We tend to think of paying in cash as a far more efficient way of doing business than
paying in goods. Yet barter and countertrade - the exchange of commodities, consumer
goods and/or investment goods without the use of money – have grown dramatically
over the last two decades and now make up between 10-20% of world trade. Why?
Writing in the latest issue of the Economic Journal, Professors Dalia Marin and Monika
Schnitzer show that barter is, in fact, an efficient economic institution that makes
international trade possible where it would otherwise not happen. The anonymity of
money as a medium of exchange can be a disadvantage in trade with highly indebted
countries with questionable creditworthiness, since the debtor can use it for purposes
other than repaying debt. Goods, in contrast, can be earmarked as the property of the
creditor, making contract enforcement more effective.
The challenge is to find goods as a means of payment that are relatively liquid and
have a low degree of anonymity. High liquidity means that there is little uncertainty
about their quality, as is typically the case for goods traded on an exchange, such as
coffee or metals. Low anonymity means that the creditor gets valuable collateral since
she can successfully label the collateral goods as belonging to her.
These two properties influence which goods tend to feature most commonly as means
of payment in international barter in different parts of the world. The less creditworthy a
country, the more likely it is to use goods that are high liquidity and low anonymity.
International barter started to increase in response to the international debt crisis in the
mid-1980s when private lending to developing and transition countries declined
dramatically. As highly indebted countries found it increasingly difficult to finance their
imports, there was a resurgence in unconventional forms of trade and trade financing.
More recently, domestic barter has grown enormously in the economies of the former
Soviet Union, particularly Russia and Ukraine. Estimates suggest that in some of the
transition economies, domestic barter accounts for up to 60% of GDP.
So why do parties prefe r to pay in goods rather than cash? Many observers argue that
barter is inefficient because it does not overcome the problem of a ‘double coincidence
of wants’ as money does – a seller may need to accept goods for which he has no use
himself. Moreover, payments in goods can be a problem as it is difficult to judge the
quality of goods offered as a means of payment. Most observers therefore conclude
that this form of exchange occurs because many developing countries lack foreign
exchange or foreign loans to pay for their imports.
But these researchers argue that parties might want to pay in goods rather than cash to
solve incentive problems that would otherwise prevent any trade from taking place.
Barter has important advantages over traditional credit arrangements in terms of
contract enforcement. As an anonymous medium of exchange, money can be a
disadvantage in trade with countries that lack creditworthiness. But goods can be
earmarked as the property of the creditor so that the debtor is less free to use them for
purposes other than repaying debt. Since goods are less anonymous and property
rights on goods are easier to define and enforce than property rights on future cash
flows of a country’s export returns, goods are better collateral than cash.
The challenge is to find goods as a means of payment that are relatively liquid and
exhibit a low degree of anonymity. Homogenous goods tend to be liquid but also
anonymous whereas differentiated goods tend to be less liquid but also less
anonymous.
Professors Marin and Schnitzer use these incentive properties to rank goods with
respect to their liquidity and anonymity and predict the pattern of specialisation in barter
trade. Among barter exports from developing countries and Eastern Europe, consumer
goods (32%) and investment goods (36%) dominate. The analysis has two predictions:
?? First, countries that differ in their creditworthiness will also have a different pattern of
specialisation in barter. Countries with low creditworthiness - like some of the Latin
American countries, which had debt-to-GDP ratios of over 100% at the end of the
1980s - will use higher value collateral goods like basic goods as a means of
payment in barter. A comparison between Latin America and Eastern Europe’s
export pattern in barter confirms that in the former region, commodity exports
dominate.
?? Second, because of their low liquidity, investment goods will be used as means of
payment only when a country’s creditworthiness is not too low. The former Soviet
Union and the former Czech Republic with debt-to-GDP ratios of between 6-20%
respectively at the end of the 1980s could ‘afford’ to use predominantly investment
goods as means of payment. Investment goods provided collateral of sufficient
value compared to the gains from defaulting. Consumer goods turn out to be ‘good
money’ because of their high liquidity and low anonymity.
ENDS
Notes for Editors: ‘The Economic Institution of International Barter’ by Dalia Marin and
Monika Schnitzer is published in the April 2002 issue of the Economic Journal.
The authors are based at the Department of Economics, University of Munich,
Ludwigstrasse 28, D-80539 Munich, Germany. Dalia Marin is currently visiting Harvard
University and the National Bureau of Economic Research (NBER) in Cambridge, MA.
For Further Information: contact Professor Dalia Marin on +1-617-613-1209 email:
dalia.marin@lrz.uni-muenchen.de); or RES Media Consultant Romesh Vaitilingam on
0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).