February 3, 2023: Global News Roundup
System D booms—Labor, oil, dollars, cocaine, fentanyl, eggs
The Global News Roundup collects news stories from entirely international (non-US) media sources on variety of pressing global issues and events.
In his 2011 book, Stealth of Nations: The Global Rise of the Informal Economy, author Robert Neuwirth describes “System D”, a “slang phrase pirated from French-speaking Africa and the Caribbean”, short for “l’economie de la débrouillardise”. Neuwirth explains, “To say a man (or woman) is a débrouillard(e) is to tell people how resourceful and ingenious he or she is”. He continues:
This essentially translates as the ingenuity economy, the economy of improvisation and self-reliance, the do-it-yourself, or DIY, economy…It used to be that System D was small—a handful of market women selling a handful of shriveled carrots to earn a handful of pennies. It was the economy of desperation. But as trade has expanded and globalized, System D has scaled up too. Today System D is the economy of aspiration. It is where the jobs are… (pp. 17-19).
System D is huge. The IMF defines the informal economy, sometimes also called the “underground” economy, as comprised of “activities that have market value but are not formally registered”, and estimates that it represents as much as 35% of GDP in middle- and low-income countries and about 15% of GDP in advanced economies, though they admit that it is notoriously difficult to measure and estimates vary widely. Neuwirth figures that if System D was organized as a single national economy it would be the 2nd largest in the world. The OECD estimates that more than 60% of the world’s workforce participates in the informal economy. The ILO finds that in Africa “85.8 per cent of employment is informal. The proportion is 68.2 per cent in Asia and the Pacific, 68.6 per cent in the Arab States, 40.0 per cent in the Americas and 25.1 per cent in Europe and Central Asia.” While informal work is often discussed in the context of the developing world, like the ILO does here, it is also prevalent and important in wealthier economies. For example, here’s a 2014 report from the Boston Fed about how informal economic activities helped Americans survive in the wake of the Great Recession.
Turning to the news, stories from the past few weeks highlighted the importance of the informal economy as a coping mechanism for households and communities struggling with crisis and insecurity, as well as how new regulatory prohibitions, shortages, and price inflation are contributing to the expansion of black and gray markets. Borrowing Neuwirth’s language, recent world news indicates an economy of both “aspiration” and “desperation”.
Starting with labor and employment, the International Labor Organization’s annual World Employment and Social Outlook report, released mid-January, explained how fragile macroeconomic conditions combined with the impact of the pandemic and a conflict-ridden geopolitical context have conspired to make incomes and employment more insecure for working people around the world, with many turning to informal work: “[T]he Geneva-based ILO warned that “high and persistent” uncertainty over the state of the global economy was depressing business investment, eroding real wages and pushing workers back into informal employment, which can involve street vending, housekeeping or picking through landfills”, reported The Guardian. The ILO report found that, “Given the substantial rise in uncertainty regarding the future course of the global economy, employment expansion is fastest among informal workers” (p. 6).
The informal economy is also getting a boost from new regulatory prohibitions, in this case in the context of possible shortages of diesel fuel in Europe stemming from an EU ban on Russian diesel that goes into effect on February 5. A similar ban on seaborne Russian crude went into effect last December. The Middle East Eye reported that Europe is rushing “to stockpile diesel ahead of the ban, even increasing purchases from Moscow before its largest external supplier is cut off, in a bid to prevent shortages of the fuel which is a lifeblood for the farming, construction, manufacturing and transportation industries.” While the Middle East is expected to be a “big winner” in this scenario as Europe seeks to replace Russian supplies, Indian refiners operating in the gray-ish global market in diesel—diesel refined in third-party countries from banned Russian crude and exported around sanctions into Europe—also stand to benefit. The precise legal status of this trade is not wholly clear.
The Financial Times reported back in June that “Indian refiners…are using cheap Russian crude to try to boost diesel exports, including to destinations such as the EU with sanctions on Russian oil”. Germany-based Deutche Welle wondered at the time whether India was “undermining the EU oil embargo”. The Guardian explained that even before the fuller ban took effect, the “stigma” alone lead companies to conceal country of origin via blending and refining: “You’ll find that several shipments of crude will arrive at a port from different countries and be blended together. Tracking a hydrocarbon is basically impossible”, said industry sources. Fast forward to this week, the Business Standard out of India reported that the EU is now additionally considering imposing a price cap on Russian diesel similar to the one imposed last month on Russian oil, which would place “limits on Russian exports to third countries, whose companies would only be able to access key western services if they comply.” Indian refiners will likely benefit from the ban as European demand for non-Russian diesel rises while Russian crude prices remain relatively low. (This month, India replaced China as the top importer of seaborne Russian crude.)
Elsewhere, shortages of US dollars are resulting in the expansion of black markets in foreign exchange. Rooted in rising US interest rates and an expensive US dollar relative to local currencies, illicit markets in dollars are popping up in economies that have recently seen crashing currency values, capital flight, and runs on foreign exchange. “Well-worn U.S. dollar notes are finding a new home on the streets of Harare, where they are bought at nearly half their value for resale at a profit after mending, as Zimbabweans find creative ways to survive an unrelenting financial onslaught”, reported Reuters last week, “Following the collapse of the Zimbabwe dollar in 2009 amid record-breaking inflation, locals have relied on the greenback for daily transactions. But with limited access to the U.S. currency, some grimy notes are making a fresh comeback” (see photo below).
(Image: Cuthbert Gudza, 33, a street money trader repairs a torn U.S. banknote, outside a shopping centre, in Kuwadzana township, Harare, Zimbabwe January 18, 2023. REUTERS/Philimon Bulawayo, in the original here.)
Following government restrictions on currency convertibility and capital outflows, a black market in dollars also sprung up in Pakistan last month: “In the money-changing businesses of Karachi, the exchange rate for buying dollars is still on display. But attempt to purchase the currency and operators will say they don’t have any left…There are still ways to get the greenback, several money changers say, but it costs about 10% more than the advertised rate.” And in Lebanon, the government is trying, so far unsuccessfully, to stabilize the local currency. One major impediment has been that parallel, black market prices for the Lebanese pound relative to the US dollar are consistently lower than the price at which the government is trying to stabilize the exchange rate: “Lebanon has devalued its currency by 90 per cent as it seeks to address a deep economic crisis, in a move that still leaves the pound far above its parallel black market rate.”
In related news, cocaine purity in Europe is on the rise as the continent increasingly becomes a major production and transport hub for Mexican cartels. On Tuesday, the US Treasury imposed sanctions on the leader of a Mexico-based fentanyl trafficking organization and two of his associates. And, Mexico News Daily reported that egg smuggling is rampant along the US-Mexico border: “[E]ggs were 59.9% more expensive in December than a year earlier and 11.1% more costly than in November. Widespread outbreaks of avian influenza on U.S. chicken farms as well as inflation and supply chain problems have caused the price of eggs to surge….increases in attempts to smuggle eggs into the U.S. from Mexico have been seen at crossings between Tijuana and San Diego…”.
(Image: A carton of Mexican eggs seized at the Mexico-U.S. border at the El Paso, Texas, checkpoint. Photo: U.S. Customs and Border Protection, courtesy of Mexico News Daily, here.)
Things I’m keeping an eye on:
1. European gas futures markets: The Intercontinental Exchange recently announced plans to create a “parallel” market for Dutch TTF futures in London in order to skirt the gas price cap recently passed in the EU.
2. Chip Wars: A lot of interesting news trickling in over the past month on this: about how recent US policies to ban chip exports to China are straining relations with allies, about Japan and the Netherlands concluding an agreement with the US to block Chinese access to chips, and about China’s response which likely includes short-term retaliation against Japan and long-term efforts to develop an independent chip supply chain.
3. Russia-Ukraine-NATO: In case you missed this week’s stories on the conflict, see here on the Doomsday clock and here on the German foreign minister’s (mistaken?) announcement that NATO is at war with Russia. Tass.com is Russian state media and is a good source for information on Russia’s official stances, responses, and announcements about the war, including press releases about the ongoing major offensive in eastern Ukraine. It’s interesting to compare these releases to those from US state media, e.g., Radio Free Europe.
4. Chinse President Xi is planning a visit to Russia sometime soon. The SCMP reported the following comments from the Russian foreign ministry about the visit: “In cooperation with our counterparts, we have been taking consistent steps toward fighting attempts by the United States to achieve global dominance by promoting the concept of a rules-based order,” and described China as “a friendly nation in the current circumstances”. US Secretary of State Anthony Blinken is scheduled to visit China in February, and US state media recommended keeping “expectations low” regarding the likely outcomes of his trip.