(Illustration by Jennifer Heuer)
Many people associate the informal economy with shady and illegitimate business practices, ranging from minor infractions like software piracy to more harmful activities, such as the drug trade. Yet beyond such stereotypes and stigma, the informal economy serves important functions and generates innovative entrepreneurial strategies that are rarely seen elsewhere.
Although the informal economy operates outside legal boundaries, it is regulated by a set of social and cultural norms established by market participants. Its goods and services range from the mundane (e.g., flour) to the sophisticated (e.g., financial services) to the illicit (e.g., single cigarettes). Its enterprises also serve as a crucial source of employment to marginalized populations. Recent estimates indicate that 61 percent of the global working population works within the informal economy, rising to a striking 90 percent in the lowest-income countries. For many, the informal economy can be the difference between severe poverty and subsistence.
The vast majority of businesses operating in the informal economy are microenterprises. Either by choice or circumstance, these minute ventures are generally not registered for taxation and do not operate from commercial-zoned premises. Employment of workers is similarly ad hoc. Thus far, however, researchers have given too little attention to microenterprises.
What’s more, the informal status and disconnection of microenterprises from financial and technology platforms renders it difficult for researchers to quantify microenterprises for statistical analyses. Scholars and policy makers infer figures from macroeconomic estimates and lack reliable, systematic data of informal firms. While ethnographers have admittedly provided rich case studies of informal microenterprises, we need a broader understanding of the relationship between these individual businesses and the wider enterprise system in which they operate.
Developing such knowledge requires a more systematic approach to collecting data on an entire ecosystem of informal microenterprises. A nonprofit in Cape Town, South Africa, the Sustainable Livelihoods Foundation (SLF), has pioneered a novel “small-area census” method. This approach focuses on a discrete geographic area, employing a combination of field research techniques including surveys, ethnographic observations, photography, and geospatial information. By repeating the census three times over 10 years in a single township, SLF has generated surprising results that provide rare insight into the ways in which an ecosystem of informal entrepreneurial activity evolves over time.
Small-Area Census Approach
The research site for SLF’s longitudinal analysis is the township of Delft in Cape Town. From a distance, Delft reflects some of the major achievements of the postapartheid state. Formal housing was established in the mid-1990s; streets are paved and lit; the communities are served by schools, clinics, libraries, and recreational facilities; and residents have access via various modes of public and private transport to job opportunities across the city.
But as with most South African townships, the state has not purposefully invested in business infrastructure to support local entrepreneurs. Delft has no public markets, for instance. But despite the urban landscape not being designed for business, local entrepreneurs and their microenterprises have transformed Delft into a vibrant informal economy.
Prior to the first SLF wave of field research in 2010, this economy was invisible. The city government had identified merely 124 businesses, most of which were situated along the main streets. To address the seeming gap between the visual evidence of entrepreneurial vibrancy and the official data, SLF decided to go into the field and collect evidence, surveying businesses on every street and pathway, those operating from houses, trading stands, and mobile arrangements. As Delft is a very large settlement, the team focused on an area of just over two square kilometers with a population of about 45,000 persons in 12,000 dwellings. They sought to conduct a census of all informal business activities in this small area. With a short questionnaire, GPS, a camera, and a notebook, the initial research took about three months.
The team was, at the beginning, relatively inexperienced in this kind of field research, despite garnering years of experience interviewing small enterprises. The businesses of the township were very different, best understood as pursuing survivalist activities. These microenterprises were operating illegally and/or selling illicit products, so their proprietors were usually reluctant to talk to strangers. The team quickly discovered that conducting a census in an informal economy required local knowledge.
So, the team trained and more thoroughly involved local residents in data collection. Researchers also made their presence more palatable to the community by riding bicycles and interviewing people involved in every identifiable business activity, irrespective of size or legal status. Despite the curiosity of pedaling social scientists, the business owners were remarkably open.
Census Insights
SLF repeated the research in two further waves, in 2015 and 2020, by studying the same geographic site and conducting a census of all microenterprise activities. Over time, they gained experience in the research approach, modernizing the method of data collection, expanding the questionnaire, enlarging the team, and working more efficiently. This process generated several important insights about the informal economy.
The sheer number of businesses reveals a largely hidden but fluid economy. In contrast with the 124 Delft businesses recognized by the municipality, SLF identified 824 microenterprises in 2010 within Delft South alone. In 2015, the number of businesses more than doubled to 1,693, although this number fell back to 1,158 in 2020. This evidence shows that microenterprises in informal economies are subject to cyclical processes, expanding with the benefit of a growing economy and rising demand but contracting in times of economic recession.
The more specific neighborhood of Eindhoven in Delft South illustrates this fluidity. In 2011, SLF identified 156 businesses in this area. Of these, only 37 were still trading in the same place in 2015 and only 33 in the same place in 2020. At one level, these data demonstrate a significant demise of businesses over time. By tracking the 2011 businesses, SLF found that in 2020, two microentrepreneurs had changed their focus, while 11 of the 33 surviving businesses were not trading in 2015 and had presumably restarted their enterprise after a setback. This means that only 20 businesses traded in all three periods.
In 2020 there were 162 businesses of 25 different types in Eindhoven. In contrast with 2011, the range of businesses had broadened significantly to include hair salons and barbershops, businesses offering internet and financial services, and furniture sellers.
The breadth of business activity is striking and evolving. Businesses in the townships do not fit squarely into traditional government classifications of industry. SLF adopted an inductive approach to categorize the nature of their business activity, eventually settling on 36 different classifications. Using this method, businesses that sold fruit and vegetables were characterized as greengrocers, businesses that sold groceries were retailers (known as spaza shops), barbers and hairdressers provided hair care, and so on. Through this structuring of the data, the researchers were able to profile the business characteristics of the site, map the results, and identify how the mixture of businesses changed over time and space. For instance, the township economy evolved from a focus on food, drink, and basic wares in initial waves toward a more diverse set of offerings in later waves including a growing number of more sophisticated services such as accommodation, law, and medical services.
Business strategy is active in the informal economy. Much of recent entrepreneurship research laments a lack of innovation and strategy in the informal economy. Through recording photographs of the businesses, SLF was able to infer strategic changes in action. They observed evidence of changes in the business frontage, including changes to the building structure, name changes, and signs of new investment. A barbershop known as the “Local is Lekker” operated from a shipping container in 2011, but in 2020 moved to a private house. As well as downscaling in infrastructure, this business showed little sign of growth in terms of assets and the professionalism of its service. A similar downward slide in business characteristics was evident through the Eindhoven neighborhood, outside the main street. These strategic changes need to be understood in light of not only broader economic conditions but also the informal social norms that shape how entrepreneurs craft their strategy and minimize risks.
Geography shapes informal economic activity. The microenterprise census of the wider Delft area enabled SLF to document spatial and business shifts. Residential neighborhoods such as Eindhoven have fluctuated in entrepreneurial vibrancy, with businesses frequently closing or pivoting to new offerings, and new businesses popping up in difficult places. Meanwhile, the main streets have seen an opposite trend, with investment in business property, diversification in businesses with new categories emerging, and intensification of existing activities.
Resilience takes different forms. SLF’s historical data suggests that many of the new businesses identified in 2020 might not last long. There is no doubt that much can be learned about business resilience from those business survivors that the repeated small area census has identified. Yet as the research shows, even those businesses that no longer exist might simply be in a phase of entrepreneurial hibernation and could spring back to life when circumstances permit. In the informal economy, resilience and success may well be measured not by the longevity of any single operational entity but rather by the entrepreneurialism of the individuals themselves. Shifting the business to a new place and testing new markets and products illustrates entrepreneurial grit.
These insights reveal that our assumptions about the informal economy are often more impoverished than the settings themselves. Instead of overlooking the informal economy—or worse, viewing it as an impediment to a “better” market arrangement—we should see it as an important channel of social and economic resilience.
Read more stories by Andrew Charman, Joel Bothello & Robert Nason.