It's the informal economy, stupid!

Last year, I read some books and articles on the mystery of the informal economy, where products are being sold and/or traded outside of the (formal) economy. During my stay here in Mozambique, this whole concept has become clearer to me, being confronted with it and dealing with it on a daily basis. The informal economy in Mozambique is responsible for a large share of the total value of transactions of goods and products; in fact, it is safe to say that a large chunk of the population depends on this informal economy.

But what is it exactly? The most obvious aspect is that it is ‘not formal’. Contrary to the formal economy, the informal economy consists of transactions performed and products sold by non-registered and non-licensed actors. These actors are running non-registered shops, and are therefore not paying the taxes that their registered counterparts are. Prices in the informal economy are therefore often lower (compare the registered supermarket, with prices on the market or in the stalls) if competition allows for it. On the other hand, when competition is lacking, margins are often several times higher than on the formal economy where some form of social and governmental monitoring exists – e.g. you will not find high margins on the sale of tomatoes, as competition is high for this product, whereas lending capital is a transaction where competition is often absent, so that margins can skyrocket.

Informal vs formal?Because prices are lower in the informal market, demand for these products is relatively high, resulting in an increased motivation for actors to either stay informal, or become informal. At first glance, there doesn’t seem to be much that would advocate a switch towards becoming formal. Still, being/becoming formal has its advantages: you can set up a registered business, and consequently own the land on which your shop is situated, which is then protected under the rules and laws of the nation; as you own property, you can bring it in as collateral when applying for a loan (this applies to regular bank loans; microfinance institutions work differently); as you pay taxes, you can subsequently benefit from tax benefits, social infrastructure (registered shops are on the main street, informal shops are more often located on markets or street corners), and some form of protection – at least everybody plays by the same rules.

It looks simple: a general switch form informal to formal economy would boost government revenue from taxes, which could then result in higher public spending and more investments in science and technology. In the end, the actor benefits from better infrastructure and better long term prospects.Clearly, this reasoning is flawed, or at least missing some aspects. For starters, in the short run there are definitely significant margins to be made and profits to be reaped in the informal market. Moreover, a lack of confidence in a governments ability (capacity) or willingness (corruption) to increase public spending when tax income increases, provides a further stumbling block on the path to formality. Thirdly, overly bureaucratic systems tend to make it very difficult for actors to become and then stay formal, as Hernando de Soto clearly points out in his book ‘The mystery of Capital’ by labeling the assets the poor possess “dead capital”. (Dead, because their assets are worthless, as they are not valued on the market (e.g. a shop built on land that is not owned, so that they cannot bring it in as collateral for a loan, and moreover that they could get kicked of that piece of land basically overnight) Finally, and crucially, the actors in the informal economy often do not have the same capacity as the formal actors in similar transactions. Forcing them into formality would therefore result in them being completely outcompeted by the more experienced and better trained formal competitors.

The informal economy has often been linked with (relatively) poor quality, and because customers knew this, they bought goods on the informal market while accepting a poorer quality for a cheaper price. Bigger investments such as TVs and solar panels were then bought in licensed and trusted shops, where warranty and after-sales service influence the decision making process. Over the last few years, however, the informal market has gradually expanded its reach into these somewhat bigger types of investments. It is therefore not surprising nowadays on the markets and in the bancas/barracas/stalls to find TVs, solar panels, and car parts on sale.

All in all, you would want a country’s informal market to decrease relatively compared to its formal counterpart, combined with a government that is both capable and willing to maximize the potential of the added (tax) revenue. However, the divide between informal and formal is becoming more and more unclear.

To be continued.

p.s. While I do not fully agree with the views of de Soto, his book ‘The Mystery of Capital’ does provide for a very interesting read.

Picture time (2)

Hellow all,

I’m back. Back in Chimoio after a successful trip to Maputo, back online, back in the rhythm. Back in general. Unfortunately, Chimoio shops have the quite annoying habit of closing either entirely in the weekend, or just opening up for the Saturday morning rush. Same for the internet café I’m currently at, catching up on emails, work, and news. Therefore, just a short message today, although I have once more included some pictures taking during my trip to Maputo and its surroundings.

Wishing you all the best, all the way from central Mozambique.

Ate a proxima,

Luc

- Studying Portuguese, and enjoying a well-deserved Prince-biscuit!

- Concert/award show for African artists. Location: Maputo.



- World Cup frenzy, featuring Mozambiquan roadside view.

Must read - 10 min of your time required (how can you say no to that?)

Happy Friday, everyone.

I recently came upon this short piece from Dani Rodrik, in his monthly column on the Project Syndicate website. It will take up 10 minutes of your time, but I strongly recommend you to read his latest entry on protectionism in the Western world, and the importance of social welfare systems. For me personally, Rodrik remains one of the best authors in the field of political economy, and I definitely look forward to his next books and articles.

Enjoy: http://www.project-syndicate.org/commentary/rodrik36

I hereby conclude this week.

Have a great weekend,

Luc

Election day + more pics

Ola!

Election day in Mozambique, and there has reportedly been a big turn out. Results will be made public near the end of the day, when the polls close, though the wait for official results could take up to two weeks.
For more info: http://news.bbc.co.uk/2/hi/africa/8329125.stm

I'll keep you posted on how things proceed here, though for the moment the capital Maputo feels like a Sunday in Europe: everything is closed (except this internet cafe i'm relaxing in).

Some more pics...:

- One of the many, many, MANY campaign cars of the ruling FRELIMO party, strong favorite to remain in power after these elections.

- I have it from a good source that "Hakuna Matata" means: 'we don't sell/have potatos here', in the local language Shona (spoken in parts of Mozambique and Zimbabwe). I'm learning so much here!

Picture time!!

Hey all,

back in Maputo after a 20h bus ride! As requested, I have added some pictures taken in the past week during some field trips. Sorry for the low quality/small size. It was all that this internet-windows pc combo would allow me...

Election day in Mozambique tomorrow, so I'm gearing up for a really quiet and relaxing day, to finally catch up with all the mails and phone calls I still have to return or reply to.

But for now: tchau (Portuguese/Mozambican version of 'ciao'... am i the only one who finds this odd?)

- Old abandoned church in Manica, 45km west of Chimoio (close to border with Zimbabwe)

- Railway in Manica, or what is to become the heart of the Beira-corridor (linking the harbour of Beira with Harare)


- Old rock paintings, several 1000 years old.

More pictures will follow soon, when the universe allows me to upload them.

ciao

soon...

Hang in there people! Only couple more days, and then I'll be back in Maputo, where the good internet lives.

Luc

p.s. Keep sending those mails, though :) miss most of you a lot, and can't wait to see you in London in 2 months time!

The blog is back… with a vengeance!

Hellow all! Guess who’s back? Second attempt to post more regularly on my blog! Why haven’t I posted more often or sooner? Laptop problems, settling in problems, and other problems… BUT there is light at the end of the tunnel, and I’m pretty sure it’s not a train coming in the opposite direction. At the end of this week, I’ll hopefully have secured a place to stay, while my laptop worries have been taken care off for the moment.

So, what have I been up to lately… After a management meeting in The Netherlands at the end of September, I flew back to Mozambique, to kick start activities here. So the past few weeks have been mainly about getting things in order, getting to know the country a bit better, setting up and holding several meetings, and learning more and more Portuguese everyday.

I’m going to leave it at that, but as requested, in my next post I will put up some pictures of the cuteness and smallness that is Chimoio.

Ate a proxima

Luc