What is the Informal Sector?

Poverty in emerging economies is characterised by individuals living in incredibly difficult conditions. They might be lacking access to clean water, energy, waste disposal, basic education, nutritious food, healthcare, jobs, or welfare, and that’s just the beginning of a seemingly never-ending list.

Breaking out of this situation is understandably incredibly challenging. In an attempt to make their lives better, many individuals in poverty turn to entrepreneurship[1]. They pick up anything they can and try and make a business out of it. Therefore, entrepreneurship in emerging markets is different to the often-glamorous association entrepreneurship has in advanced economies.

A useful way to think of this is to differentiate between necessity entrepreneurs and opportunity entrepreneurs. The former, are entrepreneurial because they have little choice – they have to be entrepreneurial to survive. The latter are entrepreneurial because they have uncovered an opportunity which they chose to exploit, often creating massive value. The majority of entrepreneurs in emerging economies are necessity entrepreneurs. They might set up businesses delivering water, selling peanuts on the streets, raising chickens or any number of activities.

 

“They are referred to as ‘informal’ entrepreneurs because, driven by living in harsh circumstances, informal sector entrepreneurs usually do things, well, informally…”

There are so many necessity entrepreneurs in emerging economies that they form their own sector of the economy known as the ‘informal economy’. In Ghana, 80% of the working population operates in the informal sector; in Kenya it is 78% – the majority of the population are working for, or running, informal businesses.

They are referred to as ‘informal’ entrepreneurs because, driven by living in harsh circumstances, informal sector entrepreneurs usually do things, well, informally. For example, their businesses might be unregistered or they might not pay taxes.

As noted by the World Bank, this informality is related to many different things, but these are almost always negative factors: unprotected workers, low productivity, unfair competition, evading law, underpayment or nonpayment of taxes, and working “underground”.

We take a slightly different view. Sure, all of those negative things about the informal sector are true. But there are also lots of positive things about it. For a start, as we discussed, most people in emerging economies get their livelihood out of this sector. If their businesses were all magically removed overnight, how would most people in these countries earn a living?

Secondly it represents the strength and will of people living in extreme situations to make the most of it. It’s a true testament to their resilience, drive and optimism. This should be celebrated, not condemned! Imagine if these hustlers had opportunities like those in developed economies, what could they achieve?

Third, the informal sector houses millions of people. Somewhere in those millions are superstars with the potential to grow big businesses if supported properly. Businesses, that create jobs and products and services for the community. Imagine if someone could find them?

Most governments and international institutions avoid the informal sector because it is seen as this negative, unmoveable, behemoth that restricts development. For us, we’ve seen the bright side. We are convinced that there is an exciting opportunity to achieve something positive despite the negatives. That is why we choose to work with informal entrepreneurs.   

To quote one of Balloon’s founders, “don’t see the glass as half empty or half full, just focus on trying to fill it up”!

 

[1]  To Balloon, an entrepreneur is ‘anyone who sets up a business’ and a business is ‘any commercial activity’ (that doesn’t violate the UDHR)– that is a product or service that is traded for something worth financial value.

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