There may be a solution for the meltdown in the global financial markets, and it entails a timely lesson on Third World economics that most First World bankers, government regulators, officials, and just about everyone else might be well advised to learn.
If you are an expatriate who has recently arrived or are living in an emerging economy in a far-off and distant land, or are planning to move or retire to some remote place that is not on the beaten path, gaining an understanding of how this financial system works will be especially useful. However, unless you are relocating to Shangri-La, there are some troublesome pitfalls associated with Third World finance, and this article will reveal two common risks that an expatriate should at all costs avoid.
Throughout the globe all First World nations are presently facing some degree of economic crisis, and if you are living in a developed country it may surprise you to learn that there very well could be an accessible source of Third World credit close at hand. Gaining this insight might be personally helpful during these difficult economic times, and beyond that it may turn out to even offer a more permanent form of alternative credit than that obtained thru conventional banking institutions if the world recession free-falls into a full-blown depression. Finally, among privately owned First World community banks, which serve rural areas, as well as smaller towns and cities, you may find it of interest to learn that it was indeed a Third World economic principle that allowed these banks to ride out the present economic tsunami, which so heavily damaged their big brother global banks.
Whether the developed nations are experiencing economic growth or recession, and disregarding the global credit crunch, in emerging economies or in outback locations where there may not be a commercial bank or any formal lending institution, credit is still readily available. The source of funds is not a lending institution, however, but individuals. More importantly, the decision on whether or not to extend the credit is not subject to an impersonal credit rating score, but what the term credit really means, which is: “honor and trust.”
During 35-years as an expatriate, this means of obtaining and offering credit often proved helpful when there was a need to obtain something for both personal uses and more so for business purposes and it was just as valuable when providing the financing to someone else. More often rather than seldom, it was especially useful at times when there was a shortage of cash. Not only did it facilitate the purchasing and sale of all kinds of tangibles, but a myriad of services as well, and none of the transactions required filling out a credit application. In addition, and only recommended with a measure of reasonable caution, almost exclusively, as a borrower and as a lender, there was not even a contract or a written agreement, but only a handshake. Coming from a big city environment, and as a novice expatriate, at first and admittedly there was a high degree of initial uneasiness in these seemingly informal if not outright loose arrangements. For me and others coming from similar backgrounds the apprehensions were considerably greater than normally associated with more conventional financial transactions in which everything was in writing, dated, signed in duplicate, witnessed, and notarized. Over time however, and upon gaining both a fuller understanding and an initially unexpected appreciation for the cultural and sociological implication of this more informal but maybe just as rock solid method of obtaining and offering credit, eventually a complete acceptance and sense of ease prevailed in these dealings.
How does the system work? Well, a decision to advance credit or not is the result of the lenders personal knowledge of the borrower rather than relying upon an impersonal rating system that in most Third World locations simply do not exist. Although Dunn and Bradstreet claims that they can make available financial reports on 100 million global companies, in Third World locations most of these relate to local operations of international companies or businesses such as the McDonalds franchiser in places like Nicaragua. Furthermore, the cost of the reports may be worth more than the average person makes in the country for a month and in some cases for a year.
Companies such as Transunion, Equifax, and Experian provide credit ratings on potential borrowers, utilizing what is referred to in First World banking as the five Cs of credit. They are; “Capacity,” meaning the ability to repay the loan; “Capital,” meaning the available income to repay the loan; “Collateral,” meaning assets to secure the loan; “Conditions,” meaning the market and economy, and finally “Character,” or in banking terms, one’s credit history. Apparently this system that almost all First World lenders depended upon must be deficient, when considering the present economic woes that the developed world is embroiled in. Even the so-called great financial oracle of Omaha, Warren Buffett, or the economic guru Alan Greenspan did not predict the recent economic disarray of the world’s primary lending institutions, or the poor credit risk that they have become. If the First World economy goes completely south, which may be sooner rather than later, what will in fact remain is a Third World economy.
Although rudimentary in process, it is nevertheless in practice a credit system that works considerably well, and compared to First World high finance, which is increasingly becoming to resemble a train wreck, there are fewer defaults associated with the transactions. Why is that? Well, those persons brought up in small towns, rather than big cities, may understand easier how the Third World credit system works, since it does so similar to a neighborhood general store, which keeps a journal or the local pub that keeps a tab. This face-to-face credit system is exactly how the Third World, which does not have access to sophisticated banking, still works, and for many throughout the globe it works just fine.
Almost anywhere in the Third World credit for small purchases or services is available between individuals and businesses, or between businesses, for which payment may be due in full and in the short-term. The only difference is that in the Third World the short-term is not 15 days with some form of incentive discount for early payment, or for that matter the customary thirty-days. The non written, but nevertheless accepted norm is ninety-days or longer and without any penalty. How it all works, however, is that everybody in the community owes everybody else, and the accounts receivable amount in a profit and loss statement is always high, but then so is the accounts payable. All this is assuming that anyone is actually keeping books, which is probably unlikely. A person new to the Third World needs to remember that the financial cycle like everything else works in slow motion.
The more important credit is the loans between individuals to facilitate larger purchases, which could include almost anything such as vehicles, boats, equipment, real estate, and even businesses. Conditions for these loans are normally flexible and negotiable, with interest sometimes being part of the deal and other times not. Generally, and of course there are exceptions since the credit terms are whatever the individuals want them to be, the rule of thumb will be repayment terms of three years or less on everything but the purchasing of real estate and possibly a small business. Although they can be, normally payments are not monthly, but usually periodic, meaning every quarter, six months, or possibly yearly. While there is a certain sense of casualness associated with all of these dealings, at least on the surface, people by and large meet their obligation as a question of living up to one’s word. Being trustworthy still has meaning, and among the seemingly less advantaged being honorable is a way of life and from personal experience it is especially true among those people who have little else.
Disregarding how unsophisticated the person who has extended you the credit might appear, on the day when the payment is due, you can expect a knock on the door. Keep in mind that for thousands of years, at least, people have been conducting business in this way, even if the debits and credits were carved on stone tablets, the balance sheet was inscribed on papyrus, or the currency used was in some form of wampum. All of this has been going on much longer than the Harvard Business School has been conducting classes. With or without an MBA in global finance, the world over even the most modest or unpretentious of people knows how to keep basic financial records, make entries into some type of daily reckoner, and use a calendar, whether or not they know how to read.
Pride likewise plays a role in this down-home economic system, but not in terms of being arrogant or self-important. People who live in these communities know how valuable these person-to-person fiscal arrangements are and treat them accordingly. As a new comer, you will first have to earn your neighbor’s trust, before these types of homegrown financial services may be available to you. When they are you are welcomed into the club and become an accepted member of the community, before that, however, you will need to pay as you go, or go without.
Real estate loans often extend up to ten years, but seldom is the term longer, and again payments may be periodic, but usually never more than yearly, and once more with or without interest. If you are considering entering into one of these arrangements, whether as a borrower or as a lender, keep in mind that anything is possible. There is no third party lender in between the seller and the buyer, who is in the business of charging interest and has lending guidelines that restrict the creativity that two individuals may be able to achieve on their own, the terms of which completely satisfies the interests of both parties. Unable at the time to accumulate the amount needed for a down payment, a personal real estate deal included paying the owner, while having full use of the property, four periodic payments over two ears, which then lowered the cost of the property to a amount that then could be financed more conventionally.
In some cultures there are religious rules that determine whether or not one can charge interest. Beyond that, people everywhere are thin-skinned when it comes to personal economic issues, disregarding culture, national origin, or ethnicity. It is a simple truth that as an expatriate it is wise to learn what you can about your host culture before you insult anyone and embarrass yourself. Trying to earn trust, which is the foundation for all of Third World economics, is not easy when an individual is viewed as behaving badly or even just unwisely. The expression that a fool is quickly parted with his or her money is a universal truism found in every society, and those who are labeled as such will find difficulty in gaining anyone’s confidence much less respect.
Outside of the interest question, everything else concerning these loans is also negotiable and completely dependent on pure market conditions, which is simply how motivated is the seller and how eager is the buyer. Grass roots capitalism at its best and in many circumstances it works perfectly well by advancing and improving the economic condition of many people the world over, but admittedly it is limited in what it can achieve. More so than any other factor, including democracy, the lack of more formal financial services in which large investment sums can be raised is what keeps the Third World, well, the Third World. On the other hand, a lack of moral standards, fostering greed and corruption, coupled with an ever increasing interdependent and complex global financial system, in which governments are inclined to freely meddle in the economy, even in those countries that claim to be in total support of capitalism, may well be the forces that will reduce the First World into a pile of rubble. If things in the global markets get to this point, it may be that a retreat to the Third World system supported by the twin pillars of honor and trust will offer humankind shelter.
Puerto Rico provides a typical example of an emerging nation, although politically it is not fully independent. Mainly, as a result of its relationship with the United States, it has the most dynamic economy of all countries in the Caribbean, including Central America, and while there is a sophisticated banking system, nevertheless, many if not the majority of people still live outside the economic mainstream. In some Third World locations, there may not truly be a formal or mainstream economy at all, and what does exist might always be on the brink of collapse while struggling under the ever-present threat of inflation. Most people in Puerto Rico live relatively well, and no one goes hungry, even though forty-eight percent of the population falls below the United States federal poverty line, and the unemployment rate is historically at least 15 percent, which is presently more than two times the national U.S. average, but still a third to a half of what may be in many Third World nations. Without the means to access the banking system many rely on the underground or cash economy that includes the individual credit system and a loan between individuals has a specific name. In Spanish, the word is “Pagare,” for which there is no one word English translation. Although it is the predominant economic facilitator for the lower economic class and being an important part of the culture, personal credit extended for the buying and selling of almost anything, or pagares are common between individuals of all classes and its use is widespread throughout the whole society.
In 1972, as a novice expatriate, a first insight into how a cash or underground economy works came during a doctor’s office visit, were it was surprising to see a prominently displayed sign that simply said Por Favor Paga Cambía—Please Pay Cash. The principal reason for an underground economy is the avoidance of taxes, which especially in Latin America is a national past time, and not just among those involved with criminal enterprises. Because of this, many nations, including Puerto Rico, use a lottery as the primary source of raising income for the government, since implementing a functioning tax system is difficult at best. It has been only during the past decade that other Caribbean island nations have established some practical form of a national income tax system. The irony is that these are some of the same islands that have off-shore banking services for people from other countries who are in fact attempting to conceal their money and avoid taxes.
Because of its nature my business in Puerto Rico had a dual personality, as I eventually developed a bi-cultural persona. In dealing with my international clients it was strictly First World with all of the typical formalities, including a paper trail of contracts and invoices as long as the Silk Road, but in my business affairs with local partners, associates, and clients it was primarily and exclusively Third World with no paper trail. For twenty-five years I maintained my equilibrium while straddling both sides of the cultural and economic great divide.
In a small mountain town in the center of Puerto Rico, an individual who became a business acquaintance opened a small furniture store and seeing the need began offering credit directly to his customers. There was no third party bank involved and normally on payday his credit customers, in what was in many ways almost a religious act, would stop at the store on their way home from their jobs and make a payment. Less than a generation later that same individual owned over one hundred stores throughout Puerto Rico and in many U.S. cities where there is a large Puerto Rican Population. Almost every Puerto Rican home had furniture from this chain of stores, and the key to the company’s success lay in the fact that every store manager lived in the community where the store was located and knew personally almost every customer and especially every credit customer. The basis for the decision to advance the credit or not was primarily that personal knowledge. The founder of the store chain became many times over a millionaire and spent the last years of his business life flying all over Southeast Asia buying tropical rattan and mahogany furniture. This same man who built his empire based on Third World economics could neither read nor write, yet he was so well respected that he never had to install any sophisticated security systems beyond door locks in any of his stores throughout the island. No burglar would ever dare to break into one of his stores, because the community would not tolerate it, and if anyone ever did, and was found out, they would be facing swift lynch mob justice.
Not all Third World financial dealings are altruistic. Extending or obtaining credit in the purchasing or sale of tangible items works well, but lending cash or paying out cash for future services, as a down payment may not always. Often the cash will find itself covering some other expense that the party given the money is maybe urgently facing rather than using it for what it was intended, or worse. After hiring an expatriate carpenter/contractor to do a design studio interior build-out in a Spanish colonial building in Old San Juan, the unexpected outcome was a classical experience that proved to be an early life lesson for this neophyte expatriate. Rather than using the advance to purchase the agreed upon construction materials, the contractor bought a one-way airline ticket off the island, and that was the last anyone saw of him. Among expatriates the world over, similar things for similar reasons happen every day.
Another risk for expatriates has to do with civil proceeding over economic issues between an expatriate and a local person. If you have to take someone to court in the Third World, no matter what the circumstances are, even when your case seems to you to be open and shut, the cards are inherently stacked against you. Even though you may have never considered yourself wealthy back in your passport country, and by standards there you very well may not have been, still, in many places just because you are an expatriate people assume, whether true or not, that you are. Based upon local values and conditions where you are now residing you very well might be, even if you are living on a fifteen hundred dollar a month pension. Although you may consider yourself an expatriate, with all of the peripheral and romantic meanings that go along with that, to the locals you are simply a foreigner, and local judges are more inclined to protect the native person, who may in fact be a distant relative or just as likely a friend of a friend. For some expatriates who find themselves the defendant in a criminal trial or a civil court proceeding, they are often surprised as well as confused to discover that in some places a person is not innocent until proven guilty, but just the opposite, you are considered guilty until you prove your innocence. Of course if you are wealthy, and live as such, and many expatriates do, in most Third World locations you simply stand as much of a chance of winning your case as a snowball in hell.
Third World finance in its aboriginal form is not just confined to emerging economies. It also exists in many First World nations where there are large communities of people from Third World countries. Recently arrived immigrants, even those who are legal; much less those who are not, stand little chance of accessing the formal banking system. Out of necessity they use what they know best and that is their Third World system, which is likely in placed in their ethnic communities. An example that had a remarkable outcome of just how effective and also almost dynamic this form of financing can be took place during the 1960’s and 70’with the influx into Miami of Cubans who were escaping the communist dictator Fidel Castro. Not all who fled Cuba left broke, still the great majority arrived in Miami literally with only their shirts on their backs. These refugees needed everything, from clothes to wear to mattresses to sleep on. Some fifty-years later the Cuban community is not only well established, but it would be correct and just to say that in fact this group was responsible for changing Miami, if not all of South Florida from a barely prosperous vacation and sleepy retirement destination to a World Class city at the center of a dynamic regional economy. Today, whereas northern Florida is still red neck territory, cosmopolitan South Florida is a different world and seemingly a distinct country. At the domino tables in Miami’s little Havana you often hear talk of succession with South Florida becoming the fifty-first state and Miami, its rightful capital. It would also be true to say that initially it was the credit granted between individuals and based upon the principles of honor and trust that became the bedrock upon which this incredible economic transition took place.
Before the Congress of the United States House of Representatives Committee on Small Business, Paul G. Merski, Chief Economist for the Independent Community Bankers of America, which is an association that represents over 5,000 small privately owned banks, recently made the following statement. “Thousands of independent community banks represent the other side of the financial story. Community banks rely on relationship lending in their communities, not on relationships with investment banks or hedge funds. Community bankers live and work in the communities they serve and do not put their customers and neighbors in loan products they cannot possibly repay. While community banks did not cause the current turmoil they are well-positioned and willing to help get our economy back on track.” Relationship lending is a First World term that defines what otherwise is a Third World economic principle, which apparently still works well even during a recession when people have suffered a loss of confidence in both big business and governments.
A.P. Giannini the founder of Bank of America became a legend for helping his customers after San Francisco’s 1906 earthquake. Although his vault was still standing, his bank had burned down, so he set up a wooden plank on two barrels along the street and made loans on a handshake. Giannini later said that each of those loans was repaid. With personal knowledge of all he lent to, it is a legendary example of Third World credit at its best. One hundred years later, Virginia Hammerness, his seventy-five year old granddaughter, heir to the family’s banking fortune and a significant stockholder in the bank, recently made a public statement criticizing the present management of the now faltering Bank of America, as being “idiots.” She reflected on how her grandfather founded the bank in San Francisco’s North Beach neighborhood in 1904 as a reaction to the fact that the big eastern banks wouldn’t lend to middle class immigrants like Italians. Hammerness was outspoken about what has happened to the bank that is her family’s legacy, saying she had little doubt that Giannini was “rolling over in his grave.”
Because of the impersonal nature of the distant dealings between borrower and lender in First World personal banking there’s also a scary side note, for it seems that Big Brother may in fact be watching. Some banks and credit card companies track where customers shop and penalize them for purchases that could signal financial difficulties. Swipe your card at a red-flagged establishment—such as a discount store, auto repair shop, even a marriage counselor—and your creditor may lop your credit line or hike up rates. “Whether it’s right or wrong, fair or not fair, that’s the way it is,” says Adam Levin, co-founder and chairman of Credit.com, a consumer advocacy website.
If the global economic meltdown continues, individuals in First World locations may have to resort to utilizing the down-home credit system to carry on their affairs, and the model may be what already exists in most immigrant communities and smaller cities and towns. Although clearly less sophisticated than the international banking system, Third World credit or relationship lending can work just as well in meeting the needs of many people, as long as individuals keep in mind that the term credit means honor and trust. It is a lesson that seems to have been recently lost, if it was ever fully understood among some of the First World large institutional bankers, hedge fund operators, and their Wall Street ilk. If you are an expatriate residing in a far-off and distant land, when you find yourself facing one of the many typical difficulties that living in a place with an emerging economy can often present, you may want to reflect on whether or not it is more preferable to live among honest poor people than dishonest rich people?
About The Author
James L Tate is author of San Juan Antigua: An Expatrate Life if Puerto Rico published by EscapeArtist. A fascinating read with lots of easy to read history and information on present day life.