INTERNATIONAL TRADE FLOWS FACING THE GLOBAL CREDIT CRUNCH: THE MULTILATERAL BARTER TRADE SYSTEM by Selina Markham

UNIVERSITA’ DEGLI STUDI DI TORINO Facoltà di Economia Corso di Laurea in Economia Aziendale

RELAZIONE DI LAUREA

INTERNATIONAL TRADE FLOWS FACING THE GLOBAL CREDIT CRUNCH: THE MULTILATERAL BARTER TRADE SYSTEM

Relatore: Francesca Silvia Rota Candidato: Vittorio Lavarino N°matricola: 721236

Anno accademico 2011/2012 INTERNATIONAL TRADE FLOWS FACING THE GLOBAL CREDIT CRUNCH: THE MULTILATERAL BARTER TRADE SYSTEM Introduction - 1. The global debt crisis and its geographies – 2. Debt crisis effects on international trade - 3. Innovative trade solutions: multilateral barter trade systems – 4. The case of study: Ormita Commerce Network Limited– 5. Conclusions – References

Introduction In 2008 the world fell into an economic, social, political and moral crisis; to which there has been little respite. This crisis has seen the neoliberal theories (which caused the crisis or, at least, did not avoid it) being strongly criticized. Perhaps as a consequence of this crisis, an even wider set of alternative models of production and trade finance have been developing worldwide. In this work I will focus on one of these models, the barter trade system, analyzing its features, opportunities and threats. I will also try and provide an answer to the question “is barter really a financial tool positioned appropriately for growth?”. In order to fully answer this question I review the perceived advantages of various barter systems and also provide a critical view on the background conditions required for the (best) implementation of this “alternative” economic model of trade.

CHAPTER 1 – The global debt crisis and its geographies The late-2000 financial crisis (known by some as the Global Financial Crisis (GFC) or the Great Recession) is considered by many economists to be the worst financial crisis since the 1930’s Great Depression. While the Great Depression was caused by an imbalance in the demand and production of certain kind of commodities, particularly those in the agricultural sector, the causes of the recent GFC are somewhat more complicated. One of the most obvious contributing factors was an aggressive U.S. monetary policy which created the lowest interest rates on 30-year record. The implication of this was that people began to borrow more when they would otherwise not have been able to afford to do so. In 2007 oil prices began a steep increase, causing a ripple through the already fragile economy. Subprime borrowers began defaulting and lenders immediately stopped lending, causing further market failures. Both the GFC and Great Depression resulted in the collapse of large financial institutions, the bailout of banks by national governments and a global stock market meltdown. It is indisputable that the GFC has resulted in ongoing economic crisis on a global scale. The effects of the Crisis have been varied but, for the most part, their origin broadly hinged on the unstable and, perhaps, ill-conceived derivatives and subprime mortgage markets. As a result of failures in these markets the U.S housing market began to falter, causing numerous foreclosures, evictions and prolonged unemployment. This, in turn, helped to contribute to the failure of key businesses, a decline in consumer wealth (estimated in trillions of U.S. dollars), and a significant reduction in economic activity, all of which culminated in the severe global economic recession of 2008 (2010, “Brookings-Financial Crisis”, www.wikipedia.org) Many causes for the financial crisis have been suggested, with varying weightings assigned by experts. The United States Senate issued the Levin-Coburn Report which found that "the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street”

(2011, “Senate Financial Crisis Report,2011”,www.wikipedia.org);

with many pundits attempting to make a grab for soaring financial returns regardless of rather obvious market flaws and their own inexperience in these new, unproven economic models. Further issues contributing to the Crisis are listed below: Some investment banks like Lehman Brothers invested heavily in the mortgage market, which they securitized and on-sold to third parties; As financially sound borrower numbers began to decline, the banks began to provide loans to less capable borrowers (the subprime), creating a significant platform of medium to high risk loans. Masking this activity, however, was an ongoing increase in house prices. This caused many lenders to believe that, on balance, these markets were not, in fact, risky at all. After all: the failure of a small percentage of these bad loans meant repossessing high-valued property; Banks borrowed excessive amounts of money, which they then lent against mortgage-backed assets. Many of these banks did not rely on incoming funds supplied by traditional savings and deposits, as they could borrow from other banks. In turn the borrowing banks would on-sell these loans as securities; with bad loans becoming the problem of whoever bought the securities; Many banks loaned far in excess of traditional balance-sheet-based lending rules using the excuse that this was done in order to securitize those loans; Collateralized Debt Obligations, or CDOs, (an even more complex form of securitization) were thought to spread the risk but were very complicated and often masked bad, and/or potentially over-leveraged, loans (and while things were good, no-one wanted bad news). (2010, Anup Shah,blog ,www.globalissues.org)

In order to understand the importance and associated risks of these financial instruments, it is worth analysing the leverage ratios trend from 2003 through to 2007, when the financial bubble burst (see Pic. 1). From 2004 to 2007 the top five U.S. investment banks significantly increased their financial leverage which exacerbated their vulnerabilities to even minor fluctuations in financial markets. These five institutions reported over $4.1 trillion in debt for fiscal year 2007; about 30% of USA nominal GDP for 2007. By the first quarter of 2007, cracks in the U.S. housing market were already becoming apparent as defaults on subprime mortgages rose to a seven-year high. When markets finally reached a tipping point in 2008 the resulting impact caused the liquidation of one of the markets biggest players, Lehman Brothers, which collapsed under a $619 billion debt burden, causing 26,000 people to loose their jobs. Lehman's filing was the largest bankruptcy in history, as its assets far surpassed previous bankrupt giants such as WorldCom and Enron. This watershed event helped contribute to the October 2008 meltdown, where world markets collectively lost almost $10 trillion dollars of market capitalization in a single month. Subsequent to this, it immediately became obvious that Bear Stearns and Merrill Lynch were also in deep financial trouble, resulting in their rapid disposal at fire-sale prices; while Goldman Sachs and Morgan Stanley became commercial banks, subjecting them to more stringent regulation and oversight. With the exception of Lehman, these companies “survived” only because of government intervention on a scale never before seen in history. (Labaton, Stephen (October 3, 2008))

Pic. 1 – Leverage ratios for major investment banks (source: Company Annual Reports, SEC)

Because of the critical role banks play in the market systems, when the larger banks show signs of crisis, it is not just the local economy that suffers. Because todays markets rely on a complex mixture of multinational, regional and local corporations, competition in pricing (made easy through modern systems of communications and global procurement

platforms) and commodity pricing arbitrage, a credit crunch can ripple through entire (real) economies very quickly, turning a regional financial crisis into a global one. Although the GFC was a global problem it affected different countries in different ways, with the differences in the resulting impact depending on the level of development, industrialization and political stability of a particular country and/or economic trade block: -

South East Asia and the Pacific: The impact of the economic crisis on the financial sectors of SouthEast Asia and the Pacific Islands has been less severe than in some other regions. There are four main reasons for this: first, most insolvent banks in the region were liquidated or reconstructed in earlier crisis periods (e.g. the Asian financial crisis of 1997/98); second, the regions financial sectors had not yet incorporated the more highly complex “leveraged” financial tools into their core business models; third, the previous crisis had brought about reforms in financial market regulation and provided for greater supervision and more prudent risk management strategies. Finally, only a handful of financial institutions in these markets had any significant amount of direct investment and exposure to American financial markets. (Green, King and Miller-Dawkins)

African Continent: It was initially hoped that African economies, immune from the direct subprime meltdown, may emerge relatively unscathed. Because of Africa’s relatively weak global linkages and poorly developed investment market most of the region was spared the worst effects of the crisis. The exception to this rule was South Africa who entered the crisis period burdened with a large current account deficit, high interest rates and high levels of inflation. Even within nations and sectors the impacts have varied greatly. In places where the headline macroeconomic figures suggest a limited impact so far, there are pockets of individuals and communities who are reeling from the consequences of the crisis. Although Africa is not a major recipient of foreign direct investment or private capital flows compared with some other regions of the world, the crisis has had significant effects in some cases. (Green, King and Miller-Dawkins, 2010)

Latin America and Caribbean: Mexico, Central America and the Caribbean have been worst hit, due in large part to their closer ties to the recession-hit US economy. In general the crisis has accelerated the shift in the economic and political centre of gravity across Latin America towards the South, consolidating the rise of Brazil as the preeminent regional power. This North-South divide is also apparent within Mexico, whose northern states are more dependent on the US economy for manufacturing trade and investment and so have been harder hit by the recession. A number of countries in the region have come together in the form of the Latin American Pacific Arc and are hoping to improve trade and investment with Asia. Diversifying in this way might be good for the region and help provide some stability against future crises. For the moment, the integration is going ahead, despite concerns about the financial crisis. (Duncan Green, Richard King, May-Miller Dawkins)

Europe: in Europe a number of major financial institutions failed while others needed rescuing. In Iceland, where the economy was very dependent on the finance sector, economic problems have hit them hard. The banking system virtually collapsed and the government had to borrow from the IMF and other neighbors to try and rescue the economy. In the end, public dissatisfaction at the way the government was handling the crisis caused the fall of the Iceland government. European countries seem to have failed to come up with a united response to the crisis with many countries opting to try to implement various solutions; for instance, some nations have stepped in to nationalize or, in some way, attempt to provide assurance for people. In Europe, starting with Britain, a number of nations decided to nationalize, or part-nationalize, some failing banks to try and restore confidence. In many cases this has included guaranteeing 100% of people’s savings or helping broker deals between large banks to ensure there isn’t a failure.

The worldwide crisis has required a country-led response. The role that banking rules and regulations, core social spending and investment can play in the crisis response has also varied considerably. An effective international response does not mean that all countries have taken identical actions. Governments have attempted a variety of market interventions to try and achieve the best possible outcomes for their respective countries. Developing countries and economies in transition are expected to continue to stoke the engine of the world economy (Pic. 2), but their growth in 2012-2013 will be well below the pace achieved in 2010 and 2011. Even though economic ties among developing countries have strengthened, these countries remain vulnerable to economic conditions in the developed economies. From the second quarter of 2011, economic growth in most developing countries and economies in transition started to slow notably. Among the major developing countries, growth in China and India is expected to remain robust: growth in China is projected to slow to below 9 per cent in 2012-2013, while India is expected to grow by between 7.7 and 7.9 per cent. Brazil and Mexico are expected to suffer a more visible economic slowdown. Low-income countries have also seen a slowdown, albeit a mild one. In per capita terms, income growth slowed from 3.8 per cent in 2010 to 3.5 per cent in 2011, but despite the global slowdown, the poorer countries may see average income growth at or slightly above this rate in 2012 and 2013. The same holds for average growth among the United Nations category of the least developed countries (LDCs). Even so, growth is expected to remain below potential in most of these economies. (Unctad, Outlook 2012) The economic woes in many developed economies are a major factor in the global slowdown. Most developed economies are suffering from predicaments remnant of the global financial crisis. Growth in the United States slowed notably in 2011. Gross domestic product (GDP) growth is expected to weaken further in 2012 and, even under the baseline assumptions, a mild contraction is possible during part of the year. The country was on the verge of defaulting on its debt obligations in August of 2011 because of political deadlock. The uncertain prospects are exacerbating the fragility of the financial sector, causing lending to businesses and consumers to remain anaemic. Growth in the euro area has slowed considerably since the beginning of 2011, and the collapse in confidence evidenced by a wide variety of leading indicators and measures of economic sentiment suggests a further slowing ahead, perhaps to stagnation by the end of 2011 and into early 2012. Japan fell into another recession in the first half of 2011, resulting largely, but not exclusively, from the disasters caused by the March earthquake. While post-quake reconstruction is expected to lift GDP growth in Japan to above potential, to about 2 per cent per year, in the coming two years, risks remain on the downside. Failure of policymakers, especially in Europe and the United States, to address the jobs crisis and prevent sovereign debt distress and financial sector fragility from escalating, poses the most acute risk for the global economy in the outlook for 2012-2013, with a renewed global recession being a distinct possibility. The developed economies are on the brink of a downward spiral driven by four weaknesses that mutually reinforce each other: sovereign debt distress, fragile banking sectors, weak aggregate demand (associated with high unemployment) and policy paralysis caused by political gridlock and institutional deficiencies. These weaknesses are already present, but a further worsening of one of them could set off a vicious circle leading to severe financial turmoil and an economic downturn. This would also seriously affect emerging markets and other developing countries through trade and financial channels. Pic. 2 (Source: UNCTAD)

World Bank President Robert Zoellick noted that â&#x20AC;&#x153;The developing world is becoming the driver of the global economy. Led by emerging markets, developing countries now account for half of global growth and are leading the recovery in (2010, Anup Shah,blog world trade.â&#x20AC;? ,www.globalissues.org). He also acknowledged that as

economic power has shifted, a multi-polar world economy is emerging. Current growth trends in the developing world means the collective size of developing-country economies would surpass that of developed-country economies in 2015, the Bank estimates. The Bank believes the following factors help to explain this: 1. Faster technological learning 2. Larger middle-classes 3. High commodity prices 4. Healthier balance sheets that will allow borrowing for infrastructure investments 5. More South-South commercial integration. (Anup Shah, December 11, 2010)

CHAPTER 2 â&#x20AC;&#x201C; Debt Crisis Effects on International Trade 2.1 - Services Trade In 2010, services trade returned to positive growth in all regions and groups of countries, especially developing countries, the least developed amongst them in particular. Nonetheless, the level of world trade in services has not yet fully recovered from the downturn caused by the global financial crisis, mainly because of the sluggish recovery of such trade in the developed countries and economies in transition. In all regions, growth in services trade is lagging behind its pre-crisis pace (figure 3A and B). Unlike merchandise trade, however, services trade has shown less sensitivity to the global demand shock triggered by the financial crisis. As a consequence, the rebound in trade in services was also less pronounced during the recovery from the crisis. International tourism services experienced similar patterns. As a result of diverging growth, the share of developing countries in world services trade has increased notably, essentially at the expense of developed countries. Despite fast growth of their tradable services industry, the share of LDCs has remained almost constant since their initial level of services trade was very low. The major services exporters among developing and transition economies further improved their overall ranking in the worldâ&#x20AC;&#x2122;s top 10 between 2006 and 2010. China, which is both the largest importer and exporter of services among developing countries and transition economies, moved from the eighth to the fourth position in terms of exports, and from the sixth to the third position in terms of imports. In the top 10 for developing countries and economies in transition, 8 of the top exporters also rank among the top 10 importers. While their share in world trade in services is growing, most developing countries and economies in transition continue to run a deficit on their internationally traded services balance. (Unctad: w.e.s.p. 2012) Pic. 3: Import/Export of services, worldwide; source: UN/DESA.

2.2 - Merchandise/Manufacturing Trade

World trade continued to recover in 2011, albeit at a much slower pace than in 2010. After a strong rebound of more than 14 per cent in 2010, the volume of world exports in goods decelerated visibly, to 7 per cent, in 2011. The level of total world exports had fully recovered to its pre-crisis peak by the end of 2010, but it is estimated to be still below the long-term trend level by the end of 2011. As has been the case with the recovery of WGP, developing countries, particularly Asian economies with large shares in the trade of manufactured goods, led the recovery. While the level of trade in volume terms has already far surpassed the pre-crisis peak for developing countries as a group, the trade volume for developed economies has yet to recover fully from the global crisis. Commodity-exporting developing countries experienced a strong recovery in the value of their exports in the first half of 2011, owing to the upturn in commodity prices, but saw little growth of export volumes. Some of the value gains were lost again in the second half of the year with the downturn in key commodity prices; the volume growth of world trade is expected to moderate to about 5.0 per cent in 2012-2013. The dichotomy between a robust growth in trade in emerging economies and a weak one in developed economies will continue. (Unctad, 2012) Looking at the graphic on the left (Pic.4), it is simple to notice that from fifteen years (and over) the world trade balance has changed: the role of the North in the global economy is being depreciated both in NorthNorth exchanges, both in North-South; conversely the South is galloping, driving the global shares with its huge quantity of commodities and human capital, and probably because, in South countries, the financialization has not reached the same level as the North one, having the productivity the main role in those economies. Developing countries have got growing potentials that in developed countries are already (probably) exceeded, starting with the Industrial Revolution and exhausted by globalization and the enormous utilization of finance to the detriment of real economy, productivity and the growth of the added values belong to the industrial sector. Governments all over the world have got the task of understanding weaknesses of their economies and make reforms and structural changes with the aim of creating a more solid economic basis for the future, without forgetting risks and problems due to a huge financializated world and making the real economy the main asset of the growth: services sector, ICT, banking and all about technologies are fundamental in a countryâ&#x20AC;&#x2122;s growth, but what could help developed and developing countries to start (again) their growth, giving the possibility to exchange in a better way their goods or services? Can the barter (in all its aspects) be one of the â&#x20AC;&#x153;alternativeâ&#x20AC;? way to overcome this stagnation period? Pic.4: Source UNCTAD

CHAPTER 3- Innovative Trade Solutions: Multilateral Barter Trade System During the period of the Great Depression total production fell by approximately 60% and, on average, world market prices fell by 30%. Prices for certain agricultural products fell much further. Agrarian countries, therefore, were hardest hit by the crisis. As money supplies shrank, prices dropped and the amount of cash in circulation rapidly decreased. During these periods alternative mechanisms to overcome economic stagnation can be found to evolve.

In order to overcome the crisis, free global trade was partially replaced by bilateral trade agreements and governmental foreign exchange controls. Most of the countries involved in this economic crunch opted for an autarchy economic model, free of dependence on imports, but linked themselves with volunteer agreements. Economic autarchy free of dependence on imports was sought by numerous countries. Nevertheless all these measures only accelerated the downward spiral of world trade since they did not adequately address many of the issues facing the world trade markets at the time. Perhaps one of the best documented and more sophisticated responses in implementing an autonomous multilateral barter structure came from Switzerland. In 1934 a small group of business owners, led by Werner Zimmermann and Paul Enz, formed the Wirtschaftsring-Genossenschaft (WIR) 1; meaning “economic circle co-operative” in Swiss. This new self-help organisation was designed as a stopgap to replace the missing national currency. The formation of the WIR came a time when traditional forms of lending became tightly controlled, consumers were reluctant to part with cash and thousands of small and medium-sized enterprises (SMEs) struggled to cope with the consequences of the great global depression. The WIR provided a mechanism to monetise goods and services by allowing participants to purchase from one another without the need of national currency. One WIR was the equivalent of one Swiss Franc but it came with no interest and was issued under a “mutual credit” type of arrangement, with members lending WIR to one another. These WIR, in turn, were repaid by the borrowers in their own goods and services. The ability for communities to autonomously increase the money supply during periods of shortage in the national currency. Many of these currencies, founded at the depths of the greatest global economic crisis of modern times.

The WIR Bank in Detail The Swiss WIR Bank (or Wirtschaftsring) was established by Werner Zimmermann and Paul Enz, supporters of the free market theories of Silvio Gessel, and well known at the time for their alternative economic theories. During the Great Depression Switzerland was affected later, and to a lesser extent, than many of the surrounding countries - with the most notable impact being on the merchandise trade deficit widening between 1930 and 1933. By 1934 the country found itself mired in deep recession. It was against this backdrop that, in October 1934, the WIR Economic Circle Cooperative was thus formed, by Zimmerman and Enz together with 15 founding members and a startup capital of SFr 42,000 (Studer, 1998). Operating within the framework of a solidarity-oriented self-help organization, members of the WIR Economic Circle Cooperative were expected to draw as much as possible on other members to cover their goods-and-services needs, in order to trigger additional turnover within the Circle. These exchanges were mediated by means of interest-free clearing deposits initially created by cash payment (1 SFr for 1 WIR franc) or sale of goods, and, before long, by the issuance of WIR loans as well. The WIR account also functioned as a kind of entry ticket into the solidarity activities of WIR users. Many small-to-medium businesses, but also public servants, farmers, and even a few large enterprises spontaneously bought WIR deposits for cash in order to participate in the WIR economic circuit. For them, a WIR deposit of one franc was worth more than a cash franc. (Studer, 1998) In the perspective of both global and regional development this new trade-circulatory system has been a fundamental innovation since it allows company owners: to reach that level of exchanges and benefits necessary to restart the local economy; to create new relationships with the members of the organisation; 1

Here the acronym WIR is referred to the Swiss Bank and the WIR currency technique used in Swiss Economy. It is not the so-called “World Investment Report” by UNCTAD Organization.

to decrease the huge number of unemployed people; and to encourage firms to supply themselves with the products or services that they needed, without paying in cash. This complementary (and not alternative) circulation, should be seen as a sort of barter theory, adjusted for the Swiss Economy, in which the goods and services exchange help filling the gaps created from the ordinary SFr’s circulation. During the following decades from the start-up of the circulation transactions denominated in WIR rapidly, surpassing ten million francs in 1952 and 50 million francs in 1958 through to two billion francs in 1991. More specifically – with the introduction in the 1995 of the so-called “Combi-Card” a dual magnetic stripe plastic card – the Circle started the process to become, for all intents and purposes, a “bank” (Stodder,1998). In 1997 the interest-bearing cash account was introduced as the first classical bank product available through WIR, completing the organization’s transition to true bank status. In the end, in 1998 an exceptionally attractive savings account option granting minimum 4% interest was introduced. Additionally, the Economic Circle changed its company name, henceforth representing itself externally as the WIR BANK. Today the WIR maintains its status both as a bank and as a form of complementary currency, with accounts denominated in “WIR” money filling the gaps created by the natural economic trend (recession- growth) and fear that the WIR could replace the SFr have abated.

So how does the WIR work? The response is quite simple: when a business joins the WIR and can sells its products and/or services inside the circuit it receives a “credit” (an increase in the balance of its WIRdenominated account) equal to the amount of the sale. When the same business purchases something, it is “debited” (a decreasing of its WIR-denominated account) equal to the amount of the purchase. Advantages of WIR circulation: -

Provides a stable customer base: Members are motivated to look to buy from firms that accept WIR money. This is because purchases paid in WIR are, in essence, paid out of new sales generated within the network. Reduces risks in failures of government monetary policy: cures for recessions can contribute to increases in inflation and restrictions in access to credit. Credit in the WIR, however, is based upon a combination of existing assets and future production based on market need within the WIR-community itself. Creates a competitive edge for smaller businesses and the middle class: The WIR does not allow everyone to join. Because large companies are not allowed to join the monetary benefits are retained within the small and medium sized Swiss companies who, through their participation in the WIR, receive a competitive advantage by being able to offer prices for goods and services payable in an alternative currency (multilateral barter) which bigger companies cannot match. Makes illiquid assets liquid: Purchasing power is obtained through the generation of new sales rather than existing cash in hand. The WIR enables participants the ability to fund purchases using these previously illiquid, or devaluing, assets at a reasonable market value. Reduces the cost of borrowing: During times of economic hardship cash loans can be costly to procure. Just as with traditional bank lending, WIR-denominated loans are backed against fixed assets however, unlike a bank. Keep the labor market leveling good order: Provides employers the ability to retain and/or hire employees during times of economic hardship through the reduction in the need for “cash” for other expenses. Creates more opportunities for new entrepreneurs: By reducing the amount of working capital needed to start up and access to a “captive” market audience.

Social impacts: reduces many of the social problems experienced by the middle-to-low classes during times of economic turmoil by reducing market stagnation through the ability to trade regardless of access to traditional forms of finance.

The A.C.A. (American Countertrade Association) report (A.C.A., 1999) has established that barter is a very important tool for countries that are suffering a recession period, yet with some limits and cautions such as: -

barter is always a useful “kick-starter” for a slow economy, helping a country exploit all available capacities to fund sales, recoup foreign expenditures and stimulate local employment - all at the highest possible margins; barter is not “the solution”: and it must be linked to political and institutional economic measures.

With this in mind, is it possible to think that barter in all forms could help governments, firms, companies, product producers and service-suppliers, worldwide, to overcome difficult economic periods. In essence: by bartering what you have for what you need – you are eliminating the burden to use cash and you are putting more “alternative” currency in circulation, thereby increasing purchasing power for everyone. This is an attractive option when cash is in short supply. Some statistical information about barter activity all over the world gives an idea of the centrality of this alternative method of finance: - According to the US Department of Commerce “Barter in one form or another, accounts for nearly 30 percent of the world’s total business” (Department of Commerce, 2004); - The National Association of Trade Exchanges, The International Journal of Hospitality Management and the Michigan State University together claim that approximately 70% of all Fortune 500 companies engage in barter (Schmidgall, R.S., Damitio, J.W. (1999)); - Approximately 65% of all New York Stock Exchange listed companies engage in excess capacity / barter trade ((2004)., Annual Report, National Association of Trade Exchanges); - In 1994, on the 60th anniversary of the Swiss WIR excess capacity trade system, annual volume in reached 2.5 billion Swiss Francs (over $2 billion US dollars) and boasted 80,000 members nationally. The WIR also enjoys a membership base of nearly 20% of all Swiss businesses. (Valentini, E. (2003)) ; (Lietaer, B & Belgin, S. (2004)). Since mid 1970’s, as a consequence of increasing financialization and globalization of the markets together with dramatic improvements in ICT, countries have developed sophisticated economic tools designed to support trade. These changes have also affected the structure and way of trade in the barter industry. Traditional barter was the precursor of both fiat and commodity backed money and involved the direct exchange of goods or services for one another. Although more complex to settle, multilateral barter has become an increasingly viable method to conduct trades, as it allows transactions that would not be possible with bilateral barter. In multilateral barter, instead, exchanges do not need to be neither reciprocal nor direct. Rather three, four, five and six-way transactions are possible at the same time. Transactions can also take place at different times so no single supplier needs to swap their product or service immediately but can do it over a period of time; the value of the deal, in fact, is recorded centrally in a database and the process is managed by a commerce network or barter exchange organization. Nearly every business faces the problem of cash flow management. Issues that contribute to the need for cash flow management include highly competitive markets where constant advertising is a mandate, increasing business expenditures to

attract consumer attention, planned or unplanned downtime, perishable inventory and the necessity of discounting inventory. Modern, multilateral barter helps businesses alleviate the affect of these problems. With advancements in computer technology, the concept of a bartering system emerged as a means by which business-to-business barter could take place between many businesses simultaneously, greatly increasing the benefits of trading without cash. In the cash market many businesses experience times of excess capacity (e.g. unsold appointments, empty rooms, slow moving stock) then they aren't operating at 100% efficiency. This can be attributed to a lack of capital in the market caused by constrictions in monetary supply and increased, outside, competition. In a barter-exchange marketplace demand for a business is dependent, not on access to money, but on the quality of the goods and/or services on offer. This is because value is created through trading needed products and/or services without the use of cash. Because of the selective nature of the barter exchange every purchase made is matched against a new sale of the businesses own products or services – thereby ensuring growth. Therefore, in a mutual credit barter network such as the WIR; goods and services, ultimately pay for other goods and services, and money (which is just an intermediary device in the exchange of assets) is dispensed with. According to a recent study, companies that actively barter can do as much as 5-10% of their business annually through trades (Schact J., 2004).

CHAPTER 4 - Case of Study: Ormita Commerce Network Limited Originally founded in 2001 in New Zealand as a software provider to the financial services sector, Ormita Commerce Network Limited (“Ormita”) is a multilateral barter exchange organisation with whom I did a summer internship at their Italy offices (headquartered in Biella). Today Ormita has offices in Australia, Canada, China, Egypt, Finland, Germany, Greece, Hong Kong, India, Indonesia, Iran, Italy, South Korea, Macau, Mexico, New Zealand, Pakistan, Romania, Singapore, South Korea, Sweden, Turkey, the United States of America and Zambia. In 2007 the founders of Ormita undertook a reform in their business and acquired interests in several barter organizations, many of which they were already supplying hosted software systems to. By merging geographically disparate systems under one unified set of operating procedures, the organisers envisaged that they could facilitate trade between cash poor, commodity rich areas on a much larger, global, scale. Just as with the WIR, Ormita appears to have come about at the right time as it allows participants the ability to acquire goods and services without dipping into their existing (and often dwindling) cash reserves. Also like the WIR, Ormita provides participants a mechanism for the indirect exchange of goods and services through the provision of a private accounting and credit control system of multilateral barter. Picture 5– Example of debts and credits in the Ormita system, classified according to some relevant sectors, 2011.

Member companies buy and sell products and services to each other using an internal currency known as barter “dollars”. Participants in the network earn barter “dollars” (instead of cash) when they sell and these “dollars” are deposited into their account. They then have the ability to purchase goods and services from other participants

using their “dollars”. One barter “dollar” is the equivalent to the national currency of the member’s country.As a condition of joining Ormita, new members are asked to create a list of wants and needs which they seek from other participants on a non-cash (barter) basis. These wants are representative of current, or planned, cash expenses that the member may incur in the normal course of their business. Ormita aims to meet some, or all, of these needs from its existing membership base. In order to fund their desired purchases from the network, each member is also asked to provide a list of products or services that they can provide in kind. A unique factor of this type of economic activity is that lines of credit are not based on traditional lending criteria and instead rely on a basic supply and demand type model. Depending on the demand for certain offers by existing participants, a new member will either be allocated an interest-free line of credit or be advised that they must sell first and buy later. Ormita performs the function of “brokering” deals and offsetting transaction values between two or more participants. When one member is in debt, Ormita markets its goods or services to any member who is in credit who needs those goods or services. As a result, the sum of all members accounts (see Figure 5) is always zero, although some are in credit and others are in debt. This type of accounting provides an effective form of collateralization for participants as those in debt are likely to be producers of the most highly desirable products needed by the most number of members in the network. Because it is a zero-sum system of accounting it is also not seen as a traditional form of banking, even though it meets many of the criteria of a modern financial system through the management of loans (interest free), and the recording of sales and purchases in the equivalent of the national currency. The Ormita network appears to be largely product-focused, although it is possible to exchange almost every type of good or service. Clients come from private and commercial firms but membership also includes public institutions and national governments. Research has found that participants in the Ormita network enjoy two major benefits:

Firstly: Ormita monetises capacity in areas which are asset rich but cash poor. When credit is hard to come by, surplus capacities are often found wanting of a market. On the other hand, buyers for those products may exist but be unable to afford traditional forms of payment. If both buyer and seller suffer from excess capacity (or able to generate new sales at a lower incremental cost) then a trade can be made without a great deal of cash and the needs of both participants can be met. Secondly: It allows the participant to receive the highest possible price for their offering by allowing trade across economies on a global scale while simultaneously reducing the cost of customer acquisition and risk collateralisation. In one market a product may suffer from low demand or high competition, and therefore low prices, however there may be other markets where the consumer price is higher. In a standard cash (or credit) scenario the cost of customer acquisition in these new and/or emerging markets can be quite high; often requiring investment in market research, consumer education, brand building, ongoing support and a large element of risk. Apparently profitable margins can also be cannibalized through resellers or the requirement to establish local sales representatives. Ormita has also been used by a handful of national governments as an alternative method of acquiring international goods and services. These purchases are seen to come at a lower cost when compared to those requiring bank funding, use of precious foreign exchange reserves and/or the manipulation of foreign exchange rates. In my perspective this feature is very important in the case of least developed and marginalized countries, many of whom are excluded from large trade agreements and who would typically borrow at interest rates far in excess of those provided to wealthier nations. Governments may also consider utilizing this method of trade to reduce the need for foreign exchange to purchase products and services by balancing these against new sales of products from their own countries. This, in turn, may also be seen to reduce unemployment and broaden export markets for locally produced goods and services. Using its globalised model, Ormita tries to create a dense trade network in each country where it is located, but customising it on the basis of the host national economy, i.e. : its development level, the presence of specialized products or services and many other features.

Table 1 – Number of Ormita’s clients and trade volume ($) per countries, 2011. (Source: Ormita International) Standard Media Government All categories Clients Late in development countries Nigeria Zambia

128

Trade volume -

Clients

Trade volume -

Clients

Trade volume -

128

Trade volume -

0 128

0 0

Developing countries

17.790

145.084.325

920

72.250.757

932

703.608.473

19.642

920.943.555

China(*) Egypt India(*) Indonesia Middle East Mexico(*) Pakistan Philippines(*) Poland Romania South Africa(*) Thailand Turkey(*)

15 0 2867 34 0 7218 0 0 3974 0 0 0 3682

242.709 122.426.324 1.683.419 11.953.532 6.218.472 2.559.868

283 0 438 0 0 92 0 0 39 0 0 23 45

15.733.459 48.544.215 3.906.401 3.856.742 39.370 170.571

418 0 386 0 3 18 1 1 63 0 3 34 5

10.780.753 75.646.747 132.558.406 34.289.736 87.253.685 360.214.212 540.190 13.574 1.181.651 1.129.519

716 0 3691 34 3 7328 1 1 4076 0 3 57 3732

26.756.921 246.617.286 1.683.419 132.558.406 50.149.669 87.253.685 360.214.212 10.615.404 13.574 1.221.020 3.859.959

Developed countries

87.981

694.320.885

1.396

37.907.167

1.001

262.356.414

90.378

994.584.467

Australia Canada Finlad Germany Greece Hong Kong Italy New Zealand South Korea Sweden United States

22534 19815 0 0 0 198 47 3521 0 8 41858

189.946.973 64.349.213 5.637.155 46.124.955 388.262.590

10 347 0 0 0 0 3 63 0 0 973

2.024.948 20.208.057 7.303.524 8.370.637

424 27 0 0 23 49 0 7 0 0 471

204.875.998 3.937.762 492.524 1.654.676 1.260.775 50.134.679

22968 20189 0 0 23 247 50 3591 0 8 43302

396.847.919 88.495.032 492.524 7.291.831 54.689.255 446.767.906

Total

110.14 1.915.528.0 8 22 (*) countries that World Bank defined as “developing countries”, but considered “newly industrialized” by IMF (International Monetary Fund). Table 2 – Number of Ormita’s clients and trade volume ($) per countries, 2008. (Source: Ormita International) Standard Media Government All categories Clients Late in countries Nigeria Zambia

development

Developing countries China(*) Egypt

Clients

Trade volume -

Clients

Trade volume -

0 0 5.162 0 0

Clients

Trade volume -

0 0

3.819.585 -

0 0 0

2.613.496 -

124 0 18

168.755.244 1.315.052

5.286 0 18

175.188.324 -

India(*) Indonesia Middle East Mexico(*) Pakistan Philippines(*) Poland Romania South Africa(*) Thailand Turkey(*)

0 0 0 2753 0 0 598 0 0 426 1385

2.279.584 468.623 175.263 896.114

0 0 0 0 0 0 0 0 0 0 0

1.702.074 808.149 67.773 35.500

0 1 3 15 0 1 12 0 3 68 3

678.651 54.292.083 10.179.766 98.277.362 70.715 31.254 3.362.521 547.840

0 1 3 2768 0 1 610 0 3 494 1388

678.651 54.292.083 14.161.424 98.277.362 1.347.487 31.254 3.605.557 1.479.454

Developed countries Australia Canada Finlad Germany Greece Hong Kong Italy New Zealand South Korea Sweden United States

12.818 1218 0 0 894 0 0 0 2153 0 0 8553

51.893.805 9.161.674 754.281 14.673.504 27.304.347

545 3 0 0 16 0 0 0 33 0 0 493

6.777.552 777.010 426.001 3.125.573 2.448.968

387 137 0 0 86 0 0 0 7 0 0 157

53.614.807 47.844.131 558.911 461.307 4.750.458

13.750 1358 0 0 996 0 0 0 2193 0 0 9203

112.286.164 57.782.815 1.730.193 18.260.384 34.503.773

Total 19.036 287.474.488 (*) countries that World Bank defined as “developing countries”, but considered “newly industrialized” by IMF (International Monetary Fund).

These two tables describe the geography of Ormita’s clients (number of firms, companies, institutions and governments that enjoy access to the Ormita network) and trade volumes (exchanges value all over the world) in different moments: year 2008 and year 2011. Starting in 2008 with 19.036 clients, Ormita has in fact reached, three years later, 110.148 clients with a positive variation of over 478%, while the trade volumes augmented from $ 287.474.488 to $ 1.915.528.022 (with a variation of + 566%). However, these positive results have not been homogeneously distributed from a geographic point of view. Developing Countries: The most important positive variation in the number of clients has been obtained in India: from 0 to 3.691 clients who have joined Ormita’s network, from 2008 to 2011. Following we find Poland, with +568%, but also China with a growth of 716 clients, starting from zero in 2008. Analyzing the composition of clients in developing countries, we can notice that more of 90% are companies/firms (industry in general), but with a slight increase of governments barter activity: this can be seen as a potential consequence of bilateral development agreements between industrialized and developing countries, with the majority of transactions from the developing countries being significantly larger in value on a per-member basis than those in the developed countries. In 2008 the weight of Developing countries in the global exchanges was about 28%, in 2011 it was 18%: a 10% loss which has coincided with the acceleration of industrialized country’s trade volumes. This loss may be put in perspective as more industrialized nations have continued to cut back on imports as access to local consumers has decreased over time. As to trade volumes, the 56% of $ 175.188.324 (2008), is composed by Philippines barter activity, followed by Middle East with about the 31%. During 2011 the composition of $ 920.943.555 trade volume has been more homogeneous, with a 40% of Philippines, followed by India with about 27% and Middle East has decreased up to 13%. It’s very important to underline that in 2008 more of 96% of developing countries trade volume was due to Governments/Institutional activity, while during 2011 has decreased on 76%, with a continuous growth of business barter sector. The reason for this may be two-fold. Firstly: Governments using the system primarily procure goods and services from businesses within the network. The trade

volume directed towards these businesses must therefore increase accordingly. As Governments are often required to sell first and have long purchasing and fulfillment cycles it may also be possible that the reduction in trade volumes in later years simply represents them having fulfilled part, or all, of their selling requirements and are now in the buying cycle of the transaction. Secondly: Several of the government projects investigated appeared to be short-term in nature and were finalized sometime in the 2008 and 2011 period. Overall, however, it should be noted that developing countries are losing power and weight in trade volume, starting from a 60% of global trade volume in 2008, decreasing at 48% in 2011. Developed Countries: data about developed countries seem to be conflicting, compared to the global economic outlook of these years; from 2008 to 2011 we find a positive increase of about 557% in terms of clients, which ran to be 90.378 in 2011, starting from 13.750 in 2008. The demonstration of this data, is represented by the percentage of clients in developed countries related to the total clients (all over the world) that sign an increase of about 10% in 3 years, settled in 82% of global clients. Mexico represents the highest growth rate of the developing countries while the USA holds the key position in the developed economical category with a valuable 67% of developed country’s clients and 48% of global number of clients in 2008, and 48% of developed country’s clients (39% globally), in 2011. Canada’s client base was subject to huge levels of growth, moving to 20.189 clients in 2011, from zero in 2008; Australia instead, probably because Ormita started their business there, has got a very strong barter policy, with a high development level, both for number of clients and trade volume. In developed countries the growth of trade volume has been wider than developing one: in fact, the percentage of the variation is settled in about +786%, in just 3 years, with a growth rate (if hypothetically data keep this trend) of more than +200% every year. In 2011, the amount is about $ 1bn, with the 45% of that produced just by USA, whereas in 2008 Australia reached 51% of barter activity in developed countries. Whatever the reason, the balance of Ormita’s barter trade has changed in the last years: by analyzing data is not difficult to perceive that developing countries has been the heart of barter trade during 2008, but from last year things has been changing with a more and more relevant position of developed countries, both in number of clients and in the value of transactions undertaken. The most significant variation that makes barter and Ormita International so unexpected, is the thoughtless growth of the amount in barter activity in a very few time; data are clear: in 3 years trade volume all over the world has grown more than 566%, reaching in 2011 the value of about $ 2bn, and it is expected to grow further in the next years. In fact, Ormita International is enlarging its business importance, with offices that are opening in Europe (Ormita Italy started in last quarter of 2011), but also in the rest of the world: South Korea, for instance, started very recently.

Chapter 5 - CONCLUSIONS The global financial crisis has resulted in the modification of the financial and trade strategies of companies, institutions and governments alike. It is in this context that I have analyzed updated economic and financial data of a large international barter company (Ormita Commerce Network) to understand whether the multilateral barter trade could be an effective tool to overcome the crisis. As a result of this report I have realized that this particular economic sector has been growing in a manner which is counter-cyclical to other forms of trade at the time , with Ormita “standard” clients growing from 18,000 in 2008 to over 100,000 in 2011. The reasons of this success are manifold. First, multilateral non-cash barter exchange simplifies the allocation of goods and/or services available. Because Ormita is a global network acting at all levels of the economy and incorporates essential supply-chain elements from raw materials (typically sourced from government transactions) through to consumer goods (produced by manufacturers using those raw materials as inputs into their production cycles) and, finally, to the services-sector and end-users; participants are able to save money on their ordinary cash expenses and avoid the problems created by

inflationary and/or deflationary monetary cycles. For Governments, multilateral trade provides a useful mechanism to: -

Channel back of recoup foreign exchange spent for an importation;

Gain access to advanced technology and training, new foreign investments, research and development and related support for national development and modernization programs;

Promote mutually beneficial collaborative business ventures between local industry sectors and their foreign counterparts through joint ventures and industrial cooperation;

Promote export products and markets.

The use of networks such as Ormita can help countries to build solid industrial bases, by balancing purchases of foreign goods and services against domestic exports in a simple, but creative manner; while addressing World Bank and IMF concerns of “bilateralism” and anti-competitive behavior. This form of trade finance has a multiplier effect as it increases overall purchasing power which helps to reduce unemployment, recover potentially depreciating (or lost) value and helps a country’s development. Second, nearly every business faces the problem of cash flow management at one time or another. Issues that contribute to the need for cash flow management include highly competitive markets where constant advertising is a mandate, increasing business expenditures to attract consumer attention, planned or unplanned downtime, perishable inventory and the necessity of discounting inventory. Modern, multilateral barter helps businesses alleviate these problems. Under traditional finance theory, a company is worth the present value of its future cash flows. As such, companies can maximize their value by expanding cash inflows and reducing cash outflows. The value proposition of barter to this equation is extremely compelling as it can influence both sides of the equation. In a typical sale, companies will offer their goods or services in exchange for cash (and equivalent) consideration—a cash inflow. But to support existing and new sales, companies are required to invest in both hard assets, like property, plant, and equipment, and in intangible assets, like human and intellectual capital—a cash outflow. Companies that use multilateral barter networks, such as the WIR or Ormita, as an additive function to their existing sales strategies and inventory management processes reap its benefits, thereby maximizing cash flows. In conclusion: I think that trade supported by multilateral barter, of the type provided by Ormita, is an efficient tool to resolve issues of local market liquidity, improve unemployment rates and stabalise basic economic activity. From a geo-economical viewpoint, there are many hazards in the implementation of this circulation (as confirmed by Ormita’s data) that show the necessity of providing late in development countries with adequate ICT technologies, necessary to build up a commerce network in which companies will find what they are looking for. In addition, depending on the main production of a country, it is seen that the density of a network will greatly impact on the velocity of which such transactions could be seen to take place: in the case of an agricultural country (as many South-America and East Asia’s countries are), goods swapped may be of a perishable nature – requiring an efficient infrastructural development level that can support a “just in time” method of exchange. This can be a disadvantage of standard multilateral barter situations, since a limited set of nations in the world can afford an expensive investment in ICT, which can result in their full potential not being realized in terms of multilateral trades. Finally, it is very important to understand that multilateral barter simply a form of commerce that “fills the gaps” created by free trade, helping participants to improve their productive capacity. The “engine” of the world trade is, and will always be, the creation of value by production with its economical features (costing and earning); multilateral barter is therefore just a different and efficient way to satisfy people’s need of exchange.

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