Shades of Gray…

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I’ve written recently about the way in which tough economic times flush out more crime in the marketplace (c.f., for instance, “Crime Doesn’t Pay”).  Now, from the always-fascinating New America Media web site, a reminder that, even as the Black Market expands, so does the Gray Market– the Informal Economy: “World’s Shadow Economies Poised to Grow.”

Simply put, the Gray Economy is commerce in legal or quasi-legal goods/services sold in a quasi-legal ways. It might be the retailing of intellectual property (movies, DVDs or operating systems) or medical necessities (like drugs), without a license.   Or it might be services– car repair, construction, agricultural, whatever– rendered for cash, on which no taxes are paid.  The Gray Market is distinct from straight-ahead crime (the Black Market), but can involves various degrees of illegality:  theft or smuggling is Black; the street vendor’s sale of goods that might be stolen or smuggled, (dark) gray…  in any case, all of the Gray Economy is off-the-books, so at least “un-legal.”

As Hernando De Soto has shown, this Informal Economy can be a huge part of a developing country’s overall economy– and hugely important, as a source of ferment, to its growth.  Indeed, in many developing nations, the Gray Economy is larger than the “official” economy; in Nigeria, economists estimate, twice as large.

In a developed country, the Gray Economy is a smaller part of the picture.  In the U.S., for example, it’s estimated at 8-9% of GDP– but that makes it the largest informal economy in the world, at close to $1 trillion.  While Gray Economies can play a formative role in developing countries, Robert Neuwirth, the author of The Stealth of Nations: The Global Reach of the Informal Economy (to be published by Pantheon Books later this year), observes that, in the developed world, the Informal Economy is “more of a small-scale, coping mechanism.”

But wherever we find it, the Gray Economy matters… and in tougher economic times– higher unemployment, more concern about expenses, etc.– it’s likely to grow, Neuwirth suggests:

I would say the informal sector is poised to grow. In China, for November and December, exports went down compared to last year. Western demand will decrease and credit markets have dried up. In the first 11 months of 2008, almost half of toy exporters closed down. Some of that was in response to the lead paint scare, but some was in response to lower demand. So, people who can still buy are the merchants in the informal sector who buy with cash. When I went to Guangdong, China, I found there is an African community of traders—more than 100,000. They are middlemen and traders, shipping products back to Africa. They may pay some customs duties in China, although they work with their Chinese counterparts to fudge the invoices. But they pay mostly nothing on the African side. They aren’t counted in normal statistics. They exist purely with cash and their own initiative.

Similar stories could be told, from Abilene to Ankara to Angkor Wat…

But while we work against the Black Market; we need to work with the Gray Market.  Under the right conditions, Gray marketeers will “grow out” of the informal economy into the formal, White Economy.  Conversely, under the wrong conditions, those same informal entrepreneurs can be forced to “turn Black.”

So how do we work with the Gray Market?  For a start, governments and companies can and should do what they can to eliminate the “incentives” to stay Gray, or worse yet, go Black:  high tariffs and duties (that encourage smuggling and traffic in smuggled goods), punitive IP laws (that encourage piracy), exclusive licensing laws (that encourage “garage” operations, and off-license manufacture), and most importantly of all, the waste, inefficiency, and corruption that makes paying taxes look like a sucker’s bet.

None of this is easy for entrenched, needy, and often entitled (if not, indeed, corrupt) governments at the best of times…  and these are decidedly not the best of times.

Still, governments must recognize that most of what’s Gray would prefer to be White, and lean into helping them make that move… Direct government investment, infrastructure improvements, loan programs– all can have the effect of stimulating the Gray Economy…  much/most of which, as it grows, can and will then turn White of its own accord.

The alternative in times like these is a Somalia-like descent into the Black Market that’s a long step toward “failed state”-hood.  (see “Ahoy There,” e.g.)  One notes that this is precisely the logic that animated the Marshall Plan. It’s the effect (if not, indeed, the rationale) of the micro-credit movement that started with Mohammad Yunus and the Grameen Bank.  As both Marshall and Yunus realized, broadly-based economic growth– the more broadly based, the better– is the most effective remedy for (as Marshall put it) “hunger, poverty, desperation and chaos”; and thus, it makes for social and political stability…

Many corporations around the world, feeling themselves the (real or potential) victims of piracy or smuggling, would eradicate the Gray Market.  But like governments, they have more–much more– to gain by working with it.  Neuwirth offers an example of this kind of creative approach:

MTN, a South Africa-based company, came into Nigeria eight or nine years ago with the idea to do a very western, very British system of selling phones at stores. They crashed and burned. So they retooled their business concept. They now sell airtime. No one has a plan and everyone buys minutes and a sim card. The minutes are sold by a massive network of informal vendors. MTN sells minutes to distributors who resell them to people on the street. Most of the minutes are sold like that. MTN makes 90 percent of its income from selling through this huge, informal sales force.

The game is eminently worth the candle:  The Gray Economy is critical to the survival of a tremendous number of people worldwide– a number that’s growing as the economy is shrinking.  At the same time, the Gray Economy can be the “nursery” for new entrants into the White Economy.  And as those new entrants emerge, companies’ markets and countries’ tax rolls grow.

But perhaps most fundamentally, the Gray Economy has a great deal to teach us, both about the human experience and about how to improve it. As C. K. Prahalad has said, “I am continually humbled by the inventiveness of the people who want to serve this population.”

And in times like these, we can use all of the inventiveness we can lay our hands on.

UPDATE: From New America Media again, an interview with Columbia professor Sudhir Venkatesh, sociologist and author of Off the Books: The Underground Economy of the Urban Poor– a discussion of the Gray Market at work in the U.S.