Review of the informal economy and its connection to the BoP

By seeking to understand how people manage their household expenses when living on irregular and unpredictable incomes, my naive assumptions at the start of this enterprise (the iBoP Project is only the first step, this broad area of business models designed for irregular income streams is very likely to evolve into a dusty dissertation somewhere) were based on the confidence I have in the user centered design process.

Therefore, the goal of conducting observations among the BoP or those who live on irregular incomes was ultimately to derive insights from analysis and synthesis of the user research data that would lead to the conceptual model of a payment strategy – that is, a paper prototype, followed by a real world testing of the prototype where the design would be tweaked based on user feedback and challenges observed. The final working model would be presented as a tool for communities to use as a means to pay for a shared resource or asset.

The essence of this approach and the methodology has not changed nor my confidence in the process wavered. However, as I go deeper into understanding the lives of the people, I cannot avoid the need to enter more deeply into understanding the concept of the informal economy in which they operate. That foray, into the whole concept of informal employment, sectors and economy – that is, economic activity that is either under the radar of regulations and official requirements or done at such a small scale that its considered negligible – has been an eye opening exercise on many levels.

My first impulse is to question whether the challenge I posed in my abstract of this research endeavour, the inherent conflict between existing payment plans on fixed schedules and amounts and the irregular and unpredictable cash flows among the great majority of the BoP, could in fact be one created by the systemic differences between the formal and informal economies? Differences, as I am discovering, in my literature search, which exist based on the assumptions being made: not only the assumptions made about the informal economy in the first place but also those that underpin the foundations of the formal.

Still, my task here is not to address the formal economy, there are quite enough people in the world focusing on it even as we speak but to take a moment to encapsulate and understand the informal one. Or rather, as I am now beginning to be tempted to call it, the so called “informal” economy. A quick summary and background of qualified economic theory on this topic is Manuel Bueno’s post on nextbillion.net “Three competing views on the informal economy and economic development” and a search around shows that these are held to be in consensus.

However, some interesting snippets emerge from my poking around in dusty nooks of Google, one is a veritable gem. Its the blog called The Memory Bank after a book of the same name that’s being lovingly maintained by its author, Keith Hart. Hart is credited with the “discovery” of the informal sector while doing fieldwork in Ghana in the very early 1970s. He’s also an economic anthropologist and to quote his about page,

Banks are slower-moving deposits of fast-moving flows, whether of
water, information or money. ~ The
two great human memory banks are language and money which are
converging into a single network of digital communications in our time.
My own research focus is on money, developemnt and on the economy more
generally which, as an anthropologist, I approach from every angle that
the economists don’t.

Hart also follows EFL supporter Vanderbeeken on twitter and I’ve just signed up to follow him. Back to point, in a 2007 post “The urban informal economy in retrospect“, Hart writes,

The original application of the informal economy concept was to the
self-employed urban poor in developing countries. But it has since come
to describe a much wider range of economic activities in rich and poor
countries alike. If the term addresses whatever is invisible to normal
bureaucracy, then it surely should include informality at the top as
well as the bottom of society, not to mention crime on any scale
wherever it happens.

This seems to imply that the concept has evolved from one that meant (more or less) those at the base of the social and economic pyramid (BoP) managing on irregular and unpredictable incomes to covering any activity that is not regulated by laws, contracts, bureaucracy and the “global system”. It also raises the question in today’s age, when there is trend towards ‘serving the poor profitably’ that is, doing business with them, whether the definition needs to shrink back to its original scope of meaning or simply expand enough to accomodate the “BoP”, the “next 4 billion” or whatever is the current term to encompass those outside of mainstream consumer culture (aka the global economy).

Terminology aside, other snippets, such as this one from a 2006 BusinessWeek article by McKinsey Global Institute’s Diana Farrell, highlight the ‘dangers’ (to big business) of the existing informal economy in the developing world,

In any sector where the costs of operating formally are large, having informal competitors is hugely damaging to the prospects of the law-abiding players. Imagine a tax-paying supermarket in Brazil, for instance, where informal retailers operating midsized supermarkets and mini-marts account for 60% of the food retail market.

The supermarket may be many times more productive than its informal rivals, and offer higher quality, but it won’t be able to get near them on price because, thanks in part to the informal food processors and wholesalers supplying them, they have an unearned cost advantage of 50%. It will never make sense for the supermarket to
invest in expanding, despite its higher productivity.

Now, lets look at the other side of this coin, particularly since my recent Filipino fieldwork was conducted as a guest in the home of just such an ‘informal retailer’, albeit a minuscule one, though she sourced her inventory from a mini mart as mentioned.

On one hand, we have the 4 billion customers who have emerged from under marketing’s radar as the “BoP market” – one characterized for the most part as having high volumes of sales offsetting low margins as price is a deciding factor. On the other, we have the informal sector perceived as a threat to the very same businesses being exhorted to consider these new markets as a source of that lucrative fortune.

If business must indeed look at the BoP as the next frontier for sales of goods and services, then one of two things must happen in order to resolve the conflicting viewpoints and gain a measure of sustainable success. Either the informal sectors that employ or provide income for those at the BoP are seperated from the “competitive threat” segments OR the two are reconciled and the interstitial space between the formal and informal evolve from “gray market” to “BoP market” in consideration and understanding.

Until then, the logical extrapolation of these opposing energies implies that the very sources of income that will allow the BoP to pay for the goods and services that the corporations wish to sell them must disappear in order for the corporations to successfully operate in these markets.

Read that through once again.

Because as long as you lump together the activities of the people like selling hotdogs door to door (although buying it from a wholesaler informally), distilling wine for the village, keeping small shops within walking distance when towns are far away or even urban services ranging from garbage disposal to dishwashing to repairing shoes – with the “firms that are hiding from formal regulations and don’t want to pay taxes etc” any formal programs or activities, whether from the social and economic development angle or the corporate profitability angle are going to act at cross purposes.

Martha Alter Chen writes in “Rethinking the Informal Economy” that India stands out as an example where the informal economy has been accepted, acknowledged and now slowly being addressed by government policy. Not in order to dissolve it or remove it but to work with it simply because the incomes of far too many people are dependent on it and no formal systems can be put into place to take care of each and every corner of the country nor her billion citizens.

One can then take what seems to be working, called “creative, resilient and efficient” by Hart, quoted by Chen, and enable systems that support it further, fostering development and increasing success rates at the touchpoints where the informal and formal meet.

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