The Lower Circuit Economy

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Summary of Santos, The SharedSpace - Ch.8 where he develops the theory of two economies in a city, upper and lower.

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The Shared Space by milton santos Chapter 8: the financial mechanism of the lower circuit :

Reviewed by Adam Cramer The Shared Space by milton santos Chapter 8: the financial mechanism of the lower circuit

Fundamental factors in the operation of the lower circuit:

Credit – Essential for entrepreneurs in that it allows them to enter into/maintain business activities Essential for consumers as it allows them access to consumption despite a lack of fixed income Middlemen – F urnish credit (either merchandise or cash) to traders and artisans Mediate between urban or rural producers and urban traders (i.e. wholesalers) Ready Cash – Allows both the consumer and the entrepreneur to pay off part of their debt in order to obtain new credit Fundamental factors in the operation of the lower circuit

Credit = debt:

Credit is essential to the survival of many families and businesses. Credit leads to increased indebtedness. In economies where cash is indispensable and scarce, usury (lending money at unreasonably high interest rates) becomes general practice. Credit = debt

Dependence on middlemen:

Middlemen are common in both developed and underdeveloped nations but for different reasons. In developed nations, activities are specialized by both sector and region in order to increase productivity and create a market for services. In the Third World, middlemen are necessary for the functioning of the economy because of high disparity of income. The poor depend more on middlemen for their purchases City size is a big factor in the role of middlemen as well (i.e. smaller cities rely less on middlemen in food sector) Dependence on middlemen

Dependence on middlemen:

Historically, m iddlemen first served as distributors of imported products and buyers of export goods. With urbanization, middlemen now take the role of bulking food products. Important role because most traders are unable to get goods directly from rural producers, importers, and wholesalers. Middlemen also serve as transporters of goods, as traders often lack means of transport (large trucks, etc.). Dependence on middlemen

Transporters:

Two roles: Serving the wholesaler Directly serving the trader Truck owners also sometimes take the roles of retail-wholesaler, transporter, and seller, essentially cutting out the middleman for the following reasons: Regional specialization in agricultural production Rapid transport of perishable produce to different markets Increased distance of cities from areas of production Inefficient organization of the urban food market Transporters

The importance of liquidity in the lower circuit:

Commonly believed that most people in developing countries live in a subsistence economy outside the normal flow of goods and money—this is no longer true, however. Many countries may have only a small minority of the population as permanent wage-earners, but most the vast majority of people still participate in the monetary economy (i.e. People may not be in the formal financial sector, but they are still engaging in the informal financial sector.) Use of cash is widespread Even small scale credit is based on money terms As urbanization progresses and cities grow, non-monetary urban consumption is disappearing Urbanization requires cash as the medium of exchange Exchanges in the upper circuit generally take place on paper (i.e. checks), while transactions in the lower circuit are cash-driven The importance of liquidity in the lower circuit

Monetary circulation:

There is a great disparity between the money supply and the number of users in the lower circuit. This has two results: Credit becomes essential Money circulation necessarily accelerates to compensate for the scarcity of capital As the velocity of circulation accelerates, so does inflation. Inflation acts as a mechanism to exploit the poor, as prices increase faster than wages. The lower circuit is hungry for cash, although the poor urban economy can only function through credit. Credit must be used to start/maintain small businesses, but to maintain credit some liquidity is necessary to pay back at least part of the debt . Because of the rapid circulation of money in the lower circuit, little can be accumulated. This is a main reason why the poor remain that way. Monetary circulation

Lack of liquidity and the demand for credit:

The scarcity of capital affects all small enterprises. The major obstacle to the acquisition of capital is the need to pay accounts on fixed dates. The rules of upper circuit banking are not compatible with lower circuit traders, so people turn to wholesalers and moneylenders. Credit is sometimes granted by customers (i.e. artisan receives credit in the form of cash or raw materials to produce goods), but this seller is doubly disadvantaged because he must accept an imposed price for his goods and pay exorbitant rates of interest. Lack of liquidity and the demand for credit

Financial ingenuity and mutual aid associations:

Trade triangles Traders with cash reserves visit places where they know in advance they can buy cheaply and sell goods with a large profit margin Requires constant travel and excellent knowledge of regional conditions Mutual aid associations Group actions such as small business owners daily pooling money together so that one of them can buy bulk goods at wholesale prices (very similar to ROSCAs) Financial associations/savings schemes Similar to ASCAs Financial ingenuity and mutual aid associations

From credit to indebtedness: Consumer credit:

Credit is necessary for the consumer who is more often than not both poor and without permanent work. Without credit, it is impossible for him to provide for his family. Modernization has also led to increased “need” of credit among the middle class—as demand has become distorted with the number of wants increasing without the proportionate rise in income. Two budget levels: Expenditure on goods/services requiring immediate payment Goods obtained through delayed payment in the lower circuit with personal credit A small number of people go into debt in order to eventually increase wealth, while most of the Third World urban population goes into debt in order to consume. From credit to indebtedness: Consumer credit

From credit to indebtedness: entrepreneurial credit:

The wholesaler is the link between the modern (upper) circuit and the lower circuit. He is the only operator in the circuit with sufficient ability to obtain bank credit. Small scale activities would not be profitable to the bank Lower circuit traders recognize the dangers of taking bank credit which would ruin them were they unable to honor their debts. Wholesalers offer credit to traders, usually in the form of advances in merchandise. The time-frames for these loans are often very short. Loans are seldom repaid in lump sums. Borrowers often remain in debt in order to obtain more credit. From credit to indebtedness: entrepreneurial credit

Profit margins:

Division of goods into small quantities leads to an increase in retail prices for the final consumer (usually the poor). Profit margins are generally sizeable—varying from 100% to 2000% on local commodities and 50% to 350% on imported products. Profit margins are generally highest in small-scale commerce. Hawkers have the largest profit margins per item, although it is a risky business with no guarantees. Profit margins

Price mechanisms:

Prices in the lower circuit depend on the supply conditions the trader is facing and his existing customer relations. Prices rise when supply is limited. Prices may increase when there is more money circulating in the lower circuit. Relations between sellers and buyers result in fewer and shorter-lived price variations. Bargaining depends on whether products are perishable, seasonal, indispensable, necessary, or simply useful. The pressure on the sellers and the consumers are both crucial to the bargaining process. Price mechanisms

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