“Inclusion” and the Informal Economy

Traders are the link between millions of smallholders and local, regional or global markets. They are a channel of ‘inclusion’. But because that trade sits outside of the regulatory and tax regime, it is considered informal.

Informal trade is the norm for many agricultural commodities in sub-Saharan Africa, and has become fundamental to national food security. Despite regional trade agreements, it is estimated that 3 million tonnes of food staples were traded informally in East Africa in 2013. The West African food economy is worth US $175 billion and most of the value chain is in the informal sector.

The majority of ‘inclusive business’ programmes involve -- to a lesser or greater extent -- elements of formalisation, because of chain requirements for traceability and proof of legality and compliance with standards. The costs to the farmer are outweighed by these markets being ‘high value’.

But even when formal value chains are available, farmers often continue to choose informal channels. Why is this? A study of oilseeds trade in northern Uganda showed that the informal channel – which ranged from large-scale cross-border traders to itinerant entrepreneurs -- offered important advantages over ‘inclusive’ business links to the formal processing industry.  Those advantages included direct payment in cash and collection at the farm, as well as acceptance of small volumes of all qualities.

What may be described in project proposals as ‘high value’ markets may be no such thing once transaction costs, delays in payment, wastage and risks are factored in. The trader channels can be more ‘inclusive’ of smallholders, especially for those who are cash-strapped or remotely located. Trading also provides important employment opportunities for rural youth. More examples of this active preference for trader channels over formal value chains are appearing in the literature.

We certainly do not want to romanticise the informal economy. For one thing, a world of informal trade is one without chain investment in farm productivity or sustainability. But despite the significance of the informal economy for smallholder farmers and its many links to formal sectors, it remains largely invisible or even vilified in policy.

A recent event in London on informality and inclusive green growth, called for a greater appreciation of the dynamism that can be found in the informal economy, and opportunities for building skills as part of any formalisation effort. The event stressed the value of creating spaces for representatives of the informal private sector in policy processes. Through this hybrid approach, we can ensure that we’re supporting inclusiveness in markets, and not just chains.

This blog is part of the July 2016 series from the Practitioner Hub and Seas of Change on Inclusive Agribusiness. Download the PDF for more insight, updates and opinion.