The digital disconnect of informal businesses

Informality has been stubbornly high for decades, despite all manners of regulatory reforms. While regulation or taxation reforms may have had some impact, it seems that they have failed to considerably change the private sector given that informality remains high in economies that have reformed considerably. One such example is Zambia which ranks 17th in the ease of paying taxes indicator of the Doing Business Report, but the ILO reports over 70% of informal employment (a bit of self-promotion -  we are in the process of collecting data on Zambian informal businesses). For these economies a new hope may lie in the rise of digital technologies. The idea is that the spread of digital technologies will enable informal businesses to access wider markets, allowing for innovations that could eventually raise the productivity of low-performing sectors. Or simply, digital technologies may blur the lines between formal and informality with the rise of the gig economy.

Can digital technologies change the informal sector? The answer seems to be not yet. Informal firms hardly use basic technologies such as computers or even the internet for their business activities. Results from recently completed World Bank Surveys of informal businesses show that only about 1% of informal businesses in Lao PDR and Mozambique use computers for their operations. The figures for internet use are not that different with only 1 in 200 businesses in Mozambique using internet, and slightly higher in Zimbabwe with only 2% of businesses using internet.

_{Source: Representative surveys on informal businesses in Lao PDR, Mozambique, and Zimbabwe by the World Bank’s Enterprise Analysis Unit.}

However, there is hope. Mobile money, particularly in the two African countries, has significantly penetrated the informal economy. In Mozambique over 40% and in Zimbabwe nearly half of businesses utilize mobile money in their operations. Studies have found that formal firms that use mobile money tend to invest more (Islam, Muzi, Rodriguez Meza, 2018). An open question we wish to explore in the upcoming survey is whether mobile money can make informal firms more productive.

The digital connection achieved through mobile money may be limited. The gains from advances in the digital economy may be further away than expected. Many of the innovations in the tech sector require an infrastructure that uses computers and access to broadband internet. Informal businesses, those operating without being registered, lack the means to implement many of the developments in the digital economy.

From our reading of the data from the World Bank Surveys of Informal Businesses, we have two main takeaways:

1.    Get the basics right. We need to first make sure that businesses in developing economies have access to more rudimentary technology - internet, and basic infrastructure – electricity to harness dividends from digital technologies. Without these in place, capitalizing on new developments from the tech sector are unlikely in places with high level of informality.

2.    Context matters. Stakeholders targeting the informal economy should tailor digital interventions in accordance to the type of digital platforms prevalent in the informal sector. Mobile money platforms present a different array of opportunities and constraints than a fully connected digital platform through a smart device.
Digital platforms, or any platforms for that matter, exhibit increasing returns as the size of the network increases. Clearly there is still work to be done to increase participation in mobile money platforms, particularly in Lao PDR.

Our findings are based on three informal surveys, and thus somewhat limited in scope. Will we find the same results for informal firms in other developing economies? Ask us again in a couple of years.