capital are concerned; the article in the OP quotes Keith Hart, "It's very difficult to separate the nice African ladies selling oranges on the street and jiggling their babies on their backs from the Indian gangsters who control the fruit trade and who they have to pay rent to." Scheider then goes on to describe how he's accounted for that in his calculations but concedes that the gangsters will be in there at some point.
Strikes me that there's a dichotomy where on the one hand the informal economy flowers most where the regime is most corrupt or kleptocratic, but that doesn't mean that the unregulated trade thereby becomes the sole preserve of later-day Robin Hoods or single mums making an extra few quid (though they're certainly in there too) or exempt from all the other bad things the best legislation in better regimes seeks to control. So I end up feeling we can both 'honour the struggle' (as per the last person quoted in FPP) of those doing what they have to to make ends meet but not imagine that if this is the future of the global economy, that would be an unalloyed good thing.
posted by Abiezer at 12:38 AM on November 3, 2011

Yes you are right Abiezer, I parsed your comment again after the coffee and I was just coming back in here with the ditto quote. (Hart's blog btw)

You said:
So I end up feeling we can both 'honour the struggle' (as per the last person quoted in FPP) of those doing what they have to to make ends meet but not imagine that if this is the future of the global economy, that would be an unalloyed good thing.

Struggle is the right word. Part of the challenge is the concurrent rise of big business's focus on Bottom of the Pyramid (BoP) customers without taking into consideration their sources of income and the fact that its irregular and unpredictable. It feels like there's almost a cognitive dissonance between the McKinsey reports decrying the shadow economy and its perceived negative impact on supermarkets say with the same organizations supporting increased focus on the "rising middle classes of Sub Sahara" or the 'next 4 billion'.

The two are not separate challenges to be handled independently but instead, peace must be made with the interstitial space between the two economies in order for these Big Co's to do business with the mass majority.

How I've attempted to articulate this tension, at the granular level (I'm neither an economist nor a journalist, simply trying to understand people at the base of the pyramid and their daily lives and challenges):


Back to point, in a 2007 post “The urban informal economy in retrospect“, Hart writes:
"The original application of the informal economy concept was to the self-employed urban poor in developing countries. But it has since come to describe a much wider range of economic activities in rich and poor countries alike. If the term addresses whatever is invisible to normal bureaucracy, then it surely should include informality at the top as
well as the bottom of society, not to mention crime on any scale wherever it happens."

This seems to imply that the concept has evolved from one that meant (more or less) those at the base of the social and economic pyramid (BoP) managing on irregular and unpredictable incomes to covering any activity that is not regulated by laws, contracts, bureaucracy and the “global system”. It also raises the question in today’s age, when there is trend towards ‘serving the poor profitably’ that is, doing business with them, whether the definition needs to shrink back to its original scope of meaning or simply expand enough to accomodate the “BoP”, the “next 4 billion” or whatever is the current term to encompass those outside of mainstream consumer culture (aka the global economy).

Terminology aside, other snippets, such as this one from a 2006 BusinessWeek article by McKinsey Global Institute’s Diana Farrell, highlight the ‘dangers’ (to big business) of the existing informal economy in the developing world:

"In any sector where the costs of operating formally are large, having informal competitors is hugely damaging to the prospects of the law-abiding players. Imagine a tax-paying supermarket in Brazil, for instance, where informal retailers operating midsized supermarkets and mini-marts account for 60% of the food retail market.

The supermarket may be many times more productive than its informal rivals, and offer higher quality, but it won’t be able to get near them on price because, thanks in part to the informal food processors and wholesalers supplying them, they have an unearned cost advantage of 50%. It will never make sense for the supermarket to
invest in expanding, despite its higher productivity."

Now, lets look at the other side of this coin, particularly since my recent Filipino fieldwork was conducted as a guest in the home of just such an ‘informal retailer’, albeit a minuscule one, though she sourced her inventory from a mini mart as mentioned.

On one hand, we have the 4 billion customers who have emerged from under marketing’s radar as the “BoP market” – one characterized for the most part as having high volumes of sales offsetting low margins as price is a deciding factor. On the other, we have the informal sector perceived as a threat to the very same businesses being exhorted to consider these new markets as a source of that lucrative fortune.

If business must indeed look at the BoP as the next frontier for sales of goods and services, then one of two things must happen in order to resolve the conflicting viewpoints and gain a measure of sustainable success. Either the informal sectors that employ or provide income for those at the BoP are seperated from the “competitive threat” segments OR the two are reconciled and the interstitial space between the formal and informal evolve from “gray market” to “BoP market” in consideration and understanding.

Until then, the logical extrapolation of these opposing energies implies that the very sources of income that will allow the BoP to pay for the goods and services that the corporations wish to sell them must disappear in order for the corporations to successfully operate in these markets.

Read that through once again.
posted by infini at 1:01 AM on November 3, 2011 [2 favorites]

Strikes me that there's a dichotomy where on the one hand the informal economy flowers most where the regime is most corrupt or kleptocratic, but that doesn't mean that the unregulated trade thereby becomes the sole preserve of later-day Robin Hoods or single mums making an extra few quid (though they're certainly in there too) or exempt from all the other bad things the best legislation in better regimes seeks to control.

Interestingly, Neuwirth writes in the FPP link:

But even in developed countries, after the financial crisis of 2008-09, System D was revealed to be an important financial coping mechanism. A 2009 study by Deutsche Bank, the huge German commercial lender, suggested that people in the European countries with the largest portions of their economies that were unlicensed and unregulated -- in other words, citizens of the countries with the most robust System D -- fared better in the economic meltdown of 2008 than folks living in centrally planned and tightly regulated nations.

Finland has one of the most regulated systems, there are no street vendors, buskers or what have you - even the hot dog stand's owner gave me a long story on how expensive it was for her to do more than this even if she wanted to due to all the regulations and requirements. However, as a culinary institute graduate, jobs were scarce right now and she needed to make ends meet, dole or no dole.
posted by infini at 1:07 AM on November 3, 2011

Throw in a personal anecdote of sitting on the veranda of the Lagos Hilton while marveling at the pluck and wherewithal of the locals picking through the hotels garbage and you have a perfect Thomas Friedman article.
posted by pianomover at 7:39 AM on November 3, 2011 [3 favorites]

Very interesting post - thanks.

infini - Dmitry Orlov made a similar point about the collapse of the Soviet Union; that given the flaws of the official system. a system-D grey market was already in place, and this cushioned the effects of the collapse. He's not as positive that the US will fare as well.
posted by Cheradine Zakalwe at 8:23 AM on November 3, 2011

Infini's reference to the supermarket offers an opportunity for reframing the issue a bit. A legal supermarket may offer higher quality, but that's not a given. The major supermarkets can't compete on quality with my garden and my neighbor's dairy farm. I get my milk directly from the farm before any processing; I know how the animals are kept, I know that farm's practices do not unduly harm land in my community, and I know the product is handled with integrity. Sometimes I even help with the milking. I know these things not because the USDA says so, but because I see it.

Tucked away in the crevices of the System D economy are some valid answers to global industrialism's worst problems, and we'd be wrong to continue to marginalize it. Are there injustices, some of them grave and crying out for solutions? Of course there are, and the black market won't automatically address those any better than the official market addresses its official crimes.

It seems to me that articulating support for System D is a potential tactic for moving OWS activism ahead after the public awareness work that has been done recently. Maybe the Occupy and peak oil movements need to rename themselves to "Plan D" and champion the kind of decentralization that will help us weather the upcoming major contraction of the industrial economy.

I'd like to see a statistical analysis that compares System D with the official system by measuring how much of peoples' actual needs each meets, as opposed to the production of luxuries. I bet System D would look somewhat stronger in that light.

The US can probably expect to see growth in System D real estate, too, as delinquent and improperly documented mortgages continue to fall apart.
posted by maniabug at 8:26 AM on November 3, 2011 [1 favorite]

The US can probably expect to see growth in System D real estate, too, as delinquent and improperly documented mortgages continue to fall apart.
posted by maniabug at 8:26 AM on November 3 [+] [!]

It's already troubling how much certain states rely on labor from Mexican "immigrants" that can't even get health care or social services.

I don't see anything particularly good about an unregulated labor market, no matter how sexy the writer tries to make it sound.
posted by Stagger Lee at 9:50 AM on November 3, 2011 [2 favorites]

Georgia loses entire crops as immigrant labour removed [June]
Alabama loses entire crops as immigrant labour removed [September]

There's always consequences...
posted by Cheradine Zakalwe at 10:15 AM on November 3, 2011 [2 favorites]

There's always consequences...

To clarify my last comment, I'm fine with immigrants doing the labor, but I want it to be acknowledged so that they can enjoy the same protections as everyone else in the country, slim as those protections may often be.
posted by Stagger Lee at 11:10 AM on November 3, 2011 [2 favorites]

Stagger Lee, its really not about sexy, its about survival. I have not looked at this stuff in developed economies with their social safety nets and services and healthcare and benefits - however meagre they may be, as you rightly say, they exist. But where they don't, its this economy that serves the needs of the majority - with the adaptability and flexibility - in fact, maniabug may be on to something I've often suspected in urban settings but definitely seen in rural locales viz.,

I'd like to see a statistical analysis that compares System D with the official system by measuring how much of peoples' actual needs each meets, as opposed to the production of luxuries. I bet System D would look somewhat stronger in that light.

primarily because there isn't the luxury of marketing budgets, inventory and whatnot - you will make and sell what hte market will buy, not try to sell them what you have made. An interesting slideshow on this is by a South African marketing agency on Ghanaian informal markets - how do you build customer loyaltly in a brandless informal market? It all boils down to relationships on a human face to face level - something I think we've moved very far away from in our sophisticated mainstream consumer culture.
posted by infini at 12:45 PM on November 3, 2011

It seems to me that articulating support for System D is a potential tactic for moving OWS activism ahead after the public awareness work that has been done recently. Maybe the Occupy and peak oil movements need to rename themselves to "Plan D" and champion the kind of decentralization that will help us weather the upcoming major contraction of the industrial economy.

There'd be a certain irony in this because isn't System D really unfettered free-market capitalism?
posted by storybored at 12:56 PM on November 3, 2011 [1 favorite]

isn't System D really unfettered free-market capitalism?

Yes and no. Or rather, not in my understanding of what is happening rurally (where the majority of those within these systems live) - it seems older than capitalism and harks back to elements such as "community as insurance", resilience and cooperation - both economic and social - on a scale and generosity that we just don't see in 'our worlds' anymore.

Even in the urban, it also depends much on the region - local culture,history and market forces play a part in how much of this is dog eat dog survival of fittest and interestingly, how much more of it is cooperation and sharing and informal support networks. I've tended to see more of the latter than the former, even in Jo'burg's worst townships. A lot however depends on whether you are part of that system or out of it.

One thing I think we tend to forget is that the majority of the informal economy is in the 'developing world' which given teh way the countries/continents are situated, tend to fall in cultures that are less individualistic and more social.
posted by infini at 1:15 PM on November 3, 2011

Here is where I'm wishing the author of the book would show up in this thread so that we could talk.
posted by infini at 1:17 PM on November 3, 2011

I left a comment on Neuwirth's blog to alert him to the existence of this thread.
posted by StrikeTheViol at 2:09 PM on November 3, 2011 [1 favorite]

There'd be a certain irony in this because isn't System D really unfettered free-market capitalism?

Yes, more or less. The interesting thing here is that System D is sort of a natural eruption of free market capitalism, precisely because the powers that be are so onerous that initiating a legitimate commercial enterprise is a non starter. In some ways this seems very much up OWS alley, where one consistent theme that emerges is that the system coddles and defends large, well established players at the expense of small newcomers.
posted by 2N2222 at 2:15 PM on November 3, 2011 [1 favorite]

Storybored: "Isn't System D really unfettered free-market capitalism?"

That word unfettered, as it is often used next to capitalism, is more symbolic than specific. One of the advantages I see with a clandestine market is that its localized nature can impose on it certain constraints, the absence of which allows a larger and more organized industry the freedom to damage its host over community objections. A small scale operation can't get away with damaging a community as easily, because the members of its constituency more likely have a common stake in the ramifications.

The "fetters" provided top-down regulation of top-down industries is necessary exactly because they are large enough to survive the veto of local communities. If a small local company wanted to practice mountaintop removal, without the power of an enormous national market behind it, I suspect the practice would be much more limited.

So in that sense, perhaps ad-hoc equates with local and democratic.

Am I idealizing small communities, assuming they will tend to wield their market power to enhance their health? Maybe. But there's something to be said for the potential to do that, versus not having the potential.
posted by maniabug at 5:19 PM on November 3, 2011

Another blog that people who are interested in this kind of thing (and some of you probably already read it), is John Robb's Global Guerrillas... He always has interesting links and information for those looking for decentralized community building and activism. He is, I should clarify, on the more right-wing side of the spectrum, but he never pushes it in your face.

His current posts seem less about "open source warfare" and more about community building. Here's a blurb from his "about me" page:

The Future of Peace. Resilient communities. Our tightly interconnected global system is increasingly prone to large shocks from a variety of man-made and natural causes. These shocks can disrupt flows of energy, food, commerce, and communications to produce widespread wealth destruction (at best) and famine/death (at worst). The best way to mitigate these shocks is to build resiliency at the local level so that communities can enjoy the benefits of globalization without being damaged by its excesses. I am exploring what a community needs to do to be resilient.

I find he has many interesting and informative links that I don't get elsewhere, necessarily, regarding things like the Occupy movement.

My friend also just finished a book about the Oaxaca uprisings in 2006 called Teaching Rebellion: Stories from the Grassroots Mobilization in Oaxaca.

And here's a website for a film regarding it: A Little Bit of So Much...

Also, an interesting story (found while perusing the publisher's site) about the Common Grounds collective in NOLA, called Black Flags and Windmills (the site has a little trailer for the book as well - very cool to see).

I know that these aren't necessarily related directly, but greymarket/blackmarket economics (Agorism - in the more right-wing anarcho-capitalist libertarian literature), as well as movement building and other such things, against the institution of traditional markets and economics I think is where the future lies. Community currency (such as Ithaca Hours, or my hometown, Madison's own related Currency, Madison Hours) is another possibility of future underground/community based economics (there are, of course, other forms of Competitive Local Economic Transfer Systems (as these things are called) that are not based on the "Hours" framework)...
posted by symbioid at 5:38 PM on November 3, 2011 [2 favorites]

Which leads me to think of many of the community based initiatives in this broad direction of localization and resilience emerging in the UK, some that Robb has touched upon but others that friends of mine are looking into in Wales for eg - transition towns, the whole movement around rep rapping, and others in this vein, including variations of local currency.
posted by infini at 9:45 PM on November 3, 2011 [1 favorite]

infini - I recall there being a "hackday" for the Occupy people, and there were a few apps to help them out. I can see more of this happening between the hackspace movement and such. I think, in Madison, that the Occupy folks aren't too far away from the hackspace.

There's so much potential, I just am so afraid of it being wasted and I don't know a way to get some direction and momentum.

While looking for that hacking thing, I found human power after generators confiscated -- basically that Gilligans Island episode where the professor rigs up a bike to power a radio? Well here it is :) Maybe Sherwood Schwartz was a prophet!

Ah, here's the page for the occupyhack thing.
posted by symbioid at 10:11 AM on November 4, 2011 [1 favorite]

Have you seen the work around hackerspaces they've been doing, most recently at Maker Faire Cairo last month?
posted by infini at 12:20 AM on November 5, 2011 [2 favorites]

I purchased the book today, plan to review it after reading
posted by infini at 1:41 AM on November 27, 2011