System D, and the importance of the relationship between Governments and Informal Markets

System D is the shadow, or informal market that is unregulated by governments.  The term, System D, comes from a French word that refers to the skill or ability to manage in any situation.  System D is a major economic phenomenon with a level of economic output that is, in global terms, second to only the United States.  In his book, Stealth of Nations, Robert Neuwirth estimated that the annual value of System D is about $10 trillion dollars, but the truly important number is that it employs about half of the world’s workers.

One example of a state needing System D is China.  China is noted for counterfeiting and piracy, and accounts for the vast majority of these activities in the world.  China relies on global trade, and is under great pressure from other countries and from important multi-national organizations and corporations.  China has shown state capacity in taking control of separatist regions and dismantling dissident groups, but is unlikely to apply the same pressure to counterfeiting.  Too many Chinese rely on counterfeiting operations for jobs, and also for cheap products like software, designer goods, and cell phones, for the Chinese government to strictly prohibit the activity without suffering massive economic consequences and social disorder.  In terms of cost-benefit analysis, the Chinese governments response is rational, it is better to risk upsetting relations with the world than threatening economic prosperity for so many citizens in a country where government legitimacy has increasingly come to depend on positive economic outcomes.

Another reason that states benefit from System D is its inherent innovative spirit allows it to create solutions to problems that states have proven to be ineffective at.  In Lagos, Nigeria, Neuwirth describes how effective System D has been in improving the living standards of the population.  In Lagos, about 70% of the working population is involved in informal market activity, and this sector has been vital to keeping the city running.  One example of this is technology, according to Neuwirth, with out System D traders, personal computers would not be present in the city, nor it be possible to find affordable cell phones, or services where people are able to pay to use a communal cell phone, in order to communicate.  Aside from technology, System D is even providing basics of life such as clean water.  In Lagos it is possible to buy pouches of clean water on the street, which provides business and employment, but also solves a life or death public health issue.

The relationship between informal markets and governments isn’t one sided, but symbiotic.  System D needs the state structure to succeed.  In China the same factories that build goods for the formal market during the day often build counterfeits of the same products at night.  Aside from that, many of the cheap items that are sold in street markets or by System D traders originate in China.  Many of these factories would not have been built with out state support, and all of the factories depend of state infrastructure such as roads and electrical grids to function.

System D is not a localized phenomenon, but operates in the same global economy as the formal system.  One example of this is the relationship between China and Africa.  In Neuwirth’s book he describes one Chinese town with an estimated population of over 100,000 African traders.  These African traders have come to China, because China has the infrastructure to manufacture the goods that can be sold cheaply in Africa. Some African countries lack things such as stable electric grids, so they depend of the cheap manufacturing power available in China and other places.  These African traders would not have been able to travel to China without the possession of a passport that entitled them to their initial tourist visa, nor would they be able to move their goods without the freedom of the international waterways protected from pirates, or without things like harbors to unload their goods.

It is clear that states and informal markets rely on each other for survival.  Finding the right balance can be difficult, but if it is not found can result in tragic results.  In North Korea, the totalitarian Communist state has tried to suppress all informal commerce, which has been partially responsible for the high rates in starvation in the country.  Only recently is the State starting to allow some small forms of informal farmers markets in realization of their necessity to make up for the decaying state food distribution system.  In Peru, there was the opposite problem, where the barrier to formal markets were so high a disproportionate number of people were forced into System D, which resulted in inefficient production and terrorism.  The relationship between the state and System D is a complex one that has to be considered seriously, its calibration is vital.

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About Leon Whyte

I'm a recent graduate of the Fletcher school of Law and Diplomacy. My interests include Pacific Asia and Security. I am looking for related opportunities.
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