Delve podcast: Lessons on Economic Growth from the Informal Economy, with Robert Nason

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Delve podcast, September 8, 2022: Lessons on Economic Growth from the Informal Economy, with Robert Nason
Robyn Fadden – host: What first comes to mind when you think about entrepreneurship? Your answer hinges on where you live in the world, how the local, state and national economies function, and even how the culture views business ownership. In a formal economy, as in most of Canada, entrepreneurs are beholden to multiple institutions, whether governments and business associations or universities and other institutions that shape how business is done. However, in an informal economy, often found in developing nations but also in pockets in more affluent countries, entrepreneurs and their businesses answer to different criteria – because their institutions differ and may be less, well, formal. Being an entrepreneur, running a business and making that business grow might depend more on your community or your extended family than on your bank or professional association. Welcome to the Delve podcast. I’m your host for this episode, Robyn Fadden.
Robyn Fadden – host: In this episode I talk with Desautels Professor Robert Nason about informal economies and intuitions, including what has been missed in how we think about entrepreneurial growth in those informal economies. In Nason’s research paper Far from Void: How Institutions Shape Growth in the Informal Economy, he and his co-author see informal economies as institutional interfaces built of “bits and pieces” from market and non-market institutions. How these interfaces are arranged influences concepts of entrepreneurship and growth. Welcome to the Delve podcast, Professor Nason.
Robert Nason: Thank you so much. It’s great to be here with you.
Robyn Fadden – host: Thanks for being here. When most people think about informal economies, we might think about cash-only marketplaces or underground economic activity, but that’s not necessarily the case – could we start by defining the informal economy in terms of what you’re looking at in your research?
Robert Nason: It’s a great question because there’s a few different ways to do it. In this paper, the approach we take is a kind of definition that informal economy is the absence of economic activity with the absence of legal or state regulatory institutions. You can think of it as kind of unregistered business activity. Another kind of definition that’s often used is that it’s economic activity that’s often kind of socially acceptable, like that we all kind of understand, appreciate, even if it’s still technically illegal. We’re not talking about in this case, like, what others were called the renegade economy or the kind of, you know, dark and disturbing economic activity, like the mafia, and those kinds of things. In our case, we’re also situating it more narrowly within a low-income context and context of poverty. But the informal economy exists everywhere. Here, you know, if you redo your bathroom and pay your contractors cash you’re participating in the informal economy. But it’s most prevalent in low-income countries where you have individuals who, you know, might even prefer to get a job, stable job somewhere else, but kind of our go into entrepreneurship as a way to provide for their family and just end up selling simple wares that they make or a whole range of activities though.
Robyn Fadden – host: Who are the main players and entrepreneurs in these informal economies?
Robert Nason: We often think of them as those that just go out and start a business often with little money and few resources. They don’t necessarily go through the hurdles of registering their business, raising money. Frankly, the way we often teach entrepreneurship, around this kind of a formal path. It looks very different in the informal economy, you don’t have raising capital in the same way though, you still have a big influence on friends and family in your own personal resources you can get together, but it’s often more kind of limited resources. And it’s more of a kind of trying to get buy in and create something new and out of that – you do see still quite a bit of innovation and quite a bit of kind of going about and doing new things.
Robert Nason: I think in general, there’s not one type of entrepreneur. There’s also not one type of informal economy entrepreneurs. So some end up developing quite sophisticated businesses, even technology oriented businesses, others, it’s what we might think of: where you go on vacation to develop a developing economy, and you go to the night markets or something with people selling their wares and goods, those are almost all entirely informal economy or people kind of trading on the streets, street traders.
Robert Nason: This research for us is very much inspired by work that Joel, my co-author and I have been doing in South Africa, and in partnership with this amazing nonprofit sustainable livelihoods foundation in Cape Town, and they’re the ones that really helped open our eyes to how entrepreneurship activity plays out in the in the townships there, that’s the main focus. That was part of the inspiration. And there you see entrepreneurships of all stripes and backgrounds, running small convenience stores that they call spaza, shops, running, sometimes quite sophisticated, but informal bars, or nightclubs, or those that are just, you know, distributing wholesale goods and services and, or that are kind of manufacturers for auto parts or bikes or that kind of thing. So, I mean, really runs the gamut of, they don’t necessarily fit into the traditional, standard industrialized codes of how we would categorize businesses here, but certainly all kinds of sectors and all kinds of different types.
Robyn Fadden – host: So in terms of networks, there are family businesses supporting each other and there are also certain NGOs in place that connect entrepreneurs, but it’s quite different from traditional western economic institutions that connect and regulate businesses. Your paper’s title, Far From Void, alludes to how these informal economies are nevertheless measured against traditional economies that have formal institutional systems in place.
Robert Nason: What Far from Void is doing is reacting to the dominant approach to how the literature treats informal economies. And what we argue is that, again, there’s been this kind of emphasis on state legal market institutions. And basically where it’s been set up has taken this inherent comparative approach that like, we know what entrepreneurship looks like in the West, this is what it looks like, if we go into another country and look at how it is there. They don’t have a lot of the same things that we have. So they don’t have the well-developed market institutions that stayed in regulatory institutions. And so they’ve been characterized as voids. So meaning it’s an institutional void, because those things that we see as undergirding our economic activity don’t exist there. And because of that, that competitive approach has said, those are institutional voids.
Robert Nason: Institutional voids in the academic literature has become essentially an academic euphemism for what Donald Trump called shithole countries. So that basically, it’s become a rather disparaging characterization of a different way of doing things in a different institutional environment. And so, what we’re saying in this paper is that most of our literature, especially international business, characterizes these places being void, because they don’t have market and legal institutions. But that’s because you don’t really understand what’s happening there.
Robyn Fadden – host: That word institutions could mean a lot of things. Typically, in a western capitalist sense its interpreted through an economic and political lens. Your research incorporates a sociological view of institutions. Could you outline what that is?
Robert Nason: I’ll give you the kind of academic definition that we use, and, and then some examples, too. For us shifting away from this kind of economics and political interpretation of institutions, it’s quite narrow, to a broader sociological view of institutions. We use a well-known definition from Scott that defines institutions as regulative normative cultural cognitive elements that together with associated activities and resources, provide stability, stability, and meaning to social life. So what are those things that define the taken-for-granted norms of behavior in life. In terms of kind of specific institutions rather than just the state or the market, we talk about institutions like the family, institutions like religion, institutions like your local community, that have norms and ways of behaving and operating, and that people just kind of implicitly understand to be true and that guides their behavior. And it kind of guides their behavior in how they engage with each other. And importantly, it guides their behavior in how they undertake economic activity, how they do entrepreneurship, and that’s the piece we’re trying to connect.
Robyn Fadden – host: It also sounds like a rethinking of what institutions are and how they function differently in different places or economies.
Robert Nason: When we shift the way we think about institutions, so rather than purely this kind of economics and political lens of viewing what is an institution, we view institutions more broadly from a sociological lens, and understand the kind of cultural institutions that exist things like family, community, religion – all of these non-market institutions, when you start to understand the role that they play in a society, you realize that these places are not void at all, they’re rich and vibrant in terms of the institutional arrangements. They’re just different from the ones that we have. And they’re different, especially in the way that they influence economic activity.
Robert Nason: What we called it is that the current approach is this absence-based approach that basically you’re defining something by the absence of what exists, so they don’t have this certain type of Western institutions, therefore, it’s a void, and therefore we don’t find growth there – we don’t find the growth that we’re looking for. What we say is try to develop this presence-based approach of saying, No, let’s take seriously and understand the informal economy on its own terms, understand the institutions that do exist there, and then you will see the different kinds of growth that they have. And so it’s shifting the nature, the kind of institutions that you’re looking at, and that then leads you to realize that growth occurs in different ways. And there might actually and often is growth that’s occurring, it’s just in less visible ways and in ways that are less familiar to us, as we typically study it.
Robyn Fadden – host: The area you’re studying is highly interdisciplinary – you can’t study the management side of entrepreneurship and institutions without looking at broader social and cultural contexts, such as what influences entrepreneurship styles and even the politics that might undergird business development, informal or otherwise.
Robert Nason: We focus on informal economy and context of poverty, but there’s lessons back for us too, we have lots of economic activity that’s shaped by cultural institutions, in the arts, in music and entertainment, and in all kinds of things. And I think what’s considered legitimate, what’s considered cool, what’s considered acceptable or not, those are often shaped very much by our kind of cultural institutions. And that has bearing on the economic activity. I think we can learn something then from understanding informal economy and in that context.
Robert Nason: And I think it shapes also the way even as far as what is considered rational or what is the kind of strategic practices that should be undertaken. The literature characterizes much of entrepreneurship, economic activity, and context of poverty as being relatively irrational – meaning you don’t see high levels of strategic differentiation. You’ll have sellers selling the same product right next to each other for exactly the same price, and not trying to vary it in some way. Or there’s been emphasis on entrepreneurs that mimic others, that just copy and don’t kind of do their own thing. The overall picture is strategically kind of deficient and rather disparaging picture, even going so far as to call it kind of irrational.
Robyn Fadden – host: What seems rational and profitable in the informal economy would seem irrational and without growth potential when measured using a formal western economic system.
Robert Nason: This is based on a false sense of economic rationality: that that’s how man is, and it’s you should be kind of optimizing for some kind of economic performance, when a lot of people in all walks of life don’t operate that way. I mean, we just don’t, we don’t. In general, I think even in our privileged positions here in Canada, you see a lot of heterogeneity in terms of the decisions people make. I think especially and importantly, when you look in a context of poverty is a lack of understanding the institutional environment. And who am I to say, if I was in that it, how I would act in what I would consider to be rational if I truly understand that different environment than I’m in? Really we’re trying to bridge that kind of individual level of what does it mean to be strategic or rational in some ways, with you have to understand the macro environment and context in which individuals are living in order to make those kinds of assessments?
Robyn Fadden – host: What is currently missing in the current understanding about entrepreneurship and how business growth is thought about?
Robert Nason: I think what’s missing is appreciation and understanding for the variety of ways in which growth occurs. So because we’ve taken this approach of a baseline of, we understand in some ways how growth occurs, you know, in Western developed settings, then we’re looking for that same type of growth, when we go to a kind of informal context of poverty, and we don’t find it, therefore it doesn’t exist. Well, we say is that well, no, there’s different ways that growth can occur. And we need to understand more diversity around that.
Robert Nason: So what we propose in the paper is three different types of growth, and I’m sure there’s more that I think have been missing and that kind of come to light if you factor in some of the non-market institutions that exist or the relationship between market and non-market institutions. The first is a kind of more traditional type of firm let scaling up a firm which we call direct growth. The other would we call dispersed growth. In there, it’s what we might think of as kind of like a micro diversification strategy. So an individual entrepreneur who starts lots of different businesses, and so they have kind of a range of things. And often again, I mean, informal, so it’s not like, you know, a bunch of formally registered businesses, but, you know, we might think of this as like side hustles, or, you know, a side project or something that you kind of try out for a little bit, it may not last, or it might have some continuity, or you’re just earning income from multiple sources. And so that there’s this kind of that dispersed growth is a model that exists.
Robert Nason: And we have a good friend of ours has written about research that he did in, in Kenya, where he talks about the kind of hustler mindset of like lots of people in many with, you know, full time jobs, even middle-class jobs are still, you know, doing all kinds of side hustles, the chicken farm here are kind of consultancy here. It’s just part of the kind of mentality and energy and vibrancy of what economic activity looks like. And, of course, much of that is kind of informally structured. So I think once you start to incorporate that you see a broader range of economic activity that’s existing. And then the last is what we call disguised growth, that basically, this is growth, it is intentionally concealed in some way. And it could be intentionally because you don’t want to, you know, I think, traditionally has been intentional, because you don’t want to catch the eye of the tax man or government.
Robert Nason: We’ve seen, it’s often driven by non-market institutions, as well as that there can be strong, sometimes collectivist norms, that people are quite skeptical of those that are doing well. From the developed Western standpoint, entrepreneurs are pretty valorized and lauded, and we see these great successes as something that’s worthy of praise. But in some other contexts is not necessarily the case. The NGO we’re working with, they kind of talked about this and shared with us about what they called fronting – businesses that are intentionally kind of shabby on the outside, but are really quite profitable and doing well. So that kind of backhand, the business itself is actually super profitable, but they intentionally make themselves look kind of less performing than they are because it’s more socially acceptable to be that way in the townships than to be kind of standing out.
Robert Nason: I think this is super interesting, because it’s basically the opposite of how we think of or treat entrepreneurship here. Here you have a college student who’s starting a new business from their parents basement that they’re never going to show you a picture of, and they build this glossy website that has all their high-status contacts, or whatever, that are overly dramatizes how successful they are, in an attempt to try to conform with that meaning of success, what means to be legitimate. And there you have the kind of complete opposite even that’s kind of fundamentally sound and bringing in a good kind of consistent cash flow is presenting themselves as being underperforming or not successful.
Robyn Fadden – host: Yes, showing that markers of success are cultural too. Are there similarly unique economic possibilities for growth in informal economies, as well as social empowerment or other benefits?
Robert Nason: In the literature, again, there’s a lot that’s about the benefits of formalization or even research on how do we get these informal firms to formalize and often the policy assessments and government’s approach have been kind of this have with this kind of orientation of saying, you know, look, it’s a kind of tax loss. These are kind of unregulated firms that are doing who knows what, and, you know, we need to figure out a way to formalize them. And I think it’d be quite kind of stringent kind of crackdowns as a result. You know, what I think we’ve seen our approach is that when you take that approach, what you’re doing is further marginalizing some of already the most marginalized people, and in a way that it’s just not, you know, productive. I think there is certainly a time and a place where informal economy, maybe that disguised growth grows to a point where it should be formalized, and something more nefarious is going on. And I think in that the orientation should be, how do we make it more compelling for entrepreneurs to formalize? How do we make it so that it’s worth it for them, that they realize that look, if you formalize, then here are the benefits that come with it? Right, I think that’s a different, you know, more of the carrot than the than the stick approach.
Robert Nason: By and large, though much informal, economic activity might never make sense for it to become formalized. But it still plays a vital role. Statistics from Cape Town, again, where we’ve done work, shows that informal economy reduces the poverty level by 5%. Meaning that there’s 5% of people would be in poverty, if it weren’t for the informal economy. So it’s playing this role of helping people survive and get by, and I think it needs to be appreciated for that. The other is that it is really kind of a sandbox for experimentation in entrepreneurial activity, and some of these businesses that start out super informal, will grow into very successful business that can create jobs have an impact, change people’s lives, and I think it can be viewed more in that way as kind of an incubator of sorts, allowing this experimentation to exist, and kind of then finding ways to support the viable and kind of higher growth and potential economic activity coming out of it to grow further. That is the kind of way that informal economy can be approached, I think, a little bit differently, helped along to have a productive impact.
Robyn Fadden – host: What can be learned about entrepreneurship from your findings?
Robert Nason: I think there’s a there’s a number of things, one, what’s the role that nonmarket institutions play on economic activity? And we tried to draw attention to that in the informal economy, but as I said, it plays a vital role in in many industries, like creative industries, cultural industries here. I think in some ways, you see a growing sense of that, as there’s a bit of a kind of cultural reckoning around some of the negative impacts of an unfettered capitalism, I think you see that amongst the next generation of students amongst many that are kind of becoming disillusioned with, Okay, well, growth at all costs, or, you know, what’s the point that, you know, or recognizing a lot of the damage that happens? And I think there you see, then there’s pushback from kind of cultural institutions saying, no, maybe we need to shape and channel our economic activity in a way that that kind of matches or alliances with important non-market institutions as well, not just that kind of market, dominating and fusing everything. And so I think, kind of call for more balance, I think, I think that’s something you can learn and see in the informal economy. I think you can see what happens when institutions kind of clash and collide as well.
Robert Nason: This kind of experimental approach to entrepreneurship that you see in the informal economy, sometimes by necessity, is really in many ways, what we’re starting to even teach now, and I think it’s good to do more of a kind of best practice for entrepreneurial process of rather than raising a ton of money to build the best, perfect product and then release it to the market and see what happens. What I think the approach is, is more, would you see this in the informal economy, you know, starting with limited resources, a lot of trial and error and experimentation until you get something that kind of has some momentum and, and, and grows, and you can kind of scale it up from there. This kind of, you know, we might say, is, you know, minimum viable product, by necessity, you see that in the informal economy, people are doing all kinds of innovative things, using, you know, resources that they have, for, for ways that are not at all, how its intended, you know, just kind of trying to create something new. And a lot of innovative stuff comes out of that. And I think that mentality that approach, that entrepreneurial process is something that we can learn a lot from and try to implement, as well.
Robyn Fadden – host: What else can be learned from informal economies in terms of organization and leadership?
Robert Nason: I think what I would say more broadly, is that there just needs to be a different kind of understanding and appreciation for the more diverse institutional environments in which organizations are situated. We home in on the informal economy as a kind of unique institutional environment. Part of what we’re pointing out is that informal economies are very heterogeneous. And I think rather than thinking in this kind of monolith of what does it mean to be an organization in the market, understanding that markets take different shapes and sizes, you have to appreciate those differences in order to understand how organizations compete, how to lead people in those contexts, what’s going to motivate them, what’s going to resonate with people. I think understanding those environments is really imperative. What we need is a more decolonizing approach that’s getting away from imposing our implicit biases and assumptions on other places and understanding them on their own terms. To me, that means less intervention as well, more just kind of understanding and unpacking the dynamics. That’s what we kind of tried to do here. And I think through that, you’ll have a better appreciation for what organizations and people need to grow and succeed and thrive along whatever dimensions they find most important.
Robyn Fadden – host: Thank you so much for being on the podcast.
Robert Nason: Thank you so much for having me. It was a pleasure.
Robyn Fadden – host: As Professor Nason points out, there is much to be learned about economics, entrepreneurship, and business ecosystems through the study of informal economies and the institutions that influence them. His research suggests that Western economies could augment their approach to business and entrepreneurship with a deeper understanding of the informal economy – the outcome might lead to new concepts of economic growth that take into account and actually benefit groups and individuals who have been less visible or underrepresented in Western, formal economies.
Robyn Fadden – host: Our guest today on the Delve podcast was Desautels Faculty of Management Professor Robert Nason, discussing his research on informal economies and entrepreneurship, as outlined in his recent paper Far from Void: How Institutions Shape Growth in the Informal Economy. You can find out more about that research in an article at Thank you for listening to the Delve podcast, produced by Delve, the thought leadership platform of the Desautels Faculty of Management at McGill University. You can follow DelveMcGill on Facebook, LinkedIn, Twitter and Instagram. And subscribe to the DelveMcGill podcast on your favourite podcasting app.