Risk mitigation strategies in the uncertainty of the informal economy

By | September 28, 2012

Weights and measures, Village Rewalpur, Rajasthan India Jan 209

What is the role of flexibility as an inherent design principle for transactions in the informal economy? Why is it so critical to the success or failure of business models in this operating environment? What does flexibility primarily tend to mean in this context?

Uncertainty is the primary differentiator between the developed world’s systems that work and the developing world’s perceived chaos.  For your average rural (or even urban) resident, who manages on an irregular income stream, from a variety of sources, there is always an undercurrent of constant uncertainty – that of time (when?) and of money (how much?) – an inherent risk involved in entering into an agreement or a transaction.

A farmer’s self help group in Kenya’s Kisii region articulated the reasons for their reluctance to enter into any layaway plans or microfinance agreements, whether formal or informal. They felt too much of an uncertainty that was less specific and more existential. Weather or disease could harm their crops, they felt insecure about taking on loans or committing to layaway plans against future harvest gains.

The degree of flexibility inherent in the system that was able to hand over control to the end user, the customer, the greater the chances of successful retention of the customer rather than loss to dropouts and delinquents.

Flexibility of time and of money i.e. the opposite of the uncertainty of timing and cash flow, is a built in mitigation strategy against the risk of the random act of god or nature. The more rigid a system and stringent it’s requirements, the less its able to deal with the unforeseen situation.

Leave a Reply

Your email address will not be published.