Posted by: beninmwangi | August 12, 2007

Whythawk Meme on Informal Market Economies in Africa

Hi, here is something which has been gaining a tremendous amount of traction lately- it is the discussion on informal market economies vs formal economies in Africa. Namely, if there was a place that companies, organizations, governments, and individuals should direct there energies and resources for their benefit and for the continent’s where should it be-to Africa’s formal economies or to the continent’s informal economies?

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This question or debate has been directed not only to developing economies on the African continent, but also those outside of the continent. Fortune 500 companies in the US have been asking themselves this question too, as I recently witnessed at IBM’s Global Innovation Outlook on Africa in Atlanta, GA that took place this past July. But perhaps nowhere has this debate been gaining more steam than in Africa’s blogosphere.

Emeka, Omodudu, Imnakoya, Mr.K, Hash, Robert Shaka, Adjetay, A B Kargbo, J Arrey, and Nii Simmonds are just a few of the names which have contributed to the thoughts and discussion on Africa’s informal economies. Now someone that I have corresponded with several times on this topic with is Whythawk-aka Mr. Gavin Chait. And if you are a.) from South Africa or b.) a follower of development economics in Africa then this fellow needs no introduction. However, I still thought it appropriate to include a snippet of his bio before proceeding:

Gavin Chait specializes in economic and enterprise development. He both creates systems for economic and business generation and then project manages these through the implementation phase.

Gavin has worked with the University of Cape Town Department of Management Studies in the Faculty of Commerce to develop student entrepreneurial consulting projects. He has a close relationship with the Department of Economic Development and Tourism working on projects as diverse as tourism development and support; and the 1000 x 1000 Project in which 1 000 individuals were given the opportunity to start a business for R 1 000 each. Gavin assisted with the initial project scoping and development of his original idea for implementation at such a large scale. He further wrote the training and feedback manuals to be used in the event and project managed the event.

Essentially what Mr. Chait has done is memed or tagged me, but instead of writing about myself this meme is actually about expressing our thoughts on Africa’s informal economies. Thanks Gavin! So in keeping the conversation alive I am tagging the following:

Ok, so here is an excerpt of the post that inspired the discussion, which Gavin, Hash, and I later decided might make a good meme:

Benin Mwangi, who blogs about doing business in Africa, asked me recently: “should the discussion be about how to get the informal sector to become part of the formal sector or should it be how to cater to the informal sector?” This in an excursion into the morass of African poverty and development.

The short answer is: neither; ending poverty has nothing to do with the informal sector.

This is not to dismiss the question, which is an important one. With the failure of most centralized economic policies and governments in Africa the informal sector is the largest employer and service provider in most of the continent.

However the question conflates symptoms with causes. For starters, how do informal markets even come to be?

The break-down of property rights

A centralized state exists largely to protect contract and the enforcement of property rights. Individual rights and the welfare state are a relatively recent development. And you can’t have these without taxes. And taxes don’t exist without businesses and incomes to tax. And those incomes and businesses require contract protection and the enforcement of their property rights.

So where do I stand on this topic? Well, while I may agree with the reasoning behind the formation of Africa’s informal economies that Gavin eloquently outlined in the quote above, I do believe that the informal markets should be the focus of attention. However, not in the way that Mr. Chait understood me to say. Which is to say that my reference was to private business looking to the informal sector, not government involvement.

The premise is that in Africa’s informal market settings you can easily have several layers of formal participants acting as “go-betweens” between formal and informal businesses. What this does is raises prices, without changing the output, while lowering the income of informal export-oriented market producers. This is made possible by several factors; the two that I would like to address are infrastructural gaps and a very uneven flow of information-with the informal producers historically being on the weaker end of the information flow. With the recent relative abundant flow of mobile phones into Africa’s rural areas, however, the tide is beginning to change-at least on the information front. As a result agricultural producers who receive food commodity price updates by mobile are able to reduce the layers of middlemen involved in transactions and get closer to the end-user.

I think the discussion should be on how foreign companies could team up with these participants to reach new markets and on how they could move around the middleman , to go deeper within the supply chain and closer to this informal sector. I do agree with Gavin though, that paying more attention to the causes of the informal sector would be more productive for a government than focusing solely on eliminating the informal market.

Also, I would like to add that Whythawk’s analogy of someone in a wheel chair crawling before walking is very apt. It reminds me of George Ayittey’s call to Africa’s cheetahs to embrace indigenous solutions and technologies as a means to market participation before investing in complicated solutions. This is something which is extremely practical, it embraces the idea of “scratching where you can reach”. This is where I think Africa’s informal market participants are right now, which again is why I think that they deserve attention.

Here is an excerpt from Imnakoya, where he talks about enabling the producers behind the informal economies:

The beauty of this approach is that the discussion becomes multi-
faceted (political, policy, social, private vs public sector, etc) and
breaks out of the rarefied arena of just talking about “business”. It
also incorporates the several angles already suggested above. And it
can be easily (hopefully) synthesized into actionable points/agenda
that we/someone/TED Cheetahs can explore (point #3 from Omodudu)
further.

And here is another excerpt from another blogger, Emeka, actually coming by way of a comment that he made on an earlier post:

What leads to or has led to good governance in most parts of the world has been the growth of alternate power bases with the accompanying increase in financial power. Be it the burghers of the middle ages in Europe or the middle class in military ruled South Korea there was a common factor—an empowered class that derived its wealth from a growing capital base—Until you build that class of individuals or they build themselves you might as well be whistling in the wind. Must the growth of this group be directed top-down by aid and or fiat, not necessarily so,in fact they rarely do get built that way. Once again we have quite a few examples of disenfranchised expatriate populations that were able to achieve this feat,in fairly hostile environments: The Non-resident Indian,Chinese and Jewish Populations are the better known examples. Are there African corollaries? Yes the unrecognized Mourides of Senegal for example, or within Africa the numerous populations that have spawned informal industrial clusters.Have we recognized their promise and looked for means to strengthen their nascent steps ? No we have not. The point here is that we need to strengthen and build on those areas of strength and recognize them for what they are. With a growing stake in even an informal economy the individuals demand and over time obtain the means to implement the governance that we seek.Governance like every thing else has to proceed from bottom up and not the other way round.

The two above excerpts sort of echo’s why I think we, private folk, should be looking at the informal sectors. Imnakoya’s part about how the informal sector analysis opens the discussion up to wider issues is sage. Also, what Emeka says about the bottom up approach is very timely and often I think that we forget that people through trade and ownership precede governance. Governance comes in when the demand to protect property and foster an enabling trade environment outweigh the costs. So again, I think that foreign businesses can look to the informal sectors as customers and suppliers, by doing so they will be fostering development. On the other hand, Africa’s governments should focus on collecting taxes to build infrastructure and enforce property rights .

So that’s my take on it. What do you think? Let us know with your comments or by being part of the meme. Thanks!

photo courtesy of Allposters
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Responses

  1. You’ll find my response to this topic on my article The Status Quo and Radical Ideas.

  2. I am afraid that I cannot add much to this dialogue as I know very little about how informal market economies work. I did read somewhere in the past several months that the country of Tanzania was having some success in transitioning merchants who have operated for years in the “traditional informal economy” to the formal, tax-paying small business economy.

    It makes sense that a stronger taxbase must be created in several African economies through the taxation of existing micro and small business enterprises including fair taxes on wages and salaries. The problem for governments will be how to gain the confidence of people who have been working in informal economies for generations that collected tax revenues will be used to pay for desperately needed public services vs. lining the pockets of the ruling elites. This is a major issue for many potential new foreign investors in Africa as well.

    Why don’t you knock on the door of some of the top economists who blog regularly (i.e. Pablo at iPienso, co-founder of the World Bank’s PSD Blog or London School of Economics graduate Koluki from Angola) as they certainly should be well versed in this subject area?

    I’ll just sit back and pick from the buffet…:-)

  3. Excellent post Benin, you keep raising the bar!!!!!!!

    My two cents:
    Absolutely concerted attention must be paid to the informal economy. In my opinion it is the INCUBATOR for industrial, manufacturing and services expansion in the formal economy. Many informal entrepreneurs emerge because a) their assets (land, cash, skill sets) have little or no value in the formal economy yet there is organic grassroots demand for their value b) they have a low capital base to work with so they start micro-enterprises that fall outside the influence of the mainstream economy c) I think Wythawk alludes to this, the formal regulatory environment is PUNITIVE to wealth creation hence many entrepreneurs PURPOSELY stay outside the purview of the TAX BRACKET/FORMAL ECONOMY.

    The good news I think is major inroads are being made in to reversing all three. A couple of examples I have seen that have given me cause for jubilation:
    1) the transformation of the banking landscape in Africa where there has been a strategic shift in attracting the informal economy. The buzz is all about microfinance I know but there are deeper tectonic movements. The case of Equity Bank in Kenya that is metamorphosizing every day is a good example…..first they extended the reach of financial services……next they influenced public policy in a way that legal revisions are being made to the property rights/contract enforcement framework (sealed a partnership with Nairobi City Council where hawkers would be granted an equity stake in their operations as well as the requisite regulatory license to operate within the formal economy)…..now they have moved on to the mortgage industry…….
    2)creative tax policies that FACILITATE enterprise growth….in Ghana they are hoping to rope in many informal merchants by introducing a low fixed tax rate across the board for a certain basket of goods and services…..basically a flat tax…..that eliminates the hurdles and complications for micro-entrepreneurs.

    What I would like to see:
    1) further revisions to the tax policy that give tax credits and rebates to micro/informal entrepreneurs that can be used as collateral for home ownership, credit or an investment vehicle
    2) regulatory incentives to financial institutions to develop investment vehicles for the informal economy e.g. K-Rep Bank example
    3) trade and commerce strategy that focuses on linkages between certain segments of industry/manufacturing and the informal sector.
    4) further liberalization of the supply/value addition chain e.g. in agriculture, granting multiple use licenses to small scale growers so that they can take direct ownership of the production, marketing and distribution chain. Some progress has been made with direct marketing, private cooperatives but more can be done.

  4. […] is the role of informal sector in Africa’s development?: “Namely, if there was a place that companies, organizations, governments, and individuals […]

  5. Hash:

    I did have the opportunity to read your post. Again, I thought it was one of the best that I’ve read, it’s cool how we are all continuously pushing the envelope. What really fascinated me about your post Hash was that your tone spoke of a seasoned entrepreneur-which of course, I have always known you to be an amazing business person whose passionate about what he does, but since you mainly write about web 2.0 and other topics related to that you have always occupied that space of my mind as the one to go to about anything to do with “web communication”. But, Man that post showcased both the savvy business person behind the tech know how, plus the team player in you too. And oh by the way, be on the look out for a top 10 web 2.0 post coming straight from beninmwangi.com soon-LOL 🙂

    BRE:

    Whoa, for someone who isnt versed on it, you sure did hit that nail with a mighty hammer. I think that one word “confidence” in this instance is one that says it-ad infinitum. In fact, that question that you posed of how to convince anyone who has never done any business but an informal one must be the multi-billion dollar question. You’re right maybe I’ll have to consult Koluki or Pablo. But here’s my observation. there is a steep price that one pays nevertheless, for taking the informal route- a smaller array of services are available to businesses that are not documented and the services that are offered often are done at costs that would make one within the system shriek. So, my simple answer would be to start by having gov’t economists to thourougly research this sector. Learn the supply/demand dynamics at play-and then hone in on services that gov’t might be able to offer at better rates than current suppliers and then pbegin offering those services, for a limited time, ushing a portion of the tax revenue proceeds. And extending the incentive deeper to those who choose to make the switch to become tax payers. There was also something which Whythawk said which I agree with, which is the property rights issue. He said that if the gov’t is unable to enforce property rights during disputes, then it doesn’t make sense for a person to pay taxes-this is really a big part of what the free market system is all about-the ability to own property and make it work for you. Taking it a step further, it would also follow that those nations which through policy dissuade or prevent women from holding titles to property would do well to reverse those laws.

    Thanks BRE!

    Sijui:

    This is really good news, you’re right.

    1) the transformation of the banking landscape in Africa where there has been a strategic shift in attracting the informal economy. The buzz is all about microfinance I know but there are deeper tectonic movements. The case of Equity Bank in Kenya that is metamorphosizing every day is a good example…..first they extended the reach of financial services……next they influenced public policy in a way that legal revisions are being made to the property rights/contract enforcement framework (sealed a partnership with Nairobi City Council where hawkers would be granted an equity stake in their operations as well as the requisite regulatory license to operate within the formal economy)…..now they have moved on to the mortgage industry…….
    2)creative tax policies that FACILITATE enterprise growth….in Ghana they are hoping to rope in many informal merchants by introducing a low fixed tax rate across the board for a certain basket of goods and services…..basically a flat tax…..that eliminates the hurdles and complications for micro-entrepreneurs.

    I am not familar with K-Rep Bank, though…will have to look that up. Agree with you too on the private co-ops, they help, but multi-use licenses would probably go much further.

    Hmmm, also, your first paragraph resonated with me too. Somehow it triggered a type of deja vu in which I recalled something else that is in the supplier’s psyche-once someone has already paid you for a service you tend to not be inclined to do anything else to make that customer more happy, beyond that which you’ve already done. I say that to say that this dynamic might apply to some of Africa’s governments, particularly those that lag behind in offering incentives to tax payers. The idea being that a country’s formal sector, which is already paying taxes and isn’t complaining might not be a strong enough catalyst factor to cause a gov’t to suddenly become service oriented. However, an informal sector-with lots of undocumented cash might do the trick, at least all things being constant-i.e. responsive leadership.

    Sijui, you should run for office someday, simply because you’ve got the answers. And hey, for what it’s worth I’d stand in line two times to put my vote in for you!!! 🙂

  6. I like you “scratch where you can reach” comment 😉

    A lot of what is mentioned regarding transitioning informal businesses into the formal sector is – and I am kind of harsh on this point – window-dressing and camouflage. The reason I come back to governments – and the reason that big businesses also only dabble in the informal sector – is the idea of contract protection.

    I loved Mugabe’s recent “begging” of foreign investors to come and put money in Zimbabwe because, he says, the army will protect their assets. This is where African governments get it wrong. Businesses want to know that everyone respects the law and that the law will remain consistent NO MATTER WHO IS IN CHARGE. There is no point in a company investing only to discover that another government coming in pulls away the protection of the soldiers and disregards their property rights.

    I repeat: the only incentive necessary for informal businesses to formalise on their own (and with no other inducements required) is if the benefits of registration and formalisation outweigh the disadvantages. The fact that informal sectors exist at all (and on such a large scale) is an indication that this is not so. With this being the case the only way you can get “some” people to formalise is to bribe them with subsidies and benefits.

    But you can’t bribe everyone.

  7. Gavin:

    Thanks for your response. I can appreciate your point of view, very much. The fact that you are “on the ground” and can see rhings firsthand both as a S. African and as a development consultant speaks volumes.

    Your analysis on what comprises and causes an informal sector is so brilliant. But let me ask you, are you familiar with the debate taking place within the medical community- that of whether holistic and natural health is more effective than conventional medicine? Well, of you will, please allow me to draw an analogy between this physical health realm and the realm of economic health. So let’s say that you have two patients, one with a traumatic injury (like an auto accident) and the other patient with an urgent medical issue, but which isn’t traumatic so let’s say that this patient suffers from poor nutritional health-could one imagine natural health provide positive outcomes in both instances; what about trauma surgery? Although I am not a medical person, my inclination would be to say, “no”. Neither approach presents a “one size fits all” solution to all patients.

    Likewise, I would be inclined to say that there are varying degrees of economic health, you mentioned this too. I think the severely weakened economies-such as Zimbabwe, might be better suited for economic “trauma surgery”, which would be in line with what I mentioned in this post. However, there are other nations with much smaller informal economies where a more preventative strategy might work better in-like tightening up the property rights laws.

    I say this because the preventative approach, in a severe situation, might have some success but it would likely be very, very slow. Where as a symptomatic approach might, in the short term, provide quicker relief and from there, over the long-term, a more holistic approach might help an economy have a less bumpy ride towards equilibrium.

    Anyhow, I am considering adding this discussion to Global Voices, your argument is very relevant, thanks again. And by the way, my wife helped me become familiar with that phrase “scratch where you can itch”-I think it comes from a Kikuyu proverb-i like it too!

    Keep doing what you do!!!

  8. […] Benin Mwangi on informal market economies in Africa. […]


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