The informal economy in developing nations: a hidden engine of growth

June 2017

By Toby Boyd, Communications Division, WIPO

Innovation is happening everywhere, including in many small and informal businesses in developing countries. A new WIPO book explains how. Sacha Wunsch-Vincent and Erika Kraemer-Mbula, who edited it, talked to WIPO Magazine about the project.

Animal sculpture produced by metalworkers in the Racecourse cluster of Nairobi which specializes in art objects for middle- and high-income consumers (photo: S. Daniels).

Your book examines innovation and intellectual property (IP) in the informal economy. What do you mean by “informal economy” and why did you want to study it?

Erika Kraemer-Mbula: Definitions vary, but essentially the informal economy means economic activity that takes place outside formally regulated structures. Typically, informal economic enterprises are small, often based around families. Workers probably do not pay income taxes, nor do they enjoy social protections. While their activities are not necessarily illegal, they are not covered by the framework of national laws in a given country.

Importantly, there is not always a clear divide between formal and informal economies; for example, sometimes people may work cash in hand for formal, registered businesses. So defining informal economic activity can be difficult.

Sacha Wunsch-Vincent: And if the informal economy is hard to define, it is even harder to measure. But we do know that it is very big, especially in developing countries [see box]. That is why we wanted to study it. Our research was mandated by WIPO’s member states, who recognize that the informal economy is enormously important in many countries and that we cannot support innovation in those countries if we do not understand how innovation works in the informal economy.

Since the informal economy is hard to define and measure, does that mean it is also hard to research?

Erika Kraemer-Mbula: Yes, absolutely. Quite a few people have studied the informal economy, but very few have looked specifically at innovation in the informal economy. Much of that research has been anecdotal and rather one-dimensional. It tends to give the impression that any innovation that takes places in the informal economy is done by poor people working in poor countries, and is fairly basic and just a matter of them coping with the difficulties of their daily lives.

Sacha Wunsch-Vincent: We already knew from the best previous research that the reality is far more complex. Informal work covers a vast spectrum of activities, ranging from fairly basic survivalist labor to really sophisticated and skilled craft work. We wanted to capture that richness and complexity within a single analytical framework. And as this was a WIPO project, naturally we chose to focus on the role of IP, which no one had really done before.

Kenya’s informal sector is a vital engine of job creation. Metalworkers in the informal Kamukunji cluster in Nairobi produce a range of commodities including wheelbarrows, cookstoves, pots and pans. These are sold to low-income populations who cannot afford or choose not to buy similar imported items (photo: S. Daniels).

That sounds like a real challenge. How did you go about it?

Sacha Wunsch-Vincent: We tackled the project from several angles. Our book includes contributions from many leading authorities in the field, both academics and policymakers. While it includes some quantitative analysis, most of the research is qualitative. A literary review enabled us to construct an analytical framework which was then used by three different research teams for case studies on three very different types of informal economic activity in Africa.

What was the focus of the case studies?

Typical cookstoves, known as jikos. One type of jiko is made of
sheet metal (right), the other comes with a ceramic lining to the
fuel box (left) (photo: S. Daniels).

Sacha Wunsch-Vincent: Our aim was to enrich our understanding of how innovation takes place in specific areas of the informal economy. That is why we chose three really different examples of activity and then tried to identify similarities in terms of innovation and IP.

One research team focused on informal metalworkers in Nairobi, Kenya. There is a whole sector of craft workers there who produce a range of metal goods. The sheer variety of their work is really impressive, with products ranging from useful household goods like packing cases and wheelbarrows to sophisticated sculptures that find their way into luxury hotels. We used a picture of one such sculpture, a beautiful metal giraffe, on the cover of the book (see p.30).

Erika Kraemer-Mbula: Another case study looked at traditional herbal medicine in Ghana. Herbal medical treatments have been around for centuries, long before the formal economy. What is interesting is how the Government of Ghana is now trying to leverage that traditional knowledge and its credibility among local people to enhance its national health strategy. For example, it is now possible to obtain a university degree in herbal medicine and some hospitals are prescribing traditional herbal treatments.

As for the third case study, on the production of home and personal care products in South Africa, that was my responsibility. Although South Africa is one of the better-off countries in Sub-Saharan Africa, there is a great deal of inequality, with many people surviving on very low incomes, so there is a very important informal sector that caters to their needs. Among other things, that includes people producing low-cost products such as soap, washing-up liquid and cosmetics.

And what conclusions did you reach? Was there innovation in those three different activities, and if so did it have any common features?

Erika Kraemer-Mbula: There is certainly lots of innovation going on, and it takes many different forms. For the metalworkers in Nairobi, it is often a case of reverse engineering products sold by formal businesses and working out how to make cheaper alternatives from available materials. But as Sacha said, there is also some brilliant high-end creative work.

In South Africa, the informal manufacturers are innovative not only in terms of the new products they come up with but also in the way they market those products – through attractive, distinctive packaging and other types of branding.

Machines to cut potatoes into chips. Imported model (right). An
informal adaptation (left) uses sheet metal instead of aluminum and
includes a return spring mechanism. Innovation in the informal
economy is often a matter of adaptation (photo: © C. Bull).

As for herbal medicine in Ghana, the drive to make it part of mainstream healthcare is innovative in itself and there are also attempts to encourage innovation, for example using modern production processes to create herbal treatments in easy-to-store forms such as tablets.

Sacha Wunsch-Vincent: While we saw a diverse range of innovation, we also identified some important common points. First, we found, as in the formal economy, that geographical concentration is very noticeable. Activities tend to focus in certain areas so you get innovation clusters. Indeed, there is often some overlap between formal businesses and informal businesses or workers within a cluster.

Second, we found that there are usually ways of regulating knowledge flows and intellectual property in the informal sector. While these are not the same as formal IP mechanisms, they show some quite similar features. For example, if a worker within a cluster invents a new product or a new way of doing something, they can enjoy a competitive advantage for a while by being the first to produce or use it, but they will be expected to share it with their peers in due course. That sort of period of near-monopoly followed by the mandatory sharing of knowledge is essentially the same idea that underlies patent system and other IP systems. So there is a real sense that informal workers often have their own informal IP rules.

How big is the informal economy?

The Informal Economy in Developing Nations: Hidden Engine of Innovation? includes one of the most complete and up-to-date analyses of the informal economy in developing countries.

Detailed statistical analysis by Professor Jacques Charmes on the size of the informal economy in terms of its contribution to employment and to gross domestic product (GDP) suggests that:

  • more than half of all non-agricultural employment in most middle- and low-income economies is informal, reaching over 80 percent in Central Africa;
  • the proportion of informal employment has risen in many regions over recent decades; and that
  • the informal economy accounts for nearly a third of GDP in Latin America, more than half in India and well over 60 percent of the total GDP of Sub-Saharan Africa.

Does that mean formal IP systems are irrelevant to the informal economy?

Erika Kraemer-Mbula: Not necessarily. We wanted to examine whether there might be scope to use the IP system to help innovators in the informal economy. If just some of the enormous innovation going on there could be scaled up then potentially it could be a significant source of economic growth and development. We think there may be some scope to do that through well-designed innovation policies. For example, trademarks can be a very cost-effective way of adding value to a small business by building up a recognizable brand. But some other types of IP, such as patents, might be less well suited to a lot of informal innovation because it is often a matter of adaptation rather than truly novel technical invention.

Sacha Wunsch-Vincent: What is clear is that informal economic activities are highly diverse and there is no one-size-fits-all policy to support the development of informal businesses. But we need more research to inform policymaking. We hope our book will stimulate a lot more work in this fascinating area. People in developing countries are natural innovators in lots of different ways. We need to understand that and help them make the most of it.

The Informal Economy in Developing Nations: Hidden Engine of Innovation? is published by Cambridge University Press, ISBN 9781107157545.

Using available materials and tools, many metalworkers in the Kamukunji cluster produce metal boxes which resemble those produced in the formal sector(photo: © S. Daniels).

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