Archive for the ‘Emerging Markets’ Category

The role of the grey market in Africa’s mobile telephony boom years

The grey market refers to goods which have been manufactured by or with the consent of the brand owner, but are sold outside of the brand owner’s approved distribution channels – which can be perfectly legal. (1)

In Africa’s teeming business districts and electronics mega markets, the concept of grey market products underwent an evolution over the past two decades as it reflected the development and eventual maturity of the mobile phone market. Always, however, price arbitrage drove the parallel industry.

In the beginning, grey market products were those that met the conventional definition I’ve shared above from Investopedia. Because the majority of the African continent – barring North Africa and South Africa which were considered more investment worthy – was initially overlooked as a target audience for the world’s branded mobile phone manufacturers, African traders and merchants would source products from the Gulf – Dubai being a key hub for re-exports in consumer electronics – or ‘fairly used’ phones from the then more advanced European countries.

Thus, by the time Samsung’s Mobile division woke up to the opportunity in sub Saharan Africa about a decade after the first introductions of cellular telephony, they discovered Samsung devices being sold openly in markets they had not officially entered as yet. The challenge for them, back then, was that these handsets tended to be European models, and not really engineered to hold up under more adverse African conditions. Not only was the grey channel capturing marketshare that should have been theirs but potentially negatively impacting their brand as more fragile than the notoriously durable Nokias which were popular ‘fairly used’ models for that very reason.

The secondhand and refurbished phone market provided the necessary affordability for far more people than just the rich or upper middle class who could afford the phones and models then being sold in sub Saharan Africa.

It was only the completely unexpected great surge of growth around 2002-4 that spotlighted clearly the latent and untapped mass market opportunity for low cost mobile devices, and the trend began to develop a phone “for Africa”. Motorola won the the GSM Association’s first grant for low cost phones, priced at around $30, in 2005, but was ironically never to achieve the exponential sales and success of Nokia.

By 2009, the grey market came to mean counterfeit as cheap Chinese phones flooded the market thanks to informal traders flying to and fro from Hong Kong with suitcases stuffed with handsets. Back then, coherent brands had not yet emerged from China’s factories, and I owned a dual sim NKIAC with lots of bells and whistles as a souvenir. They were known to have their problems but offered a trade off for the aspirational owner to be – an affordable entry point online, until an established brand could be purchased.

Around 2011, however, the Chinese OEMs had woken up to the African market’s sustained double digit growth in both device sales, as well as new subscribers of mobile services. And, jumped on the Android bandwagon, sensing a boom on the horizon as big brands dithered.

This was the turning point that was to change everything about the mobile telephony ecosystem in sub Saharan Africa – Nokia’s fade out, the rise and subsequent dominance of Transsion Holdings with low cost yet branded smartphones, paving the way for the smartphone and app economy maturing rapidly across the entire continent today.

In a way, it was also the end of the gray market in terms of fakes and counterfeits, as connectivity and social media demands required functioning operating systems and apps.

In another, the original grey market, as defined, came back to it’s role in providing affordability to the aspirational and ambitious, and in Nigeria, is credited with bringing about the smartphone revolution, just as it boosted the original mobile telephony transformation of the previous decade.

Lessons from African Fintech for the Gig Economy

Earlier this week, I had the opportunity to share my research on the past decade of mobile ecosystem development across the African continent with Dr. Antti Saarnio, founder of Zippie; co-founder of Jolla (developers of the Sailfish OS, among other things).

“We want to test our product first and foremost in Africa because there is an extensive and established informal economy,” he said.

That captured my attention immediately, since few think of the Africa’s vast “informal” commercial operating environment as a strength to be leveraged for competitive advantage, preferring to hope against hope that it will disappear into thin air to be replaced by the more familiar structures of the formal and organized sectors.

And, it got me thinking about the African fintech space, and the lessons it may hold for the rapidly proliferating gig economy in the ‘developed’ world. And, since at this point of time, all I know of Zippie, Dr. Saarnio’s latest venture, is that it’s a blockchain based mobile OS – not the kind of thing that you’d expect to be piloting in Africa – I asked him to elaborate on his thinking a little further.

Easy, he said. Not only does the informal economy dominate, with established norms and coping mechanisms, but its a mobile first and mobile only environment where people are already comfortable with the exchange of value in digital form, be it airtime or currency. People are already incentivized to think about boosting their productivity through newfangled digital tools on their smartphones. More often than not, the younger urban population is educated and tech-savvy, and in places like Kenya, ready to try something new.

I couldn’t argue with his assessment. In fact, I’d take it a step further, based on my own decade’s worth of research into the informal sector’s financial behaviour and cash flow management practices. The developed world economy is beginning to show signs of convergence, in pattern and in the types of challenges faced when attempting to manage in highly uncertain situations, on irregular and unpredictable income streams, often with the very same elements of seasonality – time of abundance and scarcity – as seen in rural Phillipines or India or Malawi.

For instance, Finnish farmers are being driven to use high interest payday loans to tide over the lean times because few other coping mechanisms exist in Finland’s highly formal commercial operating environment. Wedded to the land, they face the same challenges as a farmer in India, Kenya, or The Philippines. Yet no microfinance institutions catering to farmer needs would dream of showing up in rural Finland. Similarly, in the UK, lower income workers, dependant heavily on gig economy apps to generate revenue, can face significant differences in their cash flows from month to month, but again have no recourse but to use their credit cards or high interest payday loans to tide them over. The systems in their operating environment are designed for the past generations’ periodic and regular wages and paychecks, and cannot cope with the irregular cash flow patterns, as prevalent in the informal economy.

That is, the characteristics of the gig economy and the informal economy, when seen from the perspective of the end-user, are more or less the same. Ironically, however, those in the developing world have numerous solutions available to them – albeit informal, social, local – available to them to cope with shocks and volatility. These coping mechanisms have developed over decades (and centuries, in the case of India), hence the well known resilience of the local rural or informal economy.

As uncertainty increases globally, there are numerous lessons to be learnt from the mostly ignored informal economies of the developing countries which have provided incomes and employment for the vast majority of their populations, in times of conflict or peace, making sure that food reaches the urban table from the farms out in the countryside, regardless of the adequacy and availability of either systems or infrastructure. This is one situation where the formal economy’s inbuilt rigidity and dependence on predictability and periodicity are its embedded weak spot at a time when flexibility and negotiability are required to ride the shocks and volatility.

Why the Potential of the African Consumer Market Cannot be Considered in Isolation from the Informal Economy

Top flight management consulting firms like McKinsey, BCG, Deloitte, PwC et al have been taking a good long look at the emergent African Consumer Market for a number of years now. McKinsey, in fact, has just released a book on the theme, authored by their leading Africa experts. All of them acknowledge the existence of the informal sector in retail and wholesale trade and distribution, recognizing the competitive advantages and disadvantages for modern retail and consumer product companies seeking growth in African markets. They know their clientele must operate in the formal sector, and target the wealthier segments of the populace, and this is what they focus on.

Brookings Institution, however, has now caught up with their version of such a report – drawing heavily on consumer data from all the previous management consulting firm reports mentioned above – and this has inadvertently brought to light a major blindspot in the assumptions being made on the African consumer market opportunity. Unlike the management consulting firms who position their reports for the private sector, Brookings is necessarily forced to consider policy implications of their publication by virtue of their institutional nature.

Therefore, you have a report on the African Consumer Market opportunity that includes sections that attempt to justify the rise of consumerism as a signal of industrial development, through citations based on development indicators from the formal economy in sectors such as agriculture and manufacturing, thus necessitating optimistic expectations of the decline of the informal sector. This theory of market evolution predicated on the decline of the informal as a signal of economic development, has, in fact, been debunked by numerous learned scholars in the field of development economics, such as Martha Alter Chen, and Ravi Kanbur.

By taking this route, the Brookings’ report is grounded in the assumption that the informal economy is a separate animal all together and one which will vanish into thin air with the ‘rise of Africa’ and her growing middle and upper classes with the discretionary incomes that make them so attractive to global brands.

This framing reveals their blindspot.

Ghanaian scholar Bright Stevens, and the OECD, both have described the emergent middle classes expected to make up the bulk of the African consumer market as those whose roots are firmly established in the informal economy, and that this emerging middle class is unlike the conventional descriptions of middle class as seen in the developed world.

That is, the emerging consumer classes of the African continent are more likely to earn their discretionary income from various activities that fall within the informal economy than from more traditional white collar employment or civil service. This can be easily discerned from the available data on the proportion of the working age population dependent on the informal economy, and the size of that informal economy, in each of the major consumer markets highlighted.

Take Nigeria for example, Africa’s largest economy and most populous nation. Estimates from the IMF put the informal sector’s contribution to the national GDP as high as 60%, providing employment for as many as 85% of the working population. More than 90% of retail (and related services) is provided by the informal sector. This will not be transforming any time soon into modern retail, even given the penetration of ICTs as projected by the Brookings report.

The African consumer market is not growing in isolation from the informal economy, nor are the impacts of digital commerce only influencing changes in consumer behaviour. A vast majority of these emerging consumer classes are directly involved in the informal sector, and any changes in their spending patterns and behaviour are bound to have corollaries in their commercial activities and business operations. The two are not two separate entities.

In fact, ICT penetration is changing the informal economy, particularly retail and wholesale trade. B2C sales and marketing facilitated by digital platforms are a contemporary reality, visible if you know where to look online. WhatsApp, Facebook, Twitter, and Instagram offer scale and reach to enterprising entrepreneurs looking for new customers, and the proliferation of on demand apps for services such as car hailing are promoting wholly new business models for transportation and distribution. This is the current reality evidenced by any number of new startups announcing their arrival in the tech press in Nigeria, Kenya, Ghana, South Africa, and more.

What is not transforming as rapidly are the policies and regulations concerning formalization, and those barriers and costs still hold sway. Trade and services are still likely to remain within the informal sector even if their productivity and efficiency are being improved almost daily by the adoption of new and improved communication technologies. Viable pathways for their integration into the formal economy are few and far between. And, their progress and development is hampered by obsolete models and worldviews, as though they’re stuck in stasis.

It is this blindspot that makes the Brookings report at odds with the current landscape of the African operating environment for consumer oriented companies and global brands, particularly in the most promising markets highlighted such as Nigeria or Kenya, or even Angola.

The African consumer market cannot be considered in isolation, as though it’s on its own trajectory of evolution and development, separate and apart from the informal economy. Nor can one segment decline without having impact on the other. Their linkages and interdependencies are far too closely intertwined for that to happen. The rise of the African consumer class will remain linked to the health of the resilient and persistent informal economy for some time to come.

 

Further reading: How Africa Is Challenging Marketing, Harvard Business Review, June 2014

All Hail the Business Model Behind the Global Gig Economy

Uber driver Mohammed, New Delhi, 26th November 2018

The first world’s ardent embrace of the gig economy is already over. Buyer’s remorse is setting in, even though it may have helped global unemployment hit its lowest point in forty years. What will remain, however, is its impact on the usually overlooked Rest of the World, where the ability of an app to drive demand and scale reach, affordably and instantly, is currently transforming informal economies across the African continent, opening up whole new opportunity spaces for the social, mobile, youthful generation. Easy to set up and deploy, this app driven business model offers a flexible and negotiable solution to the age old problem of demand and supply in a mobile first world. My only question is whether it’ll turn out to be as world changing as prepaid mobile airtime?

From the Caterpillar to the Butterfly: Africa’s Mobile Boom Years Are Over, Here’s What Next

For the past 15 years, Africa watchers have been waiting for her mobile phone industry to reach a critical landmark – almost full saturation of the market. This milestone may be close at hand, as recent news and data show. In June 2018, Kenyan mobile subscriptions reached 98% penetration, a 13% jump over the previous year, the highest ever recorded, even with all the caveats of youthful demographics and many users owning more than one line.

And, it isn’t just Kenya, long known to be early adopters of innovation and technology. The African mobile market, as a whole, maybe reaching saturation point as the latest IDC data shows. Phone sales continue to show signs of decline. Unlike previous slowdowns of smartphone sales1 which were economy related and feature phones continued selling, this time the decline can be seen in both categories, implying the great African mobile subscriptions growth boom may now be over.

Even Nigeria, recently found to have more people living below the poverty line than India, has achieved more than 80% mobile phone penetration, with hopes that the end of 2018 will see 100%.

The number of mobile subscribers grew astronomically in 2017 and its penetration increased to 84% in comparison with 53% in 2016. With an increase in the number of affordable phones entering the Nigerian market and looking at the trajectory of growth between 2016 & 2017 (31% growth year-on-year), there is a strong indication that by the end of 2018, there might be a 100% penetration of mobile subscriptions.2

Healthier West African economies such as Ghana and Ivory Coast have already crossed the magic 100% threshold, as has conflict riven Mali.

Achieving this landmark has not been consistent across the continent, and some countries like Malawi and Chad are still below the halfway mark. However, it is known that Africa may never achieve the same level of penetration as seen elsewhere, given that 40% of the continent’s population is under the age of 163. And so, the current decline in new phone sales can already be considered the signal of a mature market, showing signs of saturation.

From the caterpillar to the butterfly

In a very short generation, Africans have gone from being mostly isolated – from each other, and the rest of the world – to being plugged in, all because of this very powerful device in their hands. The decline of phone sales, or the slowing down of subscriber growth numbers, should be cause for jubilation. The continent is now connected to the rest of the world, and Africans are talking to African across the span of mountains and deserts. Traditional pastoralists receive satellite data informing them of the best locations for forage for their livestock, and they can access insurance in times of famine and drought. Urban youth are trading bitcoins, while their mothers gather in social media groups to trade in goods and information. The entire operating environment of the African economic ecosystem has been transformed.

Where just over ten years ago, Nokia’s greatest concern was how to design ever more affordable and robust mobile devices which could connect people across languages and literacy barriers, now we have a population that has a decade of experience in information technology, regardless of their education levels. Even the most remote or marginalized have seen the phone, and can access its use, through intermediaries and access points. Digital Africa has become a daily matter of fact rather than an unusual achievement for the development crowd. You can see it in the tenor of the research articles, and read the difference between the way the growth of the mobile ecosystem was covered in 20054 and the way its taken for granted now.

The end of an era – double digit growth of the African mobile market – signals the beginning of a whole new phase of development and opportunity – a connected continent, ready for commerce and communication with the world.

Ten years of transformation

Over the past decade, mobile phone ownership has gone from a novelty to commonplace. It has bridged the rural – urban divide, strengthening linkages, both social and commercial. In turn, innovation diffusion pathways have proliferated from the urban centers, and the adoption of new ideas and goods has accelerated, changing aspirations and expectations, particularly among the younger generation. The global African does not need to leave her childhood village in order to speak to the rest of the world or be recognized for her achievements. Social media is there to give him a voice, and a platform.

It is this new reality that has not yet be recognized by the long established experts on Africa and its many varied challenges and unmet needs. The mindset, worldviews, and the consumer culture have changed far more rapidly than the now obsolete snapshot of the poverty stricken, marginalized African that media and researchers base their assumptions and their writing on. Policymakers and programme designers are even less in the know, and the gap between generations has never been wider.

On the upside is a whole new playing ground – my friend and colleague Michael Kimani calls it the informal economy’s digital generation. Young people like himself, graduating with university degrees into a business landscape without the jobs to hire them, are turning to the platform made available by their smartphones to establish themselves and earn a living. In the four short years I’ve known Michael, I’ve seen him grown and evolve into the voice of African blockchain and cryptocurrency, soon to be an educator on the subject, and already organized as the Chairman of the Blockchain Association of Kenya.

“What a great time to be alive,” Michael’s joyful voice still rings in my ear after our call last week. The digital future is all around him, a playground for him to build and make whatever his mind’s eye can envision.

The end of the world for a caterpillar (the decline of sales & subscriptions) is the birth of a whole new one for a butterfly (the global digital African with a powerful computer in his hands).

We need to throw a party and celebrate!

 

1 Smartphone sales, driven by more affordable Chinese brands, may continue to see growth, but as the IDC states, this growth may come from those transitioning from featurephones.
2 Jumia Mobile Report 2018 in Nigeria
3 The Mobile Economy: Sub-Saharan Africa 2018, GSMA Intelligence
4 Cellphones Catapult Rural Africa to 21st Century, August 2005, New York Times

Pondering India’s Cashless Future

Chhotu here accepts digital currency payments via the mobile platform on a daily basis.

His QR code is prominently displayed upfront next to the bottles of sauce, and a sticker displays the icons of all the payment apps acceptable to his Bhim app.

The Bhim system, launched by the Government of India, is a godsend to micro businesses like Chhotu’s – it allows him to accept payments from a wide ranging variety of apps and systems with the use of just one QR code.

Mr. AutoRickshaWallah on the other hand, preferred to negotiate with me in cash, agreeing to an amount upfront, based on my destination than to go through the hassle of using his digital meter.

By law, he must accept digital payments, if asked by a customer. But, he says, this is very rare; he might accept a Paytm fare once a week. The balance is all in cash.

One size does not fit all

The need for cash in hand during the course of each of these service providers drives their payment acceptance behaviour. Chhotu may not need as much cash on hand once he has set up his inventory and supplies for the day, barring the need for change whereupon he can suggest the customer move to a digital option if required. Plus, at the end of his shift at 10pm he’s happier if the bulk of his sales is in digital form for safety and security.

Mr Autorickshawallah, on the other hand, feels the need for cash available to purchase fuel, food, and pay out wherever required for parking or other purposes (like the police!).  He’s on the move and the signal may or may not work when the time comes for him to accept payment.

Digital adoption is unevenly distributed

Their customers are also from different demographics. Where Chhotu is set up, the market is full of young people with disposable income, out for the evening with their friends. Hearsay has it that mobile apps are selected and used based on their marketing incentives – most offer cashback on digital payments as a driver for user acquisition, but users have gotten clever and download them all so that they can take advantage of different promotions and offers to maximize their benefits.

Mr Autorickshawallah’s customers come from a wider range of demographics, and not as likely to be as comfortable juggling digital payments as Chhotu’s youthful crowd. He’s in his vehicle and on the move, and must ensure the payment gets made, unlike Chhotu who can take the risk of waiting since he and his stall aren’t going anywhere.

Is Cashless in India’s Future?

While digital payments, cards, and mobile apps were certainly far more visible than ever before, and definitely since the demonetization of two years ago, there is a very long way to go before cashless becomes as broadly accepted and mainstream as mPesa in Kenya. Unlike mPesa, the Indian digital currency ecosystem is linked intimately to bank accounts, and thus, there’s an entire ecosystem of services and goods providers that needs to shift over to the formal economy and its financial institutions before cashless becomes seamless at the borderlands of economic strata and demographics.

The current formal financial ecosystem is not designed to address the needs of the informal and unorganized sectors. And this is the iron that post demonetization analysis shows was not struck while it was hot enough to enable the broader change in culture and behaviour to stick once currency was back in circulation.

Chinese investments in African tech will transform the fintech landscape

A recent article brought to my attention this report on the pattern of funding experienced by fintech startups in East Africa and India with rather damning results. 90 percent of the capital invested by “Silicon Valley-style” investors went to startups, technically in East Africa, with one or more North American or European founders.

These results put an entirely different spin on more recent articles on the rise of African fintech and the millions of dollars raised by startups in Africa. Village Capital, too, has been making an effort to promote their recommendations for structural change in the ecosystem in order to enable the emergence of hundreds more fintech and DFS (digital financial services) startups deemed necessary to transform the economic landscape in Africa.

But the challenge, as framed by this snippet from the report, will remain, as it “reflects deep cultural trends in American life”, of bias, stereotyping, and inbred prejudice. So called “first world” technology such as artificial intelligence is already dealing with the problem.

China’s interest in African tech, particularly trade related such as in commerce and payments, is being noticed

Simultaneously, and recently, I came across this op-ed for the WEF making the case for why the tech sector is China’s next big investment target in Africa.

Given China’s position as a leading and rapidly accelerating technological superpower in the world, making strides especially in the fields of logistics (smart cars, drones, e-commerce) and energy (solar panels, smart metering, etc), it makes sense that the most logical industry for the next stage of Sino-Africa collaboration is technology.

But that’s not fintechs and DFS startups, you say, comparing these apples to the Village Capital’s report on oranges?

Perhaps this is why Alibaba Group, the unparalleled pioneer of e-commerce and payments in China, has started to show an interest in Africa. Not only did they collaborate with UNCTAD on the eFounders programme to train over 100 African entrepreneurs in the next couple of years, they recently announced a fund of $10 million to invest on the continent over the next 10 years. Furthermore, Alibaba’s subsidiary Ant Financial has signed a partnership with the United Nations Economic Commission for Africa and the IFC to promote digital financial inclusion. While these are preliminary steps, we are hopeful for more serious commercial involvement in Africa from a company with a $500 billion market cap.

DFS, DFI, what’s the difference between digital financial services for financial inclusion and digital financial inclusion? The target is clear. And been noticed from the other side, as this rival opinion piece in the Financial Times shows, albeit with a greater sense of urgency and panic in the tone and style. It may also explain why Village Capital woke up this week to trumpet the results of their analysis on funding patterns from over a year ago. From the FT:

The Trump administration has made a perceived global rivalry with China the centre of US foreign policy. This competitive stance has coloured the view of African countries in Washington and a tale of Chinese mercantilism in the region has come to dominate the narrative, under which China greedily demands privileged access to Africa’s natural resources in exchange for no-strings-attached infrastructure financing.

But that story is outdated and fails to capture an emergent area of true competition — that among US and Chinese tech giants.

Given what we’ve seen in the Village Capital report linked in the first paragraph, will Chinese funding patterns be any different? Two key factors are being highlighted by both sides:

Read On…

Financial Patterns at the Last Mile of the Farm to Fork Value Chain

Source: http://library.wur.nl/WebQuery/wurpubs/454661

This value web illustrates the last mile of the farm to fork agricultural value chain in the state of Maharashtra, India. We’d mapped it during our project/s for the Dutch government back in mid 2013, where we’d introduced human centered design thinking for sustainable agricultural value chain development. Subsequently, I led a multidisciplinary team conducting fieldwork in rural Kenya, in order to compare and contrast the last mile in the African context.

As mentioned previously, while the details of seasonality and crops may change due to geography, the essential foundation and framework of the farm’s financial management behaviour remained the same. And, while the actors and roles in the value web may shift and change between rural India and rural Kenya, the essence, here, too, remains the same. There are intermediaries and brokers, transporters and aggregators, and wholesalers and retailers, along with agrovets and extension agents. Everyone has a part to play in the interdependent web of value exchange, based on trusted relationships for the most part.

Therefore, their cash flows and income streams too, are closely linked to the harvest seasons and the crops, just like the farmers‘. In fact, Indian business magazines go as far as to assess the health of each year’s monsoon season in order to attempt forecasts on the annual peak of consumer activity – the post harvest festival season in the October-November period. They recognize the linkages and networks that connect the rural and urban markets, and the ripple effects of the quality of the year’s harvest. It would not be inaccurate to say that the degree of impact and influence is proportional to two related factors – the proportion of GDP from agriculture and related activities; and, the percentage of the country’s population dependent on agriculture and related activities.

Market town finances

In addition to the linkage, we have observed financial management behaviours among traders, and not just those dealing in agricultural commodities or fresh produce, that resemble those on the farm.

The factors that impact the management of working capital and income streams – uncertainty of amount and the timing of its arrival – remain the same, as do the majority of the characteristics of the operating environment, such as infrastructure and systems. A trader dealing in new clothes also sees seasonal differences in her sales, and, unlike a trader in foodstuffs, is also more likely to see greater impact of a low season as people go without the discretionary purchase of a new shirt. Thus, traders must also manage the volatility, uncertainty, and seasonality of their addressable market, and their customer base, and their cash flows and income streams accordingly. We see the impact of this in their business development strategies, and that will be the subject of the next post.

Furthermore, in market towns and border markets, unlike urban metros with a myriad of occupations, the health of the agricultural season will impact everyone in the ecosystem not just the traders themselves. The internetworked last mile of the farm to fork value web closely links the health of the harvests with that of the rural and peri-urban economies.

 

Collected Works
Work in Progress: An Introduction to the Informal Economy’s Commercial Environment – Links to organized series of articles on the topic

Rural Household Financial Management on Irregular Incomes

While all farms are not alike, and scale and variety and geography differs, the pattern of household financial management holds its fundamental logic across continents.

click to expand image

As we saw previously, an experienced farmer tends to fall somewhere in between a salaried employee and an odd job labourer in their ability to predict with any reasonable degree of accuracy when they might expect cash income to arrive and approximately how much. They are able to estimate the quantum of the crop, and when it will be ready to harvest. They may already have buyers or a market.

However, in practice, farmers rarely rely solely on these infrequent lump sums for managing their household finances – a big harvest once or twice a year, maybe three times depending on the crops and the local geography. Instead, they manage on sophisticated portfolio of investments, each maturing over different periods of time, as a way to mitigate risk, as well as smoothen out cash flows over the course of the natural year, and minimize the impact of uncertainty or shock. The drivers for these goals are the foundation for the variety of business practices observed across sectors in the informal economies of the developing world.

You will find even the humblest farmer, as long as he owns the patch of land on which his homestead is built, even if his fields may be further away, doing some or all of a combination of these activities to manage his income stream over the course of the natural year. I will explain the basics, and then give examples from different regions.

Managing A Portfolio of Investments based on “Time and Money”

The illustration above captures our attempt to map the various cash flow patterns from the farmer’s portfolio of investments. Consider each cluster of elements as a “deposit” with varying times of maturity for cashing out, as the need may be. For example, cows give milk which can be sold for almost daily cash returns, as can the eggs from chickens. The fresh produce from the kitchen garden matures far more quickly than staples such as maize or beans. And, if there is a cash crop such as tea or coffee, this may taken an entire year for the harvest to be monetized. At the same time, various farmyard animals are invested into when young, maturing over time for sale, as an emergency cushion or for earmarked expenses such as annual school fees.

Thus, over the course of the year, cash arrives in hand with varying degrees of frequency, and periodicity, thus ensuring the farm’s ability to manage regular household expenditure on a more or less regular basis, even though there are no predictable wages. Nor, is the farmer burdened with credit and debt over the time whilst waiting for her 2 or 3 major harvest seasons.

Variance in regional seasonality influences coping mechanisms

While the foundational framework of the farmstead’s domestic financial managment remains the same, regional differences due to geography, and thus seasonality, influence crop choices, number of harvests, and the details of the coping mechanisms selected by the farmer to manage her financial portfolio.

For instance, in rural Philippines, in the rice growing Visayas islands, only well situated farms benefit from three rain fed rice harvests a year whilst the majority must manage on two. Thus, farmers invest in piglets, calves, or even cull chicks for nurturing into fighting cockerels which sell for more than 10 times the price of a regular chicken. They stock firewood, coconut husk, and supplement their cash money needs through petty retail during the low season.

In rural Malawi, outside of Blantyre, the farmwife who is a member of beekeeper’s cooperative, distills traditional wine for sales 2 to 3 times a week, boosting her cash flow frequency instead of waiting for the annual honey harvest.

Minimizing volatility to enable financial planning

Thus, we can see that even under conditions of uncertainty, farmers have established the means to manage their household expenses, including periodic ones such as school fees or loan repayments, on irregular and unpredictable cash flows from a variety of sources. Their sophisticated portfolio of investments contain “deposits” that mature over varying times, for different amounts, and their planning, thus, goes into ensuring that the volatility between income and outgoing expenses is kept to a minimum.

Next, we will see how less agriculturally dependent sectors of the informal economy base their financial management patterns on the rural economy’s foundation of portfolio management.

 

Collected Works
Work in Progress: An Introduction to the Informal Economy’s Commercial Environment – Links to organized series of articles on the topic

Will the global trade war lead to more sustainable (and local) consumer products?

In a study titled “Competing In the Age of Multi-Localism”, ATKearney said mounting trade tariffs and other pressures have upended the global strategy – think mass-market production and achieving economies of scale – that has been a business hallmark since the early 1990s.

“It’s no longer a viable strategy for many companies,” the study said. “The age of multi-localism has arrived.”

The above snippet is from a recent Forbes article and caught my attention immediately. The implications for global value chains, not to mention product development, manufacturing, and the logistics of distribution are enormous.

“A one-size-fits-all business strategy across markets appears to be more unworkable now than ever,” the study said.

Its taken a wee bit more than a decade, but this is possibly the best news I’ve heard in a long time. The report from AT Kearney is available here and my previous musings on emerging markets, globalization, and product development can be found here.

This conversation with continue.