Unforeseen outcomes of India’s demonetization shine light on the value of our design philosophy

Informal Economy, Market Analysis and SegmentationLatest news on India’s demonetization informs us how the rural economy is bearing the brunt of this initiative.

The action was intended to target wealthy tax evaders and end India’s “shadow economy”, but it has also exposed the dependency of poor farmers and small businesses on informal credit systems in a country where half the population has no access to formal banking.

The details shed light on the consequences of implementing interventions without a holistic understanding of the landscape of the operating environment. In this case, it is the rural, informal cash intensive economy.

…the breakdown in the informal credit sector points to a government that has failed to grasp how the cash economy impacts ordinary Indians.

“It is this lack of understanding and not appreciating the importance of the cash economy in India on the part of the government that has landed the country in such an unwarranted situation today,” said Sunil Kumar Sinha, an economist and director of public finance at India Ratings.

This lack of understanding the dynamics of the cash economy (I don’t mind calling it the prepaid economy, in this context) and it’s role in the rural Indian value web has led to unforeseen challenges at a time when farmers are planting seeds for the next harvest, hampering the flow of farm inputs as traditional lines of credit face the obstacle of an artificial shortage of liquidity.

I want to use this clear example of systems design failure to explain my philosophy and approach to our work in the informal economies of the developing world. I’ve written often enough about what we do, now I have an opportunity to explain why we do it, and why it’s important.

I trot out this old diagram, possibly out of date, that shows the pyramid of stages we must progress through as part of the design process.  Our foundation is built on understanding.

Why would this approach and process make a difference to the introduction of the demonetization strategy in the rural Indian cash economy?

As the very first quote states, this action was taken without due consideration of the entire operating environment. It’s focus was urban, elite, moneyed, and corrupt. Overlooked, it seems, were the lower two thirds of the population who are rural and mostly excluded from the formal financial sector due to infrastructural shortcomings and systems design issues than any reluctance on their part viz.,

The paralysis exposes the slow progress India has made in extending banking to wider segments of the population, a key initiative under Modi. The government has taken steps, including announcing zero balance accounts for poor people, but growth of bank branches have been low as margins are slender for most lenders. In 2001, India had 5.3 bank branches per 100,000 people in rural areas. Today that stands at only 7.8 branches, according to Reserve Bank of India data.

Be that as it may, one would have begun by segmenting the cash intensive economy – the target of this intervention – by differentiating factors such as geography – urban or rural?; financial inclusion – does the target segment have access to the alternative cashless solutions such as digital currency apps; or access to a bank itself?; and dependency – how critical is liquidity to the functioning of the local economy?

These attributes are neither comprehensive nor wholly accurate, they are just to demonstrate the importance of segmentation by various criteria for the design of the implementation of a programme or intervention.

When one size does not fit all, whom do you design for?

India’s cash economy might have been the target for the intervention but it is not a homogeneous undifferentiated lumpen mass. It is a complex ecosystem made up of numerous interlinked social and cultural networks of value exchange that link the rural to the urban and the formal to the informal.

While the overall vision for the intervention can apply across teh board, the design of the strategies to introduce it could have been customized to minimize the negative outcomes. Surprise was an element of this introduction, it need not have been lost if the accompanying regulations distinguished between the needs of the urban and the rural, or the formal and the informal.

In this context, it has become very clear that the Shadow Economy is NOT equivalent to the Informal Economy1, or rather, to be more accurate, the cash intensive rural and peri-urban economies.

Lack of appropriate infrastructure and adequately functional systems lock the rural population out of the formal economy in the developing world, and thus the conflation of the European definitions of shadow economy (Schneider, for instance) cannot be applied without caveats to the context of rural Kenya or India, for example.

Design of interventions for complex, adaptive systems such as the rural economy

Thus, we approach the design challenge of introducing holistic strategies to effect positive change in the local operating environment from the perspective of breaking down the complexity into more manageable elements that can be distinguished and observed in the field.

We begin by looking at conventional wisdom and commonly held yet unquestioned assumptions. They are hauled out to be either validated or discredited, thus offering a more pragmatic and realistic understanding of the context. This also offers a clean slate for a fresh look at persistent, and often wicked problems. Our aim is discovery.

Taking a systems approach broadens the lenses by which to consider the context, both for the operating environment, as well as for the people involved.

I won’t repeat the details of our process, which are linked to in the paragraphs above, but I will take this opportunity to point out how we first consider the problem space in terms of people, their ‘money‘ (pesa), and their geographic location (place), and then drill down further to understand their worldview – their hopes and dreams and ambitions, their families and communities, and their mindset as producers and consumers of value created within their networks.
Understanding Users
All of these elements, when synthesized, provide what we call “understanding the landscape” within which we wish to introduce something new – be it an innovative product or service; or an intervention designed to effect positive change.

That is, we begin to get a sense of the complexity and dynamics of a human social ecosystem giving us a better idea of the impact of an intervention or introduction. This applies as much to consumer facing private sector as it does to public policy – whether products, services, or business models. Well known instances include Google’s now defunct Bebapay cashless public transit payment system in Nairobi; or, the efforts to replace kerosene without understanding the influence of irregular incomes on purchasing patterns.

This approach lessens the chances of the kinds of surprises and shocks that India is currently experiencing as it undergoes the process of demonetization. And, while time consuming and more expensive at inception, it’s a worthwhile one time investment that needs far less resources to update on a timely basis. After all, the world map has been refined and improved upon for centuries but does not require starting over from scratch each time.


1 I will be following up in the next post to discuss the challenges raised by this conflation further.

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