Mobile Money and the Informal Economy: A Paradigm Change

By | July 9, 2019

One of the most powerful pieces of data analysis I have come across recently has been the Banque de France’s working paper on the role of financial innovation in the informal economy. In my opinion, the importance of their conclusions are no less than the famous “price of fish” paper of a decade ago – both provide evidence that transforms the way we perceive the role and the impact of mobile telephony in the developing world context.

The essence of the paper by Luc Jacolin, Joseph Keneck Massil, and Alphonse Noah give us robust evidence that the presence of financial services on the mobile platform – basic mobile money transfers, as well as attendant value adds like loans and savings – have a proven relationship to the decrease in economic contribution of the informal sector (the relative size of the informal economy), in that particular country. In their own words:

This paper investigates the impact of mobile financial services – MFS (mobile money, and mobile credit and savings) on the informal sector. Using both parametric and non-parametric methods on panel data from 101 emerging and developing countries over the period 2000-15, we find that MFS negatively affect the size of the informal sector.

According to estimates derived from propensity score matching, MFS adoption decreases the informal sector size in a range of 2.4 – 4.3 percentage points of GDP. These formalization effects may stem from different possible transmission channels: improvement in credit access, increase in the productivity/profitability of informal firms attenuating subsistence constraints typical of entrepreneurship in the informal sector, as well as possible induced growth of firms already in the formal sector. The robustness of these results is supported by the use of an alternative estimation approach (instrumental variables).

These conclusions frame the discourse around MFS in an wholly new way. Conventional research tends to focus on the poverty alleviation impact of mobile money in developing countries such as Kenya, with mixed results. Jacolin et al focus on MFS impact* on the size of the informal economy. Thus, you get the kind of take downs of the poverty alleviation studies as recently published by Bateman, Duvendack, and Loubere, followed by debate  and discussion, even more so on Twitter. The subject matter is far too complex for simple answers and/or simplistic solutions. In my opinion, its a systemic one.

Informality != Poverty

What is left unpacked in these analyses and conversations is the unspoken assumption being made by researchers from the Global North regarding the relative wealth or lack thereof among the economic actors in the informal economy. Informality is not equivalent to poverty, although it may seem that way to academics and economists more accustomed to dealing with numbers rather than people themselves, in situ.

My go to example is Teresia, whom we met selling new clothes under a tree in the market at the border of Kenya and Uganda in spring 2016. At first impression, she seems marginalized, literally in fact operating by the side of the road. But after spending a few days with her to understand her commercial investment decisions and business management practices, one discovers that her annual investment in trade goods (her inventory) and services (transportation; mobile money, etc) ranges around 20,000 US dollars, on average.

Location specific segmentation attributes (by Niti Bhan, March 2016)

She is the perfect example of an informal business that is on the path to future formalization – not yet a proto SME, as we discovered, when segmenting the informal trade ecosystem at the border by their investment capacity, but showing all the signs of being on her way.

Digital economic ecosystem spurred by Mobile Financial Services

More recently, we undertook fieldwork to understand the rapid adoption and utilization of digital platforms among the informal trade ecosystem, this time in the regional hub markets of Nairobi. Here, what I am seeing, is the emergence of a hybrid economy, one that is neither wholly informal, but not yet wholly formalized.

This liminal space can be called the primordial soup from which the formal micro-enterprises are emerging, faster than before, given the exponential growth in usage between 2017 and 2019 that we documented.

Time to change the paradigm of digital development discourse

Thus, we can see why this Banque de France paper has the potential to shape the development discourse around poverty and mobile money services. By shifting our attention away from poverty alleviation – a magic bullet if I ever saw one – to that of transformational change – a decrease in informal sector! a long awaited magic bullet in its own right – we can open up a whole new paradigm in the way we approach the theme of economic development, at the policy design level as well as at the earliest research stages to inform programming and planning.

The evidence provides novel pathways for promoting progressively beneficial transformation of the complex adaptive system we have observed and mapped within the informal economy. And, the rapid adoption of mobile telephony and subsequent digitization imply that fresh lenses are now required for puncturing long held assumptions on poverty and informality that have been holding us back. Separating the impact of mobile money services on the informal sector from the impact on poverty offers a clarity of focus hitherto unknown in the literature, and a far more pragmatic path to follow. As Jacolin, Massil, and Noah conclude,

These findings lay the groundwork for the scarce literature on the macroeconomic impact of mobile financial services, a major dimension of the growing drive towards economic digitalization.



* Agreed, Mobile Financial Services cover a broader scope than mobile money alone, however few of these MFS could work without the foundation layer of a ubiquitious mobile money platform already prevalent in the region or location of study.

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