A recent post on Steven Levitt and Stephen Dubner’s Freakonomics blog discussed the growth of the shadow economy across the world. The post claims that the shadow economy is the second largest in the world!
It is expected that over 10 trillion dollars circulate through the black market, which can be found anywhere from flea markets, roadside farm stands, swap meets and even the darkest allies around town. If governments around the World don’t do anything soon the black market might even become the world’s strongest economy soon!
Consumer spending may be on the rise in the Euro-zone as indicated by the increase in retail sales this year, and more specifically this August. Sales rose by 0.7% from July but were still 0.3% lower than last year. It is evident that the financial crisis is still luring but these figures indicate a sign of slow but steady recovery.
Consumer spending had been declining since mid-2011. The July and August 2013 figures suggest further recovery in the future. However, retail sales are still below the rates seen before the 2008 financial crisis hit.
Without a doubt Germany has had the fastest growth with Italy notably accounting for its fastest growth in two years. On the other hand, Spain’s economy contracted.
What does the contracting of Spain’s economy signify? Post your comments below!
As recent as 6 years ago, the United States was the larger trading partner for 127 countries, China only 70. Now, the table turns – China got 124 and U.S. 76. A recent article at NPR points out that this trend is changing the way people live and do business across the globe – the “most abrupt global shift of its kind since World War II”.
Indeed, from businessmen to farmers, more and more people are signing up to learn Mandarin. Firms and organizations are looking at the Chinese markets for opportunities and investments. Without a doubt, China has enormous potential to become the biggest trader of goods and services in the world.
But not yet. The United States still does the largest trade in terms trade volume, and unlike China who occupies mostly lower-end goods and commodities, the U.S. controls the high-end and most value-added products and services. Most of China’s largest firms are state-owned. It would take these gigantic a while to transform and travel beyond the Great Wall, becoming internationally renowned like GE or Ford. Trade in services is still dominated by the U.S., beyond the reach of the Chinese.
Nonetheless, the focus of global lenses is shifting to the East. China has shown prudence in the recent financial crisis and has become politically important at the international arena. With the change of new leadership, China is inevitably facing tremendous opportunities and challenges in this the global economic winter season.
International exchanges of goods and services are typically conducted with currencies, the value of which is settled by the four legs of trust, demand, supply, and risk. If any of these legs are weakening, substitute exchange methods emerge, based on precious metals, commodities or even cigarettes. In light of economic and financial volatility in the U.S., Europe and parts of Asia, we may again be heading for such substitutions in the global market.
Interest rates now underprice the true cost of capital. Global financial shifts around the world are frequent, easy, and large scale. Government debt repayment is uncertain. Currency blocs such as the Euro are exposed to significant stress. The choice of the U.S. dollar as reserve currencies may be shifting. Financial debt and exposure are increasingly imbalanced. As a result of all these instabilities, barter, buybacks, offsets and other forms of countertrade re-appear in the global market, offering new efficiencies in the conduct of trade. Companies need to understand how such international shifts will affect them, and learn to adjust their marketing and financing approaches to these new opportunities.
Countertrade is the use of goods, services, and other non-monetary resources as payment. Recent discussions with the Global Offset and Countertrade Association indicate that countertrade is on the rise due to government and company requirements.
Governments are concerned about the influence of large transactions on their country’s balance of payments. They increasingly demand ‘offsets’ which are designed to reduce such influence. For example, in order to help pay for the acquisition of military airplanes, a country may demand that the seller of the planes encourages tourism to the country – as done by Egypt. Concern is also growing about structural trade deficits. Governments and companies make countertrade a condition for importers. For example, Zaire and Italy exchanged scrap iron for 12 locomotives. China traded Russia 212 railway trucks full of mango juice in exchange for a passenger jet.
Companies know that an acceptance of non-cash payments can affect product values negatively. But as an alternative to no trade at all, countertrade looks better every day. Take the realities of a recent countertrade deal between Argentina and South Korea. Argentina reported a trade deficit of $6 billion in 2010, driven in part by high automotive imports. Argentinean imports from the South Korean car company Hyundai alone amounted to $91 million with consumer demand for cars growing. Historically, the government handled such situations by simply refusing more imports. But international agreements and negotiations have sharply reduced this option.
The Financial Times reports that Argentinean Hyundai distributors will utilize countertrade to compensate for the negative effects of car imports from Korea. They will stimulate the Argentinean sales of agricultural goods, specifically peanuts, wine, and soy flour to South Korea. Economic hardship is not the only incentive to countertrade. Bilateralism plays a large role in the acceptance of a countertrade offer. A country may encourage its companies to accede to barter requests from foreign trade partners and allies. The link between business and politics encourages such accommodation, even though doing so may be inconvenient. In the future, trading partners may reciprocate.
After decades of dormancy, countertrade is on track to again become a vital part of the global market. In a world of economic hardship, parsimony, and growing currency uncertainty, countertrade emerges as a viable solution for market and political shortcomings. Companies are well advised to re-cast their strategy to reflect countertrade expectations and requirements. On the outreach side, new marketing and financing packages need to be prepared in order to remain ahead of the competition. Internally, personnel needs to be hired and trained, to initiate such transactions, supervise them and see them through to long term completion. Banks need to prepare for countertrade based financing and get ready to help clients use countertrade.
In sum, we all need to get out of the headlight of currency weaknesses and changes, and prepare for the resulting shifts in the conduct of international business.
If you are interested in reading a little bit more extensively about how consumers have been affected by the financial conditions, I recommend reading this recently released report by the Boston Consulting Group. They describe and contrast the consumer climates in several different regions, highlighting key differences between Western nations and the BRIC( Brazil, Russia, India, China) markets. The report ends with six suggestions for businesses to adapt to the new consumer conditions.