Delivering Development with Informal Traders: Practice (makes Perfect) and Potential Pivots
February 20, 2022
As the International Labour Organisation notes, the informal economy comprises more than half of the global labour force and more than 90 per cent of micro and small enterprises worldwide. By definition, informality is fluid, enigmatic, largely unchartered and unmapped. As such, designing interventions to support people working in the informal economy during the devastating impacts of COVID-19 proved to be complex.
In a previous blog we described a project where we recruited youth to collect data in communities and deliver emergency relief e-vouchers during COVID-19 lockdown restrictions. These e-vouchers could be redeemed at retailers, and to support the informal economy, we additionally registered 230 local vendors as redemption outlets. This was particularly important as South Africa’s COVID-19 response measures and stimulus packages were primarily focused on the formal sector.
We hypothesised that the majority of e-vouchers would be redeemed within the informal economy - and we were completely wrong.
In order to delve into the lessons learned, we interviewed Jason Bygate who was key in designing and implementing this project. Jason is the Director of Innovation and technology at Capacitate Social Solutions, as well as the co-founder of Social Capital Exchange.
- Why do you think the majority of the vouchers were redeemed at retailers and not with informal traders?
There are a number of potential reasons for the lack of redemption at small and informal traders. Firstly, there remains a level of distrust around new payment mechanisms both on the part of the payor and payee. Hard cash is still king. This lack of trust is also linked to a lack of understanding – an uncertainty that they will get their money.
Secondly, I think that the limited and inconsistent revenues did not provide sufficient motivation to participate on the part of the merchant – this may have meant that they refused to accept payment.
Third, and certainly most important (and validated with the field evidence) is the price of products. Small and informal merchants prices are significantly higher than retailers. Within the context of relief, I believe that the price difference was too significant and far outweighed the opportunity cost of going to the nearest retailer.
- It was reported from the field that many informal traders are foreigners and that this may have influenced the outcomes of the experiment. How has it come about that many informal traders are foreigners, and what impact do you think this had on the project?
The foreigner footprint in informal trade is a relatively complex one and remains an evolving issue. I believe that the root of this lies in the number of illegal immigrants and the barriers that remain in place for foreigners to find formal employment. In many cases informal “hustle” trade was the only option. This was then combined with cultural and family networks that exist within migrant communities (Somali, Pakistani, etc) where members of the same nationality or culture collaborate and work together. Finally, the strong undercurrent of xenophobia meant that these traders were further isolated and incentivised to work within their own community.
Important to note is that the informal traders consistently leverage their informality as a form of anticompetitive behaviour. They are not subject to the same constraints of licensing and regulation that local formal businesses are. This means that they can increase their margins, maintain less accountability and avoid all taxes and licensing costs. It does mean that they have limited access to capital, but this is resolved by leveraging their own network to access capital.
- What shifts can we make in future projects that would lead to successful support to informal traders?
I think that this lack of integration may also have impacted their willingness to participate and I think that in future more effort will be required to engage them in the process. This will have the added benefit of adding to the social cohesion of the community and reducing xenophobia.
I think that we can also simplify the process to start, even running it off a manual vouchering process that will give more comfort. I think that we could also agree on a fixed price pack at an agreed rate where they are not charging exorbitant prices or get a distribution fee for a product that is packed by the implementing partner.
In order to address this, in one of our projects we are incorporating the Wholesaler further up the chain, getting their buy-in to accept the digital payments from traders, and thereby providing an incentive for participation in the programme.
I think that there are also options for direct door to door distribution using an eCommerce function and existing delivery infrastructure. We are partnering with YeboFresh to facilitate an eCommerce Agent model that creates jobs for youth and enables digital market access.
Informal food systems in South Africa are complex (for example see this story with interviews with vendors). These food systems play a vital role in providing informal jobs and enhancing food security and cannot be overlooked when seeking to understand food system relationships and dynamics.
Informality in itself is a grassroots solution in response to a system that is inequitable. As such, this is a key area of sense-making for the global Accelerator Lab teams, with many labs producing valuable insights.
A thematic focus area for the UNDP Accelerator Lab in South Africa is the Food, Water, Energy Nexus. As we move forward exploring these interlinked systems, we will experiment with concepts of digitalisation, localisation, and circularity to explore pathways to transformation.
If your work is related to food systems and informality, please reach out to me at firstname.lastname@example.org to explore possibilities to collaborate.