Down to business with the informal sector

Director, AZAO Consulting, and Head of the Innovation and Social Business Programme, HEC

© Reuters/Thomas Mukoya

Innovative business models are creating new dynamics between formal companies and informal micro-entrepreneurs.

The last 15 years have seen the emergence and proliferation of new business models that aim to combine long-term economic viability with beneficial social impacts, via the likes of inclusive businesses and social entrepreneurship particularly in Sub-Saharan Africa. These various strategies are testimony not only of the private sector's renewed involvement in development, but of how a new kind of relationship with workers in the informal sector can benefit development more generally.

Take the Bel group, a food company. Under its Sharing Cities platform which it launched in Asia in 2013 and is now applying to Africa, the company uses the existing networks of street pedlars and traders to implement its strategy of delivery to the last mile. In return, and to consolidate its network, Bel is teaming up with a range of stakeholders in the public, private and voluntary sectors to offer its traders social benefits such as micro-insurance, professional training and administrative support, which help them formalise their business. This initiative allows the company to optimise its distribution network, and to help improve traders' living conditions while gradually integrating their activities into the formal economy.

Mobile banking shows just how fast this way of doing business is growing. M-Pesa, for instance, which was launched in 2007 by Vodafone and Vodacom (pesa is Swahili for money), now has some 20 million customers in Kenya. Orange Money has as many, particularly in West Africa. As the mobile money service of Orange S.A. (formerly France Telecom S.A.), it enables users to cash-in money on a wallet linked to their mobile phone number and to access services, such as domestic and international money transfer, bill payment and airtime top-up. Many of these services are now more routine in Africa than they are in OECD countries.

 

The very rapid take-up of flexible digital payment systems such as m-Pesa and Orange Money has been an asset, by allowing formal companies to work much more easily with informal micro-entrepreneurs, including providing working capital, micro-credit, etc. Digital applications, such as Sokotext and Kaymu, that allow informal businesses to be managed with just a smartphone are also gaining in popularity. Digital applications, which provide a digital interface linking informal traders with their suppliers and customers, enable small businesses and start-ups to be more efficient, and thanks to services such as online tax filing, to join the formal sector as well.  

 

This convergence of tradition (solutions devised by the informal sector) and digital technologies has given rise to a new form of hybrid innovation, in which information and communications technology allows people to optimise the informal practices that they helped to shape in the first place. By way of example, thanks to a relatively straightforward crowdsourcing system based on a mobile phone and satnav, it was possible to draw up the first map of all the lines and stops in Nairobi's “matatus” network, an operation that showed how the seeming disorder of these independent minibuses belied the highly structured nature of the system; informal they may be, but irrational they are not. Bel, Orange Labs and Orange Côte d'Ivoire are currently working together on a project that uses ICTs to understand the informal distribution routes of street traders. These digital tools will eventually be able to revolutionise the management of informal business distribution networks.

Interestingly, some of these innovations are actually ahead of practice in developed countries. In other words, a culture of breakthrough innovation has taken hold and is advancing as digital technologies enable the market to leapfrog certain steps and jump directly from highly informal and loosely organised approaches to effective, cutting-edge solutions. This kind of reverse innovation is bursting with promise for informal and formal businesses together. Companies such as General Electric have put this reverse innovation into practice by reorganising their R&D departments to be able to spot and harness those innovations in developing countries that have potential in developed ones, with health care products being a notable example.

Governance together

To ensure these new models continue to produce positive results, it is essential to ask what kind of governance the informal sector needs. For one thing, micro-entrepreneurs are crying out for improved access to the economic opportunities available in urban areas. The international street traders' convention held every year in India is, quite appropriately, entitled Cities for all. This heartfelt plea for equal access to economic opportunity, a natural corollary to the long-standing right to economic initiative, has to be reconciled with the legitimate aims of cities to free up the public space for other uses. In some cities, street traders and their representatives are involved in the decision-making processes that govern the allocation of that public space. Lasting solutions for traders and other users can be found if governance is shared in this way.

Guesne, Jean-Marc and David Ménascé (2014), “Sharing Cities: an innovative partnership between the Bel Group and street vendors” in Facts Journal

 For more on Digital Matatus Collaborative Mapping for Public Transit Everywhere, see www.digitalmatatus.com/intro_lite.html

©OECD Observer September 2016




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