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 centralised 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 centralised 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.
When individuals believe that the cost of supporting the state is less than the benefits they derive from that state then a central government is stable. When the state starts intervening in the economy and property rights are under threat then investors and business owners withdraw their support.
If they are capable of flight they will travel to other nations where they feel safer. If they are not they remove their investments to the informal market.
Informal vs Formal is subjective; technically we’re discussing third-party property rights. By that I mean that, any contractual dispute (whether about the ownership of property, ideas or products, or a legal wrangle) can be sorted out by a recognised third-party whose decision is recognised and respected by both. Normally that is a government. When the government is not respected, or when the cost of getting the protection of that government is too high, then the relationships between market players breaks down. An informal market is really a fragmented localised market where only people who trust one another directly are prepared to trade with each other.
Any central state wanting to represent the interests of its people should be doing its best to set up a fair and equitable legal and economic framework. If corrupt politicians are rewarded and kept in office then no amount of incentives is going to make businesses who abandoned the state come back. Corruption breeds corruption.
What the state should do is ignore the informal sector and do their level best to make the formal sector as powerful, dynamic, flexible and simple-to-use as is humanly possible. If I have to spend five hours in a queue to get a form to register my company, and another 12 months to wait for registration approval (if the form isn’t lost) … guess what, I’m not going to bother trying to register in the first place.
A state should realise that – as with any competitive environment – business owners and investors have the choice not to participate if they so choose.
Charity supports the state but does nothing for the market
If there was a joke about charity it would go like this: “Why do the poor hate charity? Because it makes the donors look and feel good, it gives jobs to otherwise unemployable aid workers, it lends credibility to corrupt governments, but does bugger-all for the poor.”
We can debate about whether or not a short-term bail-out is of use for the victim of a random disaster. What is starting to become beyond debate is that long-term charity is not â€“ by any stretch of the imagination â€“ the path to economic prosperity.
“We find little evidence of a robust positive correlation between aid and growth,” write two ex-IMF economists, Raghuram Rajan, who stepped down as IMF chief economist at the end of 2006, and Arvind Subramanian, who left the IMF this year.
“One of the most enduring and important questions in economics is whether foreign aid helps countries grow … There is a moral imperative to this question: it is a travesty for so many countries to remain poor if a relatively small transfer of resources from rich countries could set them on the path to growth … But if there is no clear evidence that aid boosts growth, then handing out more money makes little sense,” they conclude.
In a failed state, such as Nigeria or Sierra Leone or Myanmar or Zimbabwe, there is a clear government. What is not clear is who that government governs.
When most people living in a country choose to opt out of being governed, either by migrating or by maintaining cash links only with the informal sector then the state has no resources. It can maintain itself through possession of oil or mining or even forestry reserves. What it does not have is a middle-class tax base which is the only thing that gives wealthy nations and governments legitimacy.
Charity used to go directly to aid agencies. After experiences of duplication and astonishing corruption, along with outright incompetence, major aid donors decided that they would only work from government to government. Of course, if the government has no legitimacy then that doesn’t help either.
I think it was the Swiss government who insist on making payments in Krone directly to the Zimbabwean government to fund their aid efforts. Since the official exchange rate is 10% of the real exchange rate 90% of Swiss aid goes directly to supporting the dictatorship.
Yet central states are not necessary for investment to take place. Somalia has an extensive cellular network that is amongst the cheapest and most effective in the world. No government licence fees, no protection from the state, just isolated towers protected by a negotiated network of local militia.
No bridge from Charity to Wealth
Consider a man who, although healthy, is brought up indolent. He never walks but is wheeled around; he is fed and cleaned. He will lose the ability to walk. Given sufficient inactivity muscles atrophy. There is no physiological reason for him not to walk but it will take time to train his muscles.
It will be hard and it will require that the wheelchair â€“ the life of indolence â€“ be abandoned. There is no bridge from paralysis to movement that doesn’t involve abandoning the old life. You can’t wheel across and then magically stand up.
Proto-societies end up in particular places based on the choices made during their lifetimes. If one society has to be self-sufficient â€“ if everything it wants it either has to make, buy, or do without if it cannot be afford â€“ then it, of necessity, will come to look like some form of free-market economy.
If the same proto-society received material support and charitable donations at every step of its evolution it would be like a man in a wheel-chair. Should that support suddenly be cut then the society is helpless and will fall apart.
There is no amount of charity or support that can be given to a long-term supplicant that doesn’t reinforce the need for that charity or support. The more charity available, the less opportunity there is for the recipient to become self-sufficient.
A government that has become so corrupt that it is incapable of supporting rules of law, recognition of property rights and defence of those rights is going to have a large and intractable informal sector.
It’s like having a cough when you’re sick. You can rage against the cough, try and incorporate the cough into your life, write poems for the cough, don ear-muffs to deafen the cough. It remains a symptom.
Abandoning charity does not mean embracing mature free-market policies
When the Soviet Union collapsed Boris Yeltsin, then Russia’s president, attempted to launch the ex-communist state directly into a free-market economy. He disbanded the central state, sold off the nationalised services and created the direct form of a free-market state.
It was a disaster and resulted in the backlash that installed Vladimir Putin and cemented authoritarian rule.
The results of imposing a democratic order on Iraq have been so appalling that they need no repetition here.
The requirements for transition are more nuanced and depend on the society itself. Hurling our indolent man directly out of his wheelchair and demanding that he dance may so traumatise him that he may never recover and desire nothing more than to remain in his wheelchair. Forever. Like Russia.
The “trade not aid” position – so favoured by international rock stars and politicians – is also naive. Yet he must abandon his wheelchair.
Every single step along the path to economic sustainability and wealth creation must be internally consistent. Once the wheelchair is abandoned every step must be functional, must be just within the abilities of the previously indolent person and must result in a self-reflective reward.
The only way this can be achieved is if the person abandon also the idea of direct comparison with those who are already successful. If the best you can do is crawl across the floor then the last thing you need is for others to be performing aerial acrobatics around you.
In the short term the crawling should result in a reward. A society learning how to work on its own must set itself meaningful goals that are of immediate value.
For instance, simply building a useful and well-maintained highway between the principal cities of the Democratic Republic of Congo will require immense internal coordination, skills development and private business support. And even a partially built road has immediate local benefits in increased internal trade.
They don’t need a space programme.
The evolution of economic success
The informal sector is a distraction. It is not the cause of poverty or a market to be bound within the central state. It is the way that people survive in the absence of a central state.
The way to create a nation with a stable and outward-focused growing economy is for the central state to abandon itself and to focus on the ways it can facilitate the interactions of its own people. Link the greatest concentrations of those people. Support and protect those interactions. Ensure there is no force or fraud.
And ensure that every step is based exclusively on the premise that it must pay for itself. Any step based on charity, no matter how attractive or well-meaning, will lead back to the oft-abandoned wheelchair.
Interesting comment. Poor countries stay poor because the economic systems in those countries actually work well for some people. The economic elites (who generally also run the local government) fear changes that would negatively impact their position, even if such changes would grow the overall economy and be of great benefit to the general population. Openness, competition, tranparency, etc. generally help populations while harming the economic positions of certain individuals.
This is why the World Bank, IMF, IFC, ADB, etc. — and well as government-to-government aid programs — will never impact poverty on any material scale. These insitutions have neither the mandate nor interest to challenge the interest of local economic elites. By trying to “work with” local governments they also make it impossible to drive positive economic change. They can approve big projects, make grand announcements and employ of bunch of over-priced specialists (all of which works well for these institutions and the local governments), but they have proven completely unable/unwilling to really act to move people out of poverty.
At some point we are going to quit kidding ourselves — and starting feeling more guilty about the fact that we are not only not helping the poor, we are maintaining the systems that actually keep people poor.
Every time I read one of these commentaries, I anticipate coming across a few well-crafted sentences claiming that slavery was merely a misunderstood jobs training program.
These rants are also reminiscent of a criminal justice theory asserting that American prison evolution during the late 19th century was premised on the belief that blacks could be taught useful skills working with their hands. At the time, while blacks were believed to be commercially salvageable, Native Americans were not found to be useful in the white man’s workplace. Hence, while otherwise marginalized blacks were incarcerated in state-run plantations with bars and walls, the solution for the Indian problem was genocide!
No pun intended, but the bottom line is that the poor will always be with us because someone inclined to confuse their own greed with someone else’s opportunity is always looking for still more cheap labor.
Actually, the first reply would seem to also accurately describe the United States. Right now, those at the top are doing quite nicely. An awful lot of other people seem to be struggling.
I would only disagree with the reply to the extent that the money given was INTENDED to go to the despotic leadership rather than to the starving masses. Despite the humanitarian propaganda, the INTENT was to buy loyalty to Washington. Thus, so long as we sustained them in power, we could count on their support, for example, in the United Nations.
dchavern, thanks and exactly. Although, you have to admit that it is going to be very difficult for people to admit that charity doesn’t work – it “feels” as if it should.
threebells, you are 100% correct about slavery, however I am surprised that you didn’t extend your remarkable, and relevant, observation to include the cruel and heinous exploitation of root vegetables, such as yourself.
Paving the road to Buchenwald? Dehumanization is always the first step to annihilation and it can always be used to justify so many nasty little things along the way.
“Paving the road to Buchenwald?”
Wild Turkey Fiends!?
Try “What The F**k!?” I was hoping for an actual explanation of your comment, since it appears to be a total non sequitor.
You know, threebells, you have your lucid moments. But this is ridiculous. I’m looking at your comments here, which accuse Whythawk of favoring slavery and concentration camps. Either you’re trying to prove that you’re a complete moron or you’re trying to see, just for kicks, how offensive you can be without getting banned.
Gavin is a lot of things, but racist is most decidedly not one of them. I was willing to give you a pass because I agree with a lot of what you say, but that’s just a bullshit low blow that proves you can’t argue the substance of Gavin’s points.
You need to ask yourself why you come to this community and post–because I see a lot of self-aggrandizing speechifying mixed in with some valid points, and very little actual engagement of the issues being discussed.
By the way, being a Jew, you couldn’t have done a better job of turning me off to your cause by dragging the Holocaust into this. Nice work.
Someone give that man his meds back.
Let me add my voice to Sam’s and Martin’s. I know that Gavin and I are politically rather far apart – but I also know that he’s a serious writer, thinker, and actor in his community and that his solutions to problems like poverty are offered honestly and in good faith as reflections of his deeply held economic and political views. While I don’t always agree with them, I see them argued logically and lucidly.
For you to stoop to smearing him with Nazi and slavery references is heinous and worse, irrelevant. He hasn’t said a damned thing except that he thinks aid would be better if it got into the hands of those who might put it to use to improve the economies – and thus the lives of ordinary citizens in countries in Africa through business means rather than through governmental means. That doesn’t imply slavery or genocide. He’s merely proposing an alternative to what’s usually done. That’s important to an idea forum like this one.
But you don’t seem tolerant of that. At least from Gavin.
Maybe it’s because hes a white South African and you think of him as a secret apartheid supporter or something. Your attack reminds me of the attacks I get from blacks and Southern racists when I write about events related to the Jena 6. What I get from these people are comments that reveal their idiotic closed mindedness.
That’s what Gavin gets from you. Idiotic closed mindedness.
threebells, I call Godwin’s Law. Thank you for playing.
I have a small point. Gavin says charity does not work. This is not a statement of fact but a statement of VIEW.
I know charity works because I’ve contributed, seen the results and been involved….you cannot ask decent humans not to put their compassion into action.
When talking about charity to Africa – this is a whole can of different beans. Much of what Gavin raises I receive and agree with. I also think he is too hard line. I doubt, however, it is the Gavins of this world that lead to concentration camps. The British were the first to ‘invent’ this during the days of Empire. Afrikaaners were rounded up (women and children) and held in detention camps in South Africa.
A meritocracy needs to be established in many African countries. Feeding empty bloated bellies and setting peoples back on the road to nowhere has not worked too many times.
…and somehow despotic African governments still manage to get their dirty bloodied hands on military hardware supplied by the West. Where does the money come from to keep these idiotic murderers in control?
One truly great thing about the UK’s capitalist/socialist environment? You have a choice. You can go for broke based on your own knowledge, luck, life experiences, levels of risk taking and see how much dosh comes your way. If you lose there is a net and you can try again.
No one demands of a human go earn thy millions but I am sure glad I live in a society where individuals can and do earn millions. Money buys you freedom because it is the money that sets you free from the herds of 9 to 5 wage earners. And with money comes power and, hopefully, responsibility and philanthropy.
I just wish my
Elaine, thanks for the comments. I discriminate quite clearly between long-term charity aimed at supporting countries, and short-term charitable interventions to assist individuals who have suffered a calamity.
These are distinct. I am focusing only on long-term aid that “supports” entire nations. I’m sure if you look at what you donate to, and the fact that you “see” results most of your contributions are aimed at short-term interventions.
As for concentration camps, according to a delightful little book I have called “The book of general ignorance” written by Stephen Fry, concentration camps were invented by the Spanish in their war of independence with Cuba in 1895.
Excellent. Britain has been let off the hook – for once.
And thank you for stating clearly your, I repeat VIEW, on charity.
Anything but the most cursory reading of history reveals that the road to the Nazi death camps began with name-calling. To start a sentence addressed to someone and then end it with “root vegetables, such as yourself [sic]” is to dehumanize. On the other hand, I made no specific accusation. I merely asked a question followed by an almost universally understood statement – which no one on this forum questioned!
If the word “Buchenwald” offends you, then YOU have a problem because the road to the Nazi death camps was not confined to a particular time in history or geographical location. Nor, were the death camps necessarily racist. Those deemed “unworthy” and “useless” didn’t neatly fit into the system were among the first victims.
The paving stones are still around us. It all starts with dehumanizing because, then, “they” can be treated as animals or, perhaps, a root vegetable.
The Spanish may have invented the camps, but the British in South Africa weren’t too far behind. And, to think, they started out with such good intentions!
In light of the statement made by Philip Sheridan in the link above, the modern concentration camp most probably began with the removal of Native Americans in deadly forced marches and cattle-car train rides to those often-inhospitable places known as “reservations”. General Sheridan was quoted as saying, “The only good Indians I ever saw were dead.”
I’m sorry, threebells, but you don’t get a free pass here. You post anonymously and from that hooded and robed vantage point you lob this horseshit out there: “I anticipate coming across a few well-crafted sentences claiming that slavery was merely a misunderstood jobs training program.” That is not explicitly “name-calling,” but only the most gutless among us would pretend that there was some moral difference between the two. So no, you don’t get to act superior.
Gavin’s crime is that he holds a position that’s different from yours. Normally you could lob out a few tangentially related historical facts and pretend that they counted as a rebuttal, but that doesn’t work here because you get called on your lack on genuine knowledge, perspective, and your complete inability to address the actual arguments before you.
In other words, Gavin earns your cheap-shot abuse because he’s considerably smarter than you are and lobbing cheap shots at his back from hiding is the best you’re capable of.
Tell me, you faux-intellectual little poseur, where along the “road to Buchenwald” does your cowardly and uninformed “slavery” comment lie?
“..but the British in South Africa weren
OK, I’m going to start moderating this comment thread. Let’s go back to the original discussion which was about present-day economic conditions in Africa and my suggestion about how to bring about growth and investment.
Understanding how economies in Africa got messed up may be relevant, but you’re going to have to prove that connection and then show how it undermines my premise. Or offer ideas of your own. The slave trade, for instance, is irrelevant. Present-day Africans are not descendants of slaves, but of people who sold slaves.
No amount of posturing will change the bad decisions made by human beings in the past. However, through informed debate, we may very well inspire better decisions being made by human beings right now.
Gavin wrote: “Present-day Africans are not descendants of slaves, but of people who sold slaves.”
Thank you, Gavin. Nothing like a little historical fact to put matters into perspective….