Tag Archives: informal economy

The Ties That Bind Russia

2013.12.03.leninIn keeping with the just-released 2013 Transparency International Corruption Perceptions Index, I’m always in the market for new ways to describe the obstacles one encounters when trying to get things done in developing countries.

Enter this very enlightening piece from Peter Pomerantsev in the London Review of Books. The premise is what Russians refer to as the “Sistema”:

There are any number of paths and initiations into sistema, the liquid mass of networks, corruptions and evasions – elusive yet instantly recognisable to members – which has ordered the politics and social psychology of Russian civilisation since tsarist times.

And here’s the super gut punch:

This is the genius of sistema: even if you manage to avoid the draft, you, your mother and your family have become part of the network of bribery, fear, simulation and dissimulation. You have learned to become an actor playing different roles in relation to the state, the great intruder you wish to avoid or outwit or simply buy off. You are already semi-legal, a transgressor, but that’s fine for sistema: as long as you only simulate, you will never do anything real, you will always look for compromise and you will feel just the right amount of discomfort. You are now part of the system. If a year in the army is the overt process that binds young Russians to the nation, a far more powerful induction comes with the rituals of avoiding military service.

Read the rest here.

And if you read carefully, you’ll see a discussion of rules and laws that harks back to the very first thing I wrote on this blog, here.

Chart of the Day: Remittances from the US to Mexico

From the International Money Transfer Conference, coming to Mexico shortly:


Street Markets 101: On Money Laundering, Foreign Exchange and Counterfeit US Dollars

I’ll begin with the spoiler for those of you who should have been somewhere else five minutes ago:

The Mexican peso trades at a 50% discount on the streets of Peru and I believe this is somehow related to Peru being the top source of counterfeit U.S. dollars in the world.

That’s the basic thesis.

What is about to come next is a series of observations, some postulations, an educated guess or two, and a some rough idea of where to go next.

Contained nowhere in here is actual proof, in the Euclidean sense of the concept. But I’ll defend that by saying that what this brain dump is about is so off the radar that the only possible proof to have is to be an actual perpetrator. So, not being a perpetrator, what I can spell out here is my thought process, and I wholeheartedly welcome comment from anyone who can fill in any of the gaps I’ve left, or better yet, prove me wrong.

With that out of the way, let’s get to the data.

This whole idea began with a simple observation: upon landing in Lima’s airport, the first currency changers available—the ones you see before even clearing customs—offer to sell Peruvian soles in exchange for travelers’ American and Canadian dollars, Japanese yen, British pounds, euros, Swiss francs and Mexican pesos, quoted in terms of how many soles you can expect to receive per unit of your foreign currency. Considering that the first currency changers available upon landing at any airport anywhere in the world will never give the best exchange rate, the rates in Lima’s airport do not depart from current market rates as much as they could.

The single exception is the Mexican peso.

The number of Peruvian soles one can expect to receive per Mexican peso in the Lima airport is quoted as “0.1”. What does this mean?

To equate this to something understandable, we can use the old cross-canceling technique of multiplying fractions with different units. Here’s what happens when we do that:

1 Mexican peso            2.5 Peruvian soles           25 Mexican pesos
——————–         X    ———————-            =      ———————-
0.1 Peruvian soles        1 US dollar                       1 US dollar

Yes, you’re reading that correctly: that’s 25 Mexican pesos per dollar. Look up the going market rate for Mexican pesos, and you’ll see them trading, as of this writing, somewhere in the neighborhood of 12.3 to the dollar.

So, anyone landing in Lima wanting to change Mexican pesos for Peruvian soles at the airport will do so at an implied devaluation of the peso on the order of 50%.

Put another way: you’re going to spend twice as many Mexican pesos as you should to acquire Peruvian soles.

Granted, this is in the airport. Clearly the next step was to see if any casa de cambio in central Lima takes Mexican pesos. The answer to that question is yes, as should be expected of any fully convertible currency in world markets. The rate I was quoted at the casa de cambio around the corner from my hotel was 20 Mexican pesos per dollar. This is better than 25, but not by much; the implied devaluation here is still nearly approaching 40%.

Now, one could argue there is fault in my sample size, that the data only came from the Miraflores neighborhood, which skews it this way or that way…in short, there are always more data points to gather. But for these purposes, for what I’m trying to establish, I do not believe more evidence beyond the airport and the wealthiest neighborhood in Lima is going to materially alter the findings.

Meanwhile, changing US dollars on the street in Lima can be done for very little, if any divergence from the market rate. The single data point I have here—drawn from the casa de cambio that was willing to take 20 Mexican pesos per US dollar—was receiving 258 Peruvian soles for $100 on April 23, which, according to oanda, was exactly the market rate that day.

To further demonstrate the relative demand for US dollars in Peru, my hotel bill for a recent three-night stay there was quoted as payable with 1,386 soles or US$462, which implies a USDPEN rate of 3.0. Given the market rate of 2.58 Peruvian soles per dollar, this means the hotel was willing to devalue its own currency by 14%.

I don’t know if the hotel would have been willing to take Mexican pesos, but that’s unnecessary for a preliminary conclusion here. The 50% devaluation penalty for changing Mexican pesos in Peru is more than just statistically significant. It’s basically the Peruvian foreign exchange establishment saying, “You’re either stupid or a drug dealer.”

As it so happens, Peru is the largest producer of counterfeit US dollars in the world. Coincidence?

Suppose it is. An alternative conclusion here could be that the more convertible a country’s currency is on an international scale, the less it will charge you when you try changing more “exotic” currencies for the local money.

On that front, I’ve since checked so-called “street” FX rates for Mexican pesos in New York, London, Toronto and São Paulo. In every one of those markets, the implied USDMXN rate ranges from 13.0 to 14.5, with the 13.0 rate coming unexpectedly from Sao Paulo. That São Paulo’s rate for pesos is actually better than New York, Toronto or London kind of goes against any theory that greater convertibility reduces the peso spread.

Where this goes next:

It’s probably worth checking Mexican peso rates in Bogotá as another frame of reference, not just for another Latin American country, but another transit point of known narco-related money laundering in the hemisphere. I have no idea what to expect here but am looking into it.

Drunkeynesian, who aided me with the São Paulo data, additionally offers this comment:

“I like your thesis, and I would add to it a premium for the difficulty to convert Mexican pesos in another “liquid” currency. In a country where there are many Mexicans (or people traveling to Mexico), rates should be better, since if you’re a FX broker and you get some Mexican pesos you won’t have to wait long until you make some profit. If this is valid, this premium should grow with the local interest rate (to compensate for the opportunity cost).”

To be continued.

Charts Of The Day: The Bitcoin-Argentina Connection

On increasing chatter I’ve been hearing about bitcoin, pending devaluation in Argentina and the possible use of bitcoin to circumvent capital controls in Argentina, I had to look at the data.

Bitcoin, for those who aren’t aware, is a virtual currency that exists solely online (I have one previous discussion of it here). I’m not going to put up any links on its origins here because you can honestly just google it and find more than enough info, but the Wikipedia page gives a decent unbiased explanation.

And the operative word in that previous sentence is “unbiased”. Because there’s a rising political element to bitcoin that I really don’t want to get into, but to sum it up, there is a palpable libertarian bent to its propagation if you can sift through all the hype and speculation, good and bad, about its use.

Personally, I think it’s an interesting experiment and am wholly agnostic about its success or legitimacy, but love seeing regulators squirm at the implications of it. To borrow from former US Defense Secretary Donald Rumsfeld, the “unknown unknowns” here are nothing less than staggering.

Actually, here is an interesting profile of bitcoin’s user base for those of you already familiar with it.

And for those of you ready for the advanced class, this is a handy diagram:

2013.03.27.How a bitcoin transaction works

Anyway, on to the data.

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Infograph on the Global Black Market

Feel like getting lost in space? Check this out:

Black Market

Original source here.

Street Markets 101: Che Misterio Navigates Argentina’s Black Market for Dollars

2012.10.18.Che MisterioI am humbled, honored, grateful and excited to once again present Che Misterio in Argentina, who continues endangering his life for the purpose of shining a light on one of the blindest of economic blind spots in the world today: Argentina’s black market in foreign exchange. Che previously enlightened us in this space on the topics of Big Mac inflation and street level economics. The following was first published on Seeking Alpha under my name in a version suited to that publication’s editorial format, entitled, “How to Navigate Argentina’s Black Market in Foreign Exchange”. Below is the original as submitted by Che Misterio.

Ladies and gentlemen, Che Misterio:

Where Next for Argentina?

By Che Misterio

It is no secret that Argentina is now a two-tiered society. There are those with hard currency for whom the standard of living is quite cheap, and who are therefore immune to chronic inflation as their dollars and euros appreciate even quicker than prices. And then there are those without hard currency, and they live a precarious existence, to say the least: they cannot save their pesos, and even if they could it would be pointless as inflation rages on despite government insistence to the contrary; flagging confidence in the national currency and ever tighter regulations on foreign exchange means the only way to acquire a meaningful amount of hard currency is to pay an expensive premium on the black market.

I am grateful to belong in the first tier. I exchanged some euros recently on the black market, despite the terms being rather nebulous. For those unfamiliar with the street level workings of Argentina’s informal economy, this does not involve some suspicious character in dark sunglasses manning a backstreet stall flanked by security guards with black ear pieces protecting the stash. This was in an otherwise regulated bureau de change on a busy street, staffed by a man of average height, weight, complexion—what those in show business refer to as “the everyman look.”

The opening conversation went something like this:

“Hi, I’d like to change euros please”
“Where are you from?”
“We don’t change euros.”
“But Roberto changes euros, no?”
“Please wait here.”

“Roberto” was the code word a friend of mine had given me for signaling to this bureau de change that I wanted to transact at the black market rate. The man turned his back to me and knocked on the tinted glass of the door behind him. The door made a slight clicking sound as the magnetic lock loosened and the door opened. The man disappeared through the doorway and the door closed and locked, leaving me alone to wait. Two minutes later, the door re-opened, and he beckoned me to enter.

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Chart of the Day: The top 10 stock exchanges of 2012

This is actually going to be a few charts, because the first chart as you can see looks ridiculous:

Top 10 Frontier Market stock exchanges v DJIA

It should go without saying that there’s something very wrong with this picture, and indeed Miguel Octavio sums it up better than anyone I know here, but the long and short of it is that runaway inflation and an ass-headed capital controls regime has wildly overstated the “returns” in Venezuela. So let’s get rid of Venezuela and look at how the rest of these stack up against the Dow Jones Industrial Average. Here’s what we get:

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Miami restaurant accepts Argentine pesos as payment

Oh my. This is brilliant:

Pricing Death in Mexico

I cannot imagine more demonstrative evidence of the disconnect happening in the US-Mexico drug war conversation.

The following is a reprint of a rather mind-boggling email conversation I had a couple weeks ago. I’m generally in favor of transparency, but I’m also in favor of not shooting messengers or maligning someone’s reputation without just cause, and the folks with whom I had this conversation appear to me to be innocent bystanders who don’t seem to have a full view of what they’re about to get caught up in. I only held off on publishing this so as to minimize any potential blowback and to make sure this conversation was fully over. I’ve also redacted the names here of all correspondents aside from my own and the most that I will divulge about the other participants in this conversation for now is that they work for the research arm of a certain think tank in Washington D.C. Am I the only person who finds this one step short of…what exactly? Disconcerting? Insulting? Depressing? I don’t even know how to characterize this:

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On navigating the choppy waters of logistics, supply chain and customer relations

BEWARE: the less sexy something sounds, the more important it probably is. And so it is with the practical realities of what could easily pass as another of my Street Markets columns had I gotten to a certain Gerardo Mendoza first. In any event, Frontier Strategy Group reminds us of a reality that is sometimes easy to forget, and though the context here is the pharmaceutical industry, this could be anything really:

“Many pharmaceutical companies in Brazil have relied too heavily on distributors. The distributors have grown up to become indispensable partners. And as the market has grown, distributors have undergone a flurry of M&A activity amongst themselves. Now some pharmaceutical companies have to reach their end customers through distributors that have larger annual revenues than their clients, and they gain that revenue from a more diversified set of partnerships. This has led, and is continuing to lead, to a significant imbalance of power in the producer-distributor relationship. Continue reading

Brief review of Iran’s reserves position as the rial collapses

I’ve looked through a lot of the reports on Iran’s ongoing currency collapse and actually the only source I could find for a comprehensive visual on this was Business Insider, with the following chart that tracks the past 70 days:

By the way, the year “1391” apparently refers to the Persian calendar.

For the sake of comparison, here’s the past 90 days of NYMEX Texas light sweet, or as you city slickers like callin’ it, “dubya tee ah”: Continue reading

Update to the African Mobile Revolution

I don’t know how this has escaped me for so long, but apparently in June this year, Gallup and the Gates Foundation published a survey of 11 African nations that attempted to compare payment behavior across Sub-Saharan Africa.

There’s a lot of interesting data in here for those who want it. Here’s a sample:


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Street Markets 101: Ground Zero in Argentina

I’m very excited to introduce the second installment of Street Markets 101 today (go here for the first installment), submitted by a guest writer in Argentina who for professional and security reasons is unable to use a real name. I modified this to suit a different editorial format for publishing last week on Seeking Alpha under my name with the headline, “A Street Level View Of Argentina’s Economy, The Peso And ARGT” (see here for the Seeking Alpha version) , but I could not have done it without the help of the source. Today, I present the original unabridged version. Without further adieu:

Ground Zero in Argentina

By Che Misterio

The nationalization of YPF, the falsification of economic data, inflation, mounting street protests and the volatile commodity prices…. these are all fascinating points for the international community to examine in any assessment of the unfolding crisis in Argentina. What has failed to reach the general audience is the impact of the CFK government upon the layman, particularly beyond the confines of Buenos Aires.

I am an economist and live in the “provinces”. I am not Argentine, but am intrigued by the ability of the Argentines to adapt to economic mis-management effectively and creatively. I assume this is simply due to a century of practice. Consider the following impacts on the layman:
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How to Discern Africa’s Many Stages of Economic Development

Think tanks have never been known for their communicative prowess, and so it was hardly a surprise to find that McKinsey Global Institute’s “Africa at work: Job creation and inclusive growth” is actually more informative than the title suggests. Far more interesting than what the executive summary advertises on the report’s website are some interesting charts for thinking maybe a bit differently about how to categorize different countries across the continent. First up, take a few minutes to ruminate on this one:

The development stages are defined as such:

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Street Markets 101: How to fly from point A to point B in Nigeria

Welcome to what I hope to be an ongoing segment on this blog, called “Street Markets 101”. The idea behind this is to document the practical considerations of conducting business on the street level in underdeveloped countries. I’ve been thinking about this for a while now but the general inspiration behind it is reading a few too many research reports hyping [insert country, market, region or economy here] as the next big thing while completely ignoring the details of what it actually takes to make something happen when physically in certain countries. I could go on at length about transparency, rule of law, bureaucracy, unemployment, petty corruption and many more things, but I will stop this introduction here in the interest of keeping it succinct and hopefully forthcoming entries under this tag over time will speak for themselves. I’m working on sourcing other contributors to this effort, so if you live in or have plans to visit somewhere you think would be appropriate for this column, please contact me. In the meantime I thought I’d kick off the inaugural piece here myself.

I was in Nigeria for a project last month and on my third day there landed in the undesired but not unforeseen position of having to arrange a domestic flight from Lagos to Abuja for myself and my colleague, a white American man I shall henceforth refer to as Tommy Big Game. Following is the full play-by-play of what was required to successfully book passage for the two of us on a Monday morning flight in August following Ramadan: Continue reading

The most badass Brazil v Mexico economy chart you’ve ever seen

BBVA Research has just published the Mac Daddy of all Brazil-Mexico economic research charts. Go home, Poseurs:

I’m not sure what the general relationship is between length of time required to digest a graph versus usefulness of the graph, but at least in this case there’s a lot to think about. Here are some of the takeaways BBVA draws from this, not all of which I totally buy into:
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10 things to watch in Myanmar’s Politics of Economic Reform

The International Crisis Group’s recent report on Myanmar, “Myanmar: The Politics of Economic Reform”, provides more good overview material for those of you seriously considering entering this market. It’s fairly brief and I highly recommend downloading it and reading it in its entirety—you can basically finish this while waiting to board a flight. But if you’re too pressed for time, these are the main new ideas I took away from it:

1. Mind the export structure—this is an economy that is still very agrarian:

In fiscal 1938, four commodities – rice, minerals, timber and other agricultural products – accounted for nearly three quarters of the total. In the decade from 1990 to 1999, the picture was similar, with the same four commodities accounting for over 70 per cent by value (including border trade). After 1999, garments briefly became the top export item (30 per cent), until U.S. sanctions imposed in 2003 caused a major decline in the garment industry. The other significant recent change has been natural gas, which became the top export item in fiscal 2001 and has accounted for up to 40 per cent of the total in recent years.
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What Silk Road’s narcotics trading says about the FX market and capital controls

If you haven’t heard of Silk Road, the anonymous eBay-style marketplace that has quickly become a hub for controlled substances, read up on it herehere or here first. Otherwise, Nicholas Christin’s recent working paper, “Traveling the Silk Road: A measurement analysis of a large anonymous online marketplace”, opens no end of questions for just about any discipline under the sun. My concern is more foreign exchange related, so let’s get right to it. The table to the right shows the top 20 best-selling items available. I’m not too surprised that weed is the top seller here, but I am surprised that it doesn’t constitute a greater share of trade. Next up, still bird’s eye view, the top shipping origins and destinations:

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The Revolution Will Be Merchandised: In Memory of the Hungry Duck

The New York Times had a story out on the revival of the legendary Hungry Duck nightclub in Moscow. I’ve mentioned the Hungry Duck previously, but this paragraph buried near the bottom of the Times article caught my eye and has prompted me into a reaction:

Today, the Hungry Duck has been reincarnated as a monument to itself — a carefully considered multitiered sports bar with industrial-chic trappings. The toilets are covered with kitschy Soviet propaganda posters, and the toilet seats are chained to the walls. There is a gift shop.

Ah, the gift shop. Like CBGB’s, the Fillmore West, the Rolling Stones and other such zeit-culture snapshots of the moment, the Hungry Duck has entered the realm of what a friend of mine who works in the concert promotion business refers to as “the heritage tour”—one last gasp (grasp?) to essentially monetize what is now a ghost by any other name.

I thought this an appropriate time to add my own eyewitness account to the record. I went to the Hungry Duck a couple times in late 1997. If you do a simple Google search for “Hungry Duck” (note the photo search results in particular), that should give you enough of an idea of the obvious if you’re looking for that sort of account.

Otherwise, the truth is that period of my life is a bit fuzzy, but living in Russia was so far removed from the sort of life I had imagined for myself as a 23-year old that I felt compelled to keep a journal. I finally transferred this journal to my hard drive during a big housecleaning effort I went through last year after my father passed away. So I’ve just spent some time looking through some of those scribblings and it has brought back a couple memories. Other things I’ve written in there…well, I know it’s my writing, but I honestly just don’t remember some of this stuff. In any event, here’s what I can tell you about what’s in my notes and what little I actually remember of being in there:

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Cocaine Cowboys and the Modern Banking System

Jonathan Weil issues perhaps the strongest wake-up call so far in Bloomberg. Excerpting it really doesn’t do it justice, but here you go:

Let’s try out a novel idea: Banks that help drug cartels launder money and give cover to those tied to terrorism should be put out of business. Is that really so hard for everyone to agree on? Free markets have worked in the U.S. because we have the rule of law. It’s why so many investors from other countries want to do business here. When contracts are breached, courts can be accessed to enforce them. When individuals or companies commit crimes, they’re supposed to be prosecuted and punished. Continue reading