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Stealth of Nations: no black and white when it comes to grey market

Robert Neuwirth defends counterfeiters, arguing that this unofficial trade and product piracy is beneficial to the global economy and helps the world's poorest people.
The Stealth of Nations
Robert Neuwirth
The Stealth of Nations Robert Neuwirth Pantheon Dh92

After reading Stealth of Nations, a reader might feel no qualms about buying pirated DVDs or a "Gucci" handbag from the nearest street vendor.

The reader might even be inspired to head to a wholesaler, pick up a few gross of cheap wind-up toys and open a stall at a flea market to resell the trinkets, marked up 50 per cent.

Why resist such an opportunity? According to the author Robert Neuwirth, this business of fake and semi-legal goods - variously known as the grey market, the unlicensed street market, the underground economy, the DIY economy, intellectual piracy, smuggling, the informal economy of the book's subtitle or, the author's favourite, System D - is an economic and sociological wonder.

It employs half the population of the planet, efficiently recycles waste, offers financial opportunity to the underprivileged, provides needed infrastructure and is far more egalitarian than the classic economic models.

Not only that, this arrangement also fights corporate behemoths more effectively than customer boycotts.

"Street peddling, and all of System D, serves to open the market to a larger group of people," Neuwirth writes. "It may be inefficient ... but at least they [the participants] can earn, and in that sense, System D makes the world a less unequal place," all the while, of course, giving consumers in both developed and developing countries big discounts.

Given such a cornucopia of apparent benefits, it seems petty to mention concerns such as tax evasion, crime and poorly made merchandise.

Neuwirth, a veteran journalist who has written for The New York Times and Fortune magazine, raises valid points as he traces the geographical routes and historical roots of this economy, including denunciations by Martin Luther and Karl Marx.

He has done impressive research, travelling from Nigeria to China to Brazil to New York.

The $10 trillion world he describes is fascinating. The goods are not always illegal copies, for one thing - many are simply sold through unlicensed channels or have expired warranties.

The customers range from chic young New Yorkers to impoverished neighbours of the peddlers themselves.

There are strict rules, hierarchies and organisational structures.

True, their main purpose is often to avoid taxes and customs duties but also they can establish a smooth flow of commerce.

The sacoleiros who smuggle "blankets, plastic bins, brooms, underwear, perfume, liquor, beer, toys" from Paraguay to Brazil board chartered buses at a preset location in Brazil every Monday evening to arrive at a particular spot in Paraguay 16 hours later. There, they produce their shopping lists, "prowl the streets and malls" of Ciudad del Este to carry out their assignments, return to the arrival spot, store the purchases at makeshift warehouses and repeat the process until Wednesday afternoon.

Then they reboard the buses to return to Brazil by midday Thursday, so that "the goods the sacoleiros buy will be on the streets and in the stores by the time Friday and Saturday - the big shopping days in the market on Rua 25 de Marco - roll around".

In the process, they have skirted Brazil's value-added tax, customs duties and licensing requirements for cross-border trading.

Clearly, such ad hoc arrangements fulfil important unmet needs. Cardboard and styrofoam would pile up in the streets of Guangzhou, China, if System D recyclers didn't scavenge and sell the stuff.

The grey market provides phone services, electricity and even bridges in Nigeria, where official public services are virtually non-existent.

For high-end global clothing manufacturers, Neuwirth argues that "piracy actually helps the fashion houses because it spurs demand for new styles".

Once the pirated versions of hot-off-the-runway Paris designs spread to the mass market, these designs are obviously outdated, and thus the super-fashionable must immediately have fresh ones.

Working in the underground system is undeniably rigorous, whether it involves pulling a heavy cart by hand 18 kilometres every day in China, or cooking 18 cakes and 25 loaves of bread and brewing litres of sweetened coffee to bring to market by dawn in Brazil.

But that does not mean wealthy consumers are exploiting poor workers whenever they buy grey-market goods.

These unofficial entrepreneurs would probably be labouring just as hard on subsistence farms or in sweatshops in the legal economy - if they could find employment at all.

And if Margaret Akiyoyamen is not earning quite as much as Bill Gates or the Sultan of Brunei, she still brings in five times the Nigerian minimum wage by selling mobile-phone minutes for between Dh2 and Dh7 a time.

Yet any consumer advocate will caution that when something looks too good to be true, it probably is. The Stealth of Nations glosses over some serious problems.

As with most unregulated organisations, there is tremendous potential for abuse, including corruption, environmental damage and violations of labour laws.

Sadly, such abuse is also rife in the official markets of many developing countries, but that is no excuse.

Moreover, the author admits that "in System D, there's not a lot of protection from shoddy workmanship". Who is a customer going to sue if the "Gucci" handbag falls apart after one day?

Neuwirth is far too blasé about the dangers of unapproved medicines, both historically and today.

He also seems surprisingly unconcerned about the way pirated books, music, movies and other goods deprive the original creators of the royalties they would get from normal distribution channels.

If anything, he praises the concept that "piracy levels the technological divide, jettisoning the expensive regime of intellectual property rights".

Presumably, however, he expects to make some money from that "expensive regime" via royalties on this book's Dh92 list price.

Probably the biggest controversy surrounding the grey market is tax avoidance. An article about Italy in the New York Times, less than three months before the publication of The Stealth of Nations, was typical, citing an underground economy whose "related tax evasion deprives the [Italian] treasury of an estimated 100 billion euros [Dh367 billion] in revenue each year".

It is a vicious circle - when System D entrepreneurs such as Margaret Akiyoyamen peddle mobile-phone minutes, they are not providing the government with the tax income it might use to build a legitimate telephone infrastructure.

Of course, the government might instead squander that tax revenue.

The book also has a few structural problems. Although the chapter titles are clever, they are not always clear. "The Honest Con Men" chapter is more about government crackdowns than con men.

And it is troubling that Neuwirth seems to have printed the full names of almost all the people he interviewed - including Americans who are flagrantly violating the law.

Only in two cases does he specifically say that a name is invented or that a source would not let his name be used.

While it may be admirable that the author was able to gain the confidence of these people, perhaps he should have disguised their identities for their own protection.

Ultimately, Neuwirth is right that both the formal and informal economies have important roles to play and that they need to find ways to work together. Rather than try to eradicate the grey market, government officials should bring it halfway into the tent with partial regulation.

While some of his proposals are a bit unrealistic - taxpaying business owners would hardly appreciate his idea to legalise the current system in which street merchants pay no taxes - he also cites some examples where cooperation is already happening, such as arbitration panels and taxi-bike safety rules in Nigeria.

Indeed, trust these entrepreneurs to turn regulation into opportunity - as soon as one Nigerian governor and the taxi-bikers' union agreed to the safety rules, which required helmets for passengers and drivers, "System D sprang into action. Dozens of businesses ... started importing different styles of helmets in all sorts of cool colours".

In any case, the underground economy is not going to disappear. Its constituencies will insist on that - both the vendors and customers, local and worldwide.

And shoppers will no doubt appreciate a book that lets them enjoy their bargains, guilt-free.

Fran Hawthorne is an award-winning US-based author and journalist specialising in finance and health care, including coverage of the "grey market" in pharmaceuticals.

Updated: September 2, 2011 04:00 AM



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