Not long ago, I bought a bottle of whiskey at a liquor store in midtown Manhattan. It was only when I got home that I noticed some fine print on the bottom of the label that differentiates the Scotch from any other I had ever bought. The added words said that the bottle was reserved purely for the use of Air India and not for resale.
I drank it anyway. But that bottle got me thinking: endless supplies move along invisible chains that most people don’t know about—and this movement is the root of a great untold story of world trade.
More than half the workers of the world do business in the informal, or shadow, economy—selling legal products in a quasi-legal way, or, like the owner of that New York liquor store, selling quasi-legal products in a legal way—and their work is worth more than USD 10 trillion each year. For much of the planet, the global informal economy has become a dynamic and mobile network of ingenuity involving every type of business, from street merchants to mega-corporations.
Take Chris Nwachei, whom I met in a roadside market in downtown Lagos, Nigeria. Every week, he said, he traveled 60 miles to Cotonou, in the Republic of Benin, to pick up 28 pairs of Chinese-made shoes. Though most Nigerians wear shoes from China, they are considered contraband and prohibited from importation into the country. So Nwachei worked with a specialist to smuggle his shoes back to Lagos so he could sell them for a substantial mark-up at his kiosk.
Scores of other goods slip into Lagos by this route. A dealer in artificial flowers shifts her colorful wares from China to Cotonou via international container networks. Then they’re unloaded and repacked for the clandestine trip across the border. A wholesaler in a dirt-floored meat market told me his business depended on slipping truckloads of chickens across the Benin border. And there’s a massive trade carrying used cars from the United States to Nigeria via Cotonou.
Further afield, tens of thousands of African traders have journeyed to embed themselves in the business markets of Guangzhou, China. They travel on tourist visas but make deals with factories to produce goods people back home can afford: knock-off mobile phones, cheap refrigerators, discount diesel generators, and designer-style jeans. Nwachei purchased shoes from his dealer.
This chain also includes a technological feedback loop. For instance, Chinese firms have started producing phones that fit two SIM cards simultaneously because African customers ask for them.
Most heavy goods move into Nigeria through Lagos’s massive formal Apapa port. But even there, there’s an underground element to the trade. Israel Okonkwo, whose firm deals in parts for Renault cars from a stall in Lagos, started importing pricey goods from France three decades ago. Now, 90 percent of his goods are Chinese. According to Okonkwo, most merchants figure out ways to hoodwink the government as they move their goods around.
“The average importer always devalues the cost of the container. He makes this effort for his customers. Let’s say he imports USD 50,000 of goods. He devalues it to USD 10,000, giving room for the customs official to reduce the tariff as well.”This is a polite way of saying the merchants bribe port officials to certify the false manifests. “It’s a necessary evil,” he says. “Everybody’s trying to beat the system.”
Africa’s not the only place where smuggling and pay-offs form the underbelly of the transnational business model and push goods along their journey. The bulk of the USD 2.5 billion in annual trade that brings computers, electronics, toys, and household goods from Ciudad del Este, Paraguay into Brazil is based on smuggling and bribing customs officials. A large and lucrative cross-border trade in the United States sees merchants moving cigarettes, liquor and other products across state lines (and, as with the whiskey I bought, out of airport duty free shops and first class lounges) to avoid taxes and duties and to maximize profit on price differences.
Multinational corporations like Procter & Gamble depend on this informal push and pull. The USD 80 billion Cincinnati-based consumer goods company produces brands like Crest, Downy, Ivory, Pampers, and Tide. It trades on the New York Stock Exchange and is regulated by a bevy of federal agencies. But its products appear in thousands of squatter community kiosks—and that’s exactly how P&G wants it.Indeed, those small stores—which P&G defines as businesses with three cash registers or less—account for 20 percent of its business. “It is our fastest-growing customer and, in terms of volume, it’s our number one customer,” a former executive told me, adding that allowing its products to fan out to these haphazard retailers offered a great opportunity for relationship marketing since customers visit these stores almost every day.
P&G would never sell directly to the unlicensed merchants in a squatter community. So how does this scrupulously formal firm do business with the informal? It’s easy: look for the middle man. Nobel Prize-winning economist Joseph Stiglitz, a champion of globalization, outlined the practice: “Basically, you would sell to a wholesaler. The wholesaler would be formal but would not have the same problem selling it through informal channels.”
Increasingly, this is the way globalization circulates products and profits. Economists may decry the informal economy and its fluid movement across international boundaries. Politicians may lament its existence. In public, so do many formal firms. In private, however, they do what businesses always do: figure out how to make use of it—and their goods spread to all corners of the world.