Digitalizing Informal Business: What Systems Mapping Reveals about Drivers and Effects

By Tayo Akinyemi

Vendors at Nakasero Market in Kampala, Uganda. Photo credit: UNDP Uganda/Hadijah Nabbale

This blog captures learning from the UNDP Accelerator Labs’ ongoing process of surfacing lesser-known insights about informality, with a focus on the drivers of digitalization within informal businesses.

Digitalizing Informality: A Quick Recap

Sensing and surfacing frontier knowledge about emerging challenges in development is at the core of what UNDP Accelerator Labs do. Each Lab explores its local terrain for new challenges, maps bottom-up solutions and experiments with those that could work in other contexts, influence policy and inform the UNDP’s on-the-ground interventions. As a global network, the Labs also develop collective intelligence about what these problems look like and how to solve them. This learning journey is a working prototype in which we develop questions that anchor learning circles, or collaborative conversations designed to uncover unstructured knowledge and hidden themes.

Informality is one of the themes that is prevalent amongst our Labs — 24 out of 91 are working on it directly and many more are doing so indirectly. Half of the 24 labs engaging directly focus on the intersection of informality and digitalization, and most of those are in Africa. Our work is also part of a broader landscape of inquiry, not just inside the UNDP, but within peer organizations such as the ILO, and development in general.

What *Really* Drives Informal Businesses to “Go Digital?”

Through our exploration of informality, we are trying to understand what drives the digitalization of informal business. These insights fall into three main categories: the impact of COVID-19 lockdowns, new market expansion and increased access to digital infrastructure and social media.

• COVID-19 lockdowns. Shutting down trade in public markets impacted the ability of vendors and businesses to reach their customers, incentivizing them to “go digital” to find new income streams. As lockdowns prevented millions of formal workers from reaching their workplaces, many informal vendors and businesses were also forced to close, switch income streams or find new sales channels. For example, entire sectors such as tourism shut down in countries such as Barbados, Cabo Verde and Mauritania. In other cases, informal businesses adopted digital technologies to reach potential customers and diversify their income. For example, in Uganda, the UNDP helped informal traders sell their goods through Jumia, a pan-African e-commerce retailer, while in Togo, motorbike drivers who only accepted cash prior to the pandemic, now accept digital payments.
• New market expansion. Beyond the pandemic, informal traders sell across borders to access markets where consumers will pay more for their goods and services. And some of this is going digital. For example, artisans in Ecuador and Guatemala are trying to use digital platforms to sell their products in developed markets such as the US and Europe. Additionally, as informal vendors access these new markets, they should also benefit from the lower costs of operating virtually. However, growth in digital trade in Africa, the Caribbean and Latin America is lower than in other regions.
• Growing digital infrastructure and social media presence. People in developing countries, many of whom also work in the informal sector, are gaining access to mobile phones, mobile internet and mobile money. For example, Facebook attracts users by incentivizing mobile carriers to provide purportedly free access to low-bandwidth versions of its platform, such as Facebook Zero. The company also enables access by investing in internet infrastructure such as Wi-Fi, which allows users to connect to Facebook for free. Finally, Facebook (via Marketplace and Groups) and WhatsApp help businesses, often run by women, engage in digital commerce.

As telecommunications advance, greater connectivity means opportunities and challenges for developing countries. Photo credit: NASA

How the Private Sector, Government and Other Actors Jumpstart Digitalization

Now that we’ve discussed what drives digitalization in informal businesses, we can tackle who drives it. Based on Lab experience, we see four main actors: the private sector, government, cooperatives and Small and Medium-sized Enterprise (SME) associations, and the diaspora.

• Within the private sector, it is widely known that the telecommunications industry is bringing mobile phone and mobile internet access to billions of people, while the banking system and private companies are enabling digital payments through digital wallets, with knock-on effects. Take female entrepreneurs, who in some Bangladeshi villages use their phones to provide paid services to their neighbors, or how informal businesses in South Sudan achieve digitalization by using mobile money. In the Philippines, social media platforms such as Facebook, WhatsApp and Viber are enabling small, often home-based businesses to engage in informal online commerce. And in Ecuador, we observe the proliferation of gig platforms, which typically connect informal workers to digital work, but also help self-employed workers formalize. This leads us to wonder, with the expansion of this enabling infrastructure, will access to the internet increase or will patterns of exclusion be reinforced?
• In countries such as Bangladesh, The Gambia, Namibia and Uganda, policymakers are creating free trade agreements and public policy aimed at digitalization at the national level. Consequently, policy frameworks such as the Digital Uganda Vision are driving digitalization. Uganda is also exploring the creation of an e-commerce policy that will support digital trading by market vendors, as well as protect consumers who are purchasing goods online. With the introduction of policy frameworks for digitalization, will it become easier for informal business to transact, find new customers, and potentially formalize? We’ve seen this in the increasing use of digital money transfers. Triggered by the economic implications of lockdowns, 400 different cash transfer programs were initiated in 166 countries (including 60 developing countries). Globally, one in seven people received cash transfer aid in 2020. Additionally, because millions of people in developing countries were receiving electronic cash transfers for the first time, the prevalence of digital payments may have also grown. The ILO’s 2021 report, Renewing the social contract through e-formalization in the world of work, notes that the Government of Ghana used digital payment transfers to support 100,000 Micro-, Small and Medium-sized Enterprises (MSMEs). Has the digital delivery of social benefits opened a pathway to digitalization for informal businesses? As always, causality is hard to determine, but we can keep an eye on correlation to see if digital social payments make it easier for people to integrate digital into their businesses, informal or otherwise.
• Cooperatives and SME associations in Bangladesh and Colombia are encouraging their members to digitalize in order to improve the services they provide, but also to gather more information about them. In Ecuador, the level of digitalization within cooperatives varies, but most are on social media. Creating a Facebook page is often the first step to digitalization for cooperatives and small business associations. In North Macedonia, Zambia and Zimbabwe, informal workers formed associations or cooperatives that made it easier to share the cost of border crossings and use digital platforms to sell goods virtually. Will the cost sharing and use of digital platforms persist beyond the border crossing closure? We hope to learn more about these dynamics from our Labs in Zambia and Zimbabwe, and the others participating in the Africa Borderlands Centre’s 2021 Innovation Challenge. We also aim to further explore the role of cooperatives and SME associations in driving digitalization among their members.
• Diaspora communities drive digitalization, especially with respect to cross-border trading. In The Gambia, members of the diaspora (primarily women) increase their remittances by purchasing goods and services for family members back home. Similarly, in Uganda, diaspora members have switched from traditional channels such as Western Union and Money Gram for delivering remittances to technology-driven solutions such as Wave and World Remit. These solutions deliver funds directly through mobile money, making it easier for the recipients to transact. Given our focus on informal business, we’d like to know: are these remittances being channeled as investments into informal businesses or do they primarily offset household expenses?

When Informal Businesses Digitalize: Opportunities, Challenges and Risks

Although we’re starting to understand the dynamics surrounding the digitalization of informal businesses, it’s a multi-faceted phenomenon that invites a nuanced exploration of impact. To embrace that complexity, we’re exploring the opportunities created, challenges confronted and risks embedded in the digitalization process.

Opportunities

Digitalization within informal businesses can have wide-ranging effects by removing or shifting intermediaries, increasing digital literacy, introducing digital technology to informal businesses and expanding their networks.

• Removing or swapping intermediaries. Digitalization can help remove intermediaries from the value chains of informal businesses, resulting in increased productivity and direct access to consumers. For example, in Nepal, an e-commerce platform called KrishiCoopBazaar gives farmers’ cooperatives direct access to customers. This enables them to preserve their produce and secure their livelihoods. However, instead of removing intermediation, sometimes digitalization confers more power to a single intermediary. Uber, whose core business is to connect buyers and sellers of mobility-driven services, is a well-known example of how this dynamic can emerge.
• Increasing digital literacy. Digital literacy is still low in many developing countries, so digitalization has the potential to leave people behind. Nonetheless, it seems to be increasing, due in part to the digitalization of informal businesses. For example, drivers of digitalization in Africa — startups, corporations, and policymakers — are advised to support efforts to increase digital literacy, build infrastructure, and integrate digital products and familiar offline activities.
• Improved services through digitalization of informal businesses. Digitalization can take many forms. For example, in Uganda, the digitalization of informal businesses has improved service delivery, and provided access to new markets through business associations. Through a partnership with Jumia Uganda, informal market vendors have been able to sell to new customers via Jumia’s e-commerce platform, leveraging market agents to fulfill orders and drivers to deliver them.
• Risk assessment and access to credit. Another impactful application is the increase in access to credit for informal business. The data that digital transactions generate provides more information, which makes risk assessment easier. This reduces the risk of lending money to informal businesses. Less risk creates lower interest rates, which can lead to increased productivity. For example, tech startups such as Kenya’s Pezesha are building proprietary credit scoring models that enable SMEs to gain access to financing.
• Expanding networks. Lack of social capital is associated with poverty and vulnerability, but digitalization can provide an opportunity to expand existing social networks and build social capital for vulnerable communities. Similarly, communities may experience more resilience as digitalization expands markets and diversifies income.

Challenges and Risks

Although we have uncovered a small number of risks, there are some worth highlighting. First to note is the expansion of the digital divide, which is created when those who lack connectivity and digital skills are left behind. Similarly, we heard that digitalization may broaden social networks, but it can also decrease social cohesion and reduce the social protection afforded to informal traders and small businesses on digital platforms. Additionally, the predominance of platforms such as Facebook and WhatsApp could lead to an over-reliance on them, the centralization and corporate ownership of user data, and the potential for government to collect and use information to assert control. Finally, potential users of fully digital solutions may be wary of them due to lack of trust in financial service companies and government, and the risk that their data will be misused.

Informal market vendors can be more resilient to shocks and stresses if they tap into digital marketplaces, but some face the barrier of low digital literacy. Photo credit: Unsplash

What Did We Learn and What’s Next?

As we try to understand what digitalization looks like for informal business, we’ve learned that:

• Key “what” drivers of digitalization include the proliferation of digital infrastructure such as mobile phones and internet access; COVID-19 lockdowns that increased the attractiveness of digital commerce channels to informal businesses; and the way digital tools can help informal businesses reach new markets.
• The private sector is a key “who” driver of digitalization because it provides access to digital infrastructure, as mentioned above. Other actors such as governments also contribute by creating policy frameworks that articulate their visions for digital economies and model digital social protection delivery.
• Digitalization can have a broad range of impacts, from increasing the range of products available to consumers, to removing intermediaries from informal value chains. It can also create challenges such as broadening the digital divide, reducing social cohesion, increasing the influence of dominant digital service providers and exacerbating the lack of trust in digital solutions.

Building on this, we’ll examine what parts of informal business value chains are digitalizing, what the implications of “going digital” are, and what connection exists between formalization and digitalization. As we shift away from the “informality is a problem” narrative, we expect other provocative questions to emerge. For example, as the spread of COVID-19 variants ebbs and flows, we’ll look for signs of whether the push toward digitalization in informal markets persists. Our next learning circle will explore the potential link between digitalization and formalization as an expression of how informal businesses operate. We’re always looking for new sources of insight, so please contact us if you’re also piecing together the puzzle of informality!

Thank you to Eduardo Gustale and Angie Ong for their advice in framing this piece, and to the Lab members who participated in learning circles and contributed their knowledge: Adita, Igor, and Lazar (North Macedonia), Alberto (Angola), Amina (Bosnia Herzegovina), Eudoxie (Burkina Faso), Hadijah (Uganda), Irina and Sharleen (Philippines), Lalla (Mauritania), Miafeng and Camara (Guinea), Omagano and Yrika (Namibia), Omar (The Gambia), Paola (Guatemala), Paula (Uruguay), Paulina (Ecuador), Ramiz (Bangladesh), Samory (Cabo Verde), Sharleen (Zimbabwe), Sofia (Colombia), Tong (South Sudan), Yawo (Togo), Yem (Togo), Yomna (Egypt), and Yulia and Aisha (Indonesia). Thank you for sharing your expertise, experiences and perspectives!