During a recent trip to a low-income country, I met a young man whose story may be similar to one many of us have previously heard. Orphaned at a young age, he didn’t finish school and started working as a child. Unfortunately, as he got older, work opportunities in his small hometown ran out, so he had to move to a larger city in search of work. Despite the circumstances he was excited to reach the city, but upon moving, he found that employers wouldn’t hire him without a school diploma. There was no way he could go back to his hometown, but no way he could stay in the city without work. After months of looking, he was hired as a driver, but without a school diploma, he’d be working underpaid. He considers himself lucky.
In wealthier countries this happens as well. It may be immigrants without working permits or people without school degrees who work to make ends meet. And oftentimes (not always) these workers are underpaid and overworked. These workers participate in something commonly referred to as the informal economy or sector, but that we in Global Prosperity like to call the “independent economy”: the diversified set of economic activities, enterprises, jobs, and workers that aren’t regulated or protected by the state.
The independent economy is thriving, but the workers in it aren’t.
A third of low- and middle-income countries’ economic activity comes from the independent sector. In fact, more than 60% of the world’s entire population works in the independent economy. For many, the independent economy may be the only option to earn a living. This is troublesome for several reasons, but from a global development standpoint alone, having more workers in the formal economy helps support sustainable economic development.
To encourage development and provide better options for workers in the independent sector, how do we safely and effectively move them from independent to formal? Here’s one idea.
Create, and then emphasize, benefits
For many people in low- and middle-income countries, even when there is the option of moving to the formal economy it may not make sense for them to do so in their context because of cost, difficulty, and/or lack of benefits. Therefore, the move to the formal economy has to be about incentives rather than consequences.
To incentivize this move, it’s important for lawmakers to create policies that gradually tackle the drivers of informality and improve business environments. But good policies won’t be enough. To effectively pull in people from the independent economy into the formal one, innovators need to make it profitable to join honest and transparent markets, and to do so, they may need to create these markets first.
A successful example to take as a model can be seen in Matias Recchia’s market-creating innovation, IguanaFix.
When Recchia returned to his native Argentina, he found it extremely difficult to move because he couldn’t get a hold of a reliable plumber, electrician, or painter. And when he did, there was no price transparency. He found that he wasn’t the only one having this problem. Most contractors operated in the independent sector of Argentina, pricing jobs randomly; and not bothering to report earnings, pay taxes, abide by health and safety regulations, or even hold themselves responsible for inferior work.
This wasn’t entirely the contractors’ fault. As Recchia spoke to more people, he realized contractors lived hand-to-mouth, day-by-day, so they were simply trying to make as much money as they could whenever they could. Their life circumstances incentivized higher prices and lower-quality work. And forget about working in the formal economy, because that only meant giving away the little money they made to taxes.
Recchia recognized a Job to Be Done for both households in need of home improvement services and for contractors, so he created IguanaFix: an online service that connected consumers with reliable, transparent service providers. IguanaFix attracted more than twenty-five thousand contractors in four countries into the formal economy. These contractors reported earnings, paid taxes and were able to begin expanding and building their businesses.
Recchia was able to attract the contractors into the formal economy by understanding their struggle and making it profitable to participate in the honest and transparent platform. By joining IguanaFix, contractors would have access to corporate customers, health and work insurance, be able to open bank accounts and access financing. Recchia emphasized the benefits of joining the formal economy rather than highlighting the consequences of not doing so.
If more innovators created transparent and honest markets to pull in formal work by targeting struggle, and policymakers created measures to address drivers of informality such as education, cost, work permits, etc., then, perhaps with time, we’ll hear fewer stories of people who found no better option than working for less than they’re worth.
