Learn 5 - A Barter Exchange Transaction example that works

Comment by Rahul Dewanjee on April 1, 2010 at 12:21pm

+1 for Knowledge share.
Thanks for putting this very relevant example of Barter Card. Global Barter Corporation (GBC) is the largest business and corporate barter company in the world.

The strange thing about corporate barter exchanges is that it is fairly limited to US and EU. There is only one single office in Johannesburg (South Africa) in the entire continent of Africa. There is no office in India or Australia at all.

This is an interesting observation since most micro-enterprises in Africa are on the border line (cash flow and profitability as metrics) and perhaps could have been most benefited if companies like GBC would have been there. But it is not. This opens up a lot of questions about viability of any alternate propositions to the conventional money system in the context of developing countries. How can alternate money systems like bartering actually leverage the information asymmetry to provide the lowest transaction costs to an exchange system. We know that a value of a ten dollar bill is ten dollars and not 9.99 dollars or 10.01 dollars which is why currency notes are perfectly inelastic. In case of bartering, the value of exchange is relative and a factor of the information asymmetry. In absence of any standard reference points to which a kilo of apples can be compared to a litre of gasoline, the value of a barter ( or any alternative mode of exchange) is specific to two parties engaged in an arms length transaction and various factors like how keen one is to buy and how desperate one is to sell will eventually influence the exchange mechanism and the degree of exchange. In most developed nations, information asymmetry is very low, inflation is historically low (stable economy) and exchange infrastructure is very widely spread. So bartering is possible and even possible to be adopted for exchanges between two parties (usually corporate entities) when there is a high level of certainty how much both sides of the exchange can acquire from a bartered exchange.

In the context of Africa where information asymmetry is very large from one point to the other, there is simply very little chance to develop a bartering system that could be profitable and perhaps why we don't see global players in barter like GBC in Africa.

Africa more than ever before needs a stable financial system with liquidity that needs to be controlled by their central banks in each country.

Comment by Lynn Caldwell on April 1, 2010 at 12:51pm

Interesting isn't it? This bartercard example was offer some insight into how bartering doesn't have to be another word for straight swapping.

More interesting though:

If bartering was in place in Africa and Asia, the asymmetry of wages wouldn't be as apparent - it would reverse it?

Now, I'm not very knowlegable about economics (as you will have guessed! LOL) BUT the barterpoints don't have an exchange rate.

So 40 barter points in the UK, would be equal to 40 Barter points in India? barter points don't have a rate of exchange - every point is equal -

so,

a barter trader, over the internet wants a website, that in England cost him a months salary in pounds £2,000 and this is the amount he is willing to pay.

THEREFORE, the same person in Africa could supply this website, and get the equivalent of £2,000 in barterpoints - which I'm sure is more than a months salary for the average african?

Do you get me?

I think if a global barter exchange network (which they propose they are, even though you have disproved it!) WERE available in Asia and Africa - the benefits to the poorer suppliers would be rather more substantial.

Comment by Rahul Dewanjee on April 1, 2010 at 2:04pm

To Lynn: Let me demystify this a bit (as best as I can)

Cross country and cross-continent bartering is terribly complex with issues in taxation (both direct and indirect) inevitably impacting any legally recognized arms length transaction that happens between two legally registered corporate bodies or between one private individual and a body corporate.

Goods and services tax (GST) on consumption, excise tax (indirect tax) and sales tax (direct tax) are embedded features of any bonafide transaction for commercial purposes. The issue of refund or product recall will have to be endorsed in common law as a "transaction between two parties" and one condition of endorsing any such commercial transaction is using a "bonafide currency" prescribed/endorsed by the central banks of the respective countries entering the transaction. In floating currencies (unlike Dollar-Yuan or Dollar-Dirham), currency positions are fluctuating as money market decides.

Now to derive on-ground benefits, equivalence of barter points (as you emphasized) will have to be integrated with the local currency somehow. Because what you can buy or sell using barter is fairly limited even in most sophisticated money markets like UK or Switzerland. So there will be a compulsion to monetize the rest of what could not be consumed by liquidating it in exchange of the local currency so that you have real money to buy everything else like going to a movie hall, paying for kid's school fees or paying in a restaurant where all arm's length transactions happen in local currencies....even credit cards and things like Paypal do not acknowledge barter

In countries where there is an exchange control mechanism (like in most African countries where central banks limit sovereign debt exposures by buying US Treasury Bills known as "zero risk"), barter system where two different currencies are involved could potentially jeopardize how government derives taxes, controls the money market and regulates the risk management apparatus in the country.

In places like Europe where euro is a single currency or US$$ which is the universal currency for the entire global money market we have seen barter happening to some extent. Now if entire African continent can have a single currency (I doubt they ever will), we can see possibly a barter approach developing when two African nations (say Botswana and Somalia) when trading among themselves.

In the context of your specific query, digital currency intermediaries like PayPal is efficient (in quoting for a website development services for an African service provider) as the benefits associated with currency arbitrage can immediately trickle down to the recipient if PayPal is used instead of cheques, drafts or money orders which takes lengthy periods of clearnace (assuming that time value of money will be a factor for delay in transit and delay in clearance of the money.

Comment by Rahul Dewanjee on April 1, 2010 at 2:08pm

Please note that there are transaction costs embedded in PayPal as well but if efficiency is key objective, that is a payoff that can be offset.

Comment by Lynn Caldwell on April 1, 2010 at 3:30pm

You are VERY knowlegable about this issue, Rahul. I'm taking some time to digest all your information.

I think you are right about the single currency issue - Bartercard in the UK, is distinct - perhaps for the very reason that you state about the currency issues and government taxation etc.

I suppose that because the dominant economical system is based on money - the government have to tax a barter exchange as well. For barter to exist within the current economical system, it would need to adhere to all the rules within that system such as taxes - or else, barter would be seen as competing with the dominant economic system.

I'm getting there...slowly! LOL

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