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Economic Development

The Value of Informal Enterprise

Informal enterprise is expanding rapidly, raising questions about what we mean when we say “the” economy and how we can better engage with it.

The 2012 presidential election has been labeled an election about the economy. Indeed, the economy has been the linchpin of the campaigns: How can we build jobs, manufacturing, and business to grow the economy?

But “the economy” is a misnomer. The US, like everywhere else, is made up of multiple, parallel economies, not a singular one. Parallel economies describes different under-the-radar, unrecognized, untracked, unsanctioned, disregarded, and often disparaged but very real and substantial commercial activities that are taking place all around the world.

These parallel economies, however, are seldom recognized, or when they are, it is usually followed by a quick dismissal that labels them criminal, marginalizes them to the underground, or rarifies them as historical remnants.

Participants at The Informal Economy Symposium hosted by Claro Partners, where I am the research director, sought a new approach to parallel economies, one that takes seriously their socio-economic value and the possibility for established businesses/organizations to meaningfully take part and learn from them.

A starting point for the symposium was the agreement that  parallel economies are far from clandestine—they are visible everywhere. And whether we buy food at a street cart, exchange our website building skills for yoga class, car share, own a microbusiness, or buy a mass produced product assembled or traded by informal practice, we all participate in them.

Even more significant was the symposium’s endpoint. The symposium concluded that the isolation and brush-off of these parallel economies obscures where real economic growth is happening—in informal enterprise. The symposium offered several case examples of how informal enterprises are proliferating even in the face of the economic crisis. Discussions of the economy it seems can no longer afford to ignore the informal.

Revisiting informal

Parallel economies run on informal enterprise—that is, individuals, microbusinesses, and networks that are self-reliant, decentralized, and trust based. Informal enterprise is the fastest growing sector of both emerging and mature economies. In his recent book Stealth of Nations, Robert Neuwirth estimates that this activity is worth 10 trillion dollars globally and employs more than two-thirds of the world’s population.

Many people mistakenly see informal enterprise as transient, soon-to-be absorbed, or stamped out, or—conversely—a model to be studied and copied by formal economic structures. In reality, informal enterprise is growing at a much faster rate than formal business. Furthermore, it is diversifying too rapidly to be assimilated, and that adaptability is not easily duplicated by formal structures. Established organizations optimized for efficiency can rarely copy informal practices. They are not built for the conditions of ambiguity under which informal enterprises thrive.

Certainly informal enterprise is not going away—more importantly, it represents a very large part of future global economic growth. So why is it not more central in discussions of the future economy? Why are we not more fruitfully asking what we can learn from it?

The strength and weakness of informal enterprise

The strength of informal enterprises lies within their flexibility, lack of defined structures, and ability to quickly respond to individuals’ needs and market conditions. Of course, it is not all roses to be informal. It is dangerous to romanticize informal enterprises that often arise out of real desperation or immediate needs. From a longer-term business perspective, informal enterprises have obvious weaknesses, including a lack of scalability and the inability to set and deliver expectations for consistency.

Yet some of the most interesting business development is happening in the middle ground, in new organizations that seem to be nimbly combining informal enterprise with the growth potential of big business. AirBnB, eBay, Kickstarter, and alternative currencies show how new and profitable business can be built by leveraging informal networks and practices.

From informal enterprise to adaptive business

How can established business and organizations collaborate with informal enterprise? What other unpackaged and unregulated activities might translate into prosperous revenue streams for a new economy?

As companies (or even governments) look for new opportunity, they often focus on “emerging” markets as the next untapped market. However, this might be the wrong approach. In today’s world, simply extending business into new frontiers is not enough.

To grow, the shift needed is more fundamental. The big opportunity to flourish in the face of economic chaos is to create adaptive businesses that both harness the elasticity of microbusiness and informal enterprise, and find ways to enable and share value with them.

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COMMENTS

  • I welcome bringing up these issues but the subtitle could have been “the West finds the informal sector in its own backyard”. People working in developing countries would probably react with a “Oh yes, we’ve known that for the last 20 years”. There is a wealth of accumulated knowledge on informality, There is no clear agreement on the what and how,  one thing is sure, no one calls it parallel any more, it still one economy with different sectors that cannot exist without each other

  • BY Abby Margolis

    ON November 5, 2012 12:56 AM

    Thanks for the comments Jorge.  Yes, if one thing is clear it’s that it is entirely unclear what to call the “informal sector.”  We just hosted The Informal Economy Symposium in Barcelona (you can see the talks here: http://vimeo.com/claropartners) and that was a big theme.  “Parallel” may not seem quite right, but then again neither does “sector”.  I think we can agree that formal and informal cannot exist without each other.  It is simply the economy.

    Yet, to your other point about finding the informal: it is worth noting that informal enterprise is showing up in new places and in new forms, both in the West and elsewhere.  The expansion of collaborative consumption models, alternative currencies, P2P and micro businesses suggest this is not just what we’ve known for 20 years, but something emerging.  The informal is having new impact on the global economy; it may, in fact, be a better indicator of the future than the past.  That is why it is import to bring up these issues today.

  • BY Allison Jones

    ON November 16, 2012 08:09 AM

    I’d love to explore more how technology is fueling the growth of these enterprises. On the one hand, the informal economy concept is not new and one could argue that many formal businesses start out this way: off the books, trial-and-error, driven not by a desire to fill a market need, but rather to put food on the table or perhaps as a result of exclusion from the formal market (I recommend “the store in the hood” by Steven Gold to explore the latter). I think of the people I saw growing up selling homemade baked goods; starting small shops that sold various items; or people who did hair out of their homes.

    With technology, and the shaky ground of the formal economy, perhaps it’s becoming easier to work informally. What I also think is fueling this growth is the ability to reach potential customers and build a community of like minded people. This clearly isn’t a trend so I think the question shouldn’t solely be: what should government/corporations do? It should also be: what do these entrepreneurs want to do? What do they envision for themselves?

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