We live in turbulent times of rapid change, increased interconnectivity and rising socioeconomic complexity. Ambiguity is the new constant. This makes it increasingly difficult to build long-term strategies. Businesses and other organizations are struggling for relevant models, as their attempts to create stability and stimulate growth simply haven’t worked. Their millennial optimism has been replaced with a sense of uncertainty and lack of control.
Meanwhile, quietly amidst this chaos, the informal economy is filling in the gaps. Informal enterprise, it turns out, thrives on chaos and uncertainty. Makeshift startups, sharing networks, collaborative platforms and micro-businesses are proliferating, providing new jobs, products, services and platforms at speeds and in places the formalized economy fails to touch.
The ‘informal economy’ is shorthand for a host of different under-the-radar, non-recognized, untracked, unsanctioned, disregarded and often-disparaged commercial activities taking place all around the world. Too often dismissed as criminal or backwards, it is worthy to note that the informal economy might include everything from street vending to P2P networks to DIY exchanges, alternative currencies and ad-hoc entrepreneurship.
The economic value of informal commercial activities is becoming apparent; Robert Neuwirth, author of Stealth of Nations:The Global Rise of the Informal Economy, estimates it at $10t (USD) annually . The vast majority of this (over 80%) consists of legitimate commercial transactions, not criminal activities such as piracy or narco-trafficking. If the global informal economy were a country, Neuwirth notes, it would have the world's second largest GDP. Informal enterprise also provides an incredible amount of social value globally, providing employment for 2/3 of the globe. This landscape is not only vast, it is currently the fastest growing sector of both emerging and developed markets.
To be sure, this resurgent informality is different than the one that social scientists have spent the past three decades studying. And today more and more technologists, designers and scholars see it as the future growth source and incubator for innovative business and social practices. So, while at some level the expanding informal economy is an obvious and pragmatic response to a world in flux, its expansion has the potential to disrupt not only business as usual but the way we work, live, learn and play.
Defining the Formal Mindset
When we talk about the formal and informal aspects of society, they are already linked and in fact cannot exist without one another. The informal economy is not new—the majority of the world works and lives here, and has for a long, long time. The real shift we are experiencing today is that the influence of informality is growing and coming into proper proportion to its real size. Until recently, formal enterprise has held on to an exaggerated level of global influence because nations have valued stability, standardization and universal expectations above all else. How did this come to be? Why are these formal approaches outmoded? What has changed?
When we speak about formality, we are talking about universal agreement upon standards, exchanges, processes and rules. ‘Business as usual’ has been designed to recognize these standard forms and to attempt to suppress informality—to maintain the status quo instead of allowing or encouraging flux. But as informal mechanisms have thrived, such as free-floating rather than fixed currencies, and as the economy has become characterized by global interconnections and technology moves faster than policy, it has become increasingly difficult to adhere to inflexible standards and to continue to hold back informal solutions.
Things are changing so drastically and so rapidly that we can’t even identify a clear future state, let alone design a holistic response to it.
Traditional businesses most commonly focus on formal practices that envision a future state and then plan, design and build to try to achieve that future state. Today the level of complexity in almost every sphere—the rapid increase in ‘wicked problems’—makes the formal approach impossible to pursue. Things are changing so drastically and so rapidly that we can’t even identify a clear future state, let alone design a holistic response to it.
What’s Breaking Down, and Why Now?
The rules we have been observing, those of nation states and bureaucracy, are now in the process of being replaced by digital networks that don’t respect borders or hierarchies and act much more organically and flexibly. In fact, we can now look at the world as a series of overlapping and connected networks that enable (or pressure) individuals and organizations to change the economic roles they play and the value they create and exchange on an almost daily basis. These networks themselves make the replication and distribution of new informal memes ever faster and simpler.
The natural reaction of institutions at the top of the existing formal hierarchies, such as governments and multinational companies, is to use laws, lobbying and rhetoric to maintain the status quo and prevent the rise in informal practice and influence.
Economic anthropologist Keith Hart, who was perhaps the first to recognize and define the importance of the informal economy in the early 1970s, puts these changes into context . He sees the period from 1979 until 2008 as the era of financial globalization that built increasingly formal mechanisms to try to control commercial activity. Now those mechanisms are having increasing difficulty responding to the level and speed of global change, and this rigid approach is actually increasing the volatility of our economies and societies.
We’ve held on too long to forms that have become outmoded and disconnected from a global networked reality that is now defined by constant change. We cannot manage this away; we can only learn to continually negotiate it and become adept at surfing across its surface.
Any time where the rules (formality) no longer make economic, ethical or aesthetic sense, rebels (informality) will find new paths to meet people’s needs that do make sense. And this is where true innovation lives.
Informality is rebelling against the existing rules that are not relevant or that do not provide benefit for the majority. Informality is working in the grey areas where rules are not clear or have not been established quickly enough. Informality rises; it’s the ascendant mode now because the rules aren’t working, whether we speak about the global financial system, patent law or encouraging overconsumption of resources as national economic policy. Any time where the rules (formality) no longer make economic, ethical or aesthetic sense, rebels (informality) will find new paths to meet people’s needs that do make sense. And this is where true innovation lives.
The informal economy is not just about being unregulated or unregistered. It is about agility, about a mindset that allows businesses, big or small, to think and act quickly, radically and with flexibility. It is a mindset of survival that requires continuous risk-taking and rapid changes in strategy. It is this mindset that positions informal businesses or businesses with informal mindsets as strong competitors to established Western firms. Informal business doesn’t try to plan so much as accept instability and uncertainty and develop mechanisms for negotiating a chaotic landscape and continually course-correcting; very much a bottom-up approach.
The strength of informal enterprises lies within their flexibility, lack of defined structures and ability to quickly respond to individuals’ needs and market conditions. Informal enterprise can undertake fringe work that is not mainstream and reveal loopholes in formal systems and policies; this drives the disruptions that shape tomorrow. A key aspect of informal approaches is the co-location of problems and solutions. This co-location ensures that problem solvers have a clear and visceral understanding of the situation and leads to ongoing experimentation and the development of innovative strategies and empowering technologies.
Informality makes both chronic and acute problems more manageable. Informal businesses can excel by providing speed, addressing long-tail opportunities, creating endless levels of personalization and reaching audiences that formal businesses often cannot. 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 difficulty in scalability and the inability to set and deliver expectations for consistency.
New Interfaces Between Formal and Informal
Alternative currencies and non-traditional methods for storing, recognizing and exchanging value are enabling new, profitable business models to emerge from informal networks and practices. Business interest in frugality and resilience has in turn pushed the informal economy forward as a new source of inspiration through approaches like frugal innovation, the maker movement and agile business practices. Along with a host of other reasons, it appears clear to us that a new world is emerging at the interface of the formal and informal. As private individuals and as organizations we need a new framework for engagement that acknowledges the interdependencies of the formal to the informal rather than trying to separate them or turn one into the other.
New models can enable us to better understand the informal economy and the potential value it has for business and society. Promising things are already happening in the middle ground, not simply early experimentation, but business models and experiences that illustrate shared value between formal and informal enterprise. At Claro, we refer to these phenomena as ‘interfaces,’ as the role they play is exactly that: to act as an intelligence connection that allows value created in one system to be recognized and exchanged in the other. These interfaces are informed by, or created by, a pushing and pulling from both the informal and the formal side of the equation.
These interfaces between formal and informal worlds are extremely varied and cannot easily be seen as a cohesive grouping per se; the common thread is that they act as economic interfaces, but how they do so takes many forms. We have identified a few phenomena that we believe act in this capacity that we will examine one by one. These are:
- M-Pesa mobile money ecosystem
- Prepaid business models
- Shanzhai producers
- Fast hackers
- Entrepreneurial platforms
One obvious bridge between the formal and informal economy is a payment system. M-Pesa, a mobile phone-based money transfer and microfinancing service in Kenya, is an interesting response to a very poor infrastructure as well as a limited banking network for consumers to access. M-Pesa acts as an interface in enabling the unbanked to perform financial transactions easily, while at the same time laying the foundation for businesses to track these digital cash transactions.
Prepaid Business Models
Prepaid schemes have been around for many years, but still, they act as a type of interface between the formal and informal. They enable individuals who wouldn’t normally be able to participate in certain product and service experiences, while removing the risk of non-payment to providers of those services. Beyond mobile plans, which are common in the West, in some developing nations prepaid models are so prevalent that people don’t talk about the full retail price of a product, but simply the monthly charge they pay to access it.
The term ‘Shanzhai’ originally referred to manufacturers of cheap copycat products, especially consumers electronics and luxury fashion goods. They started by making low-quality pirated versions of popular mobile phones, but because they can get products into the market so quickly and iterate on them, they have actually developed unique niche products that bring in innovative (and sometimes bizarre) features that in the end have been adopted by the companies they copied in the first place. Case in point, Nokia introduced a dual SIM phone after a copycat version of a Nokia with that feature proved wildly popular. In turn, the Shanzhai producers’ own companies have evolved into credible manufacturers of innovative products. The Shanzhai are an interface between what is considered illegal and legal. It’s a fine line between their activities and what Spanish fashion retailer, Zara, does with couture trends, how Samsung has paid fines for aping Apple products, or even how Disney appropriates classics of children’s literature and defends these works as unique intellectual property.
The revolution in communication technologies allows people to co-develop projects more easily than ever before, and these people also have access to technology that allows them to build, test and improve the work they develop together, at a pace that formal businesses simply cannot match. But these ‘fast hackers’ would never be able to do this without remixing the products, services and ingredient parts therein both to fire their imaginations and to actually use as raw materials. Fast hackers act as interfaces because they show new possibilities of existing technologies and provide R&D and market research for formal businesses.
Amazon, Apple, Facebook and Google have helped usher in a new era, introducing not just new technologies but alternative ways of doing and enabling business. Today, organizations of all sizes around the globe embrace such platforms as a business model. However, success is not as simple as creating an entrepreneurial platform, it requires building collaborative relationships, enabling networks and opening new opportunities. Companies like Alibaba and Etsy act as interfaces because they both enable and benefit from micro-enterprises. This is not a one-way B2B relationship, but is core to how these companies create and share value. Through the platform model, both company and micro-enterprise are able to quickly adapt to change.
Micro-enterprise May Provide a Template for the Future
Many of the interfaces described above are happening in the form of micro-enterprises—extremely small businesses that work best at a very small scale due to efficiency and flexibility. Micro-entrepreneurs are working everyday, and unlike startups, they are not dependent on venture capital and business plans based on explosive growth to reach dominant scale globally. Instead, micro-enterprise find a niche where they can leverage the advantages of extremely small scale—providing an offer that doesn’t currently exist for a given market, or to provide a better alternative to an existing offer by being faster, cheaper, more locally relevant and more personalized.
We already use the products and services created my micro-enterprise everyday. It is not a new phenomenon. It has always been the dominant form of commerce and it will continue to be, but they are now succeeding in new places and in new forms. We believe these are the people that will truly change the face of business and society over the next generation. Micro-enterprises can easily interact with both large and small organizations because they can maintain the resilience and expertise of the immediate informal context while also adopting the reliability and scalability of the formal business world.
Micro-enterprises combine informal and formal practices pragmatically and exhibit the strength of co-location for need and solution. Being close to their customers, to the data patterns around them, to their needs and to the context in which they operate, has tremendous benefits. This leads to better responses to real-time needs, which means micro-enterprises are extremely flexible actors even as part of a supply chain. Their just-in-time nature comes from networks of known and trusted human beings connected and enabled by digital networks where redundant availability is more valuable than efficiency of resources. Micro-enterprises demonstrate flexibility through their ability to change roles based on the scarcity and abundance of what others have to offer, and through their negotiation of the rapidly shifting landscape. They can start to understand the informal systems they work within without having to map out every corner, process and pathway within them.
There is a big opportunity is to flourish amidst chaos, to create new or evolve existing businesses into adaptive enterprises that harness the elasticity of micro-business and informal enterprise, but also find ways to enable and share value with them.
Preparing for Chaos
This chaotic informal landscape is already here. Responsive interfaces between the formal and informal now exist. Common dialogue seems to be about how corporations need to become more like startups, but we think it is much more important to make sense of the micro-enterprise; the everyday entrepreneur who goes about his business without fanfare. By examining these micro-enterprises, we will be able to predict much more about the future all of us are moving towards. They are going to be the most influential segment, and they are adapting to the new reality already. What do they need? How can you enable and interact with them as a business, or encourage their growth as a government agency?
By looking more closely at micro-businesses, we can understand how the landscape of chaos impacts both organizations and individuals. They are growing in number, importance and influence as very credible response to the failure of formal systems and are already acting as interfaces and/or platforms for negotiating ambiguity. As William Gibson has famously noted, the future is already here—it’s just not evenly distributed. So we must look to micro-enterprise today to prepare for a future that is already upon us. Digging deep into micro-businesses, the existing and potential links between informal enterprises and the current business landscape, holds promise for businesses struggling with the complexities of operating under a permanent state of flux.