Informal Development

by Lindy Davies

For the last two decades the indebted, developing nations of Sub-Saharan Africa (and many other parts of the world) have been compelled by their Western creditors to undergo "structural reforms" and "modernization programs" in order to meet their debt service obligations and maintain their good standing in the club of well-behaved world traders. This implies that such nations, having squandered the billions they borrowed in the name of development, can only be saved by "tough love" -- compelled learn good old-fashioned fiscal discipline. Government budgets must be scrutinized; with GDPs growing slower than populations, they cannot afford the luxuries of public education, health or infrastructure. They wanted to dance, we are told, and dance they did, buying airports, monuments, gigantic dams, lots and lots of weapons -- now the Western piper has got to be paid. And the piper can only be paid in Western currency, so all resources must immediately be channeled into production of export goods.

It is suggested that those folks should follow the Bankers' advice for their own good, and learn to love exports. Ah, exports! Isn't that, after all, what production is all about -- savoring the subtle joys of shipping our stuff away? Production for our own consumption, why, that's downright passé. Let's de-emphasize that; let's send it all off, and get nothing in return! Now that's market reform! Under the tutelage of the Bretton Woods Institutions, the Heavily Indebted Poor Countries (HIPCs) have become hyper-disciplined -- they have developed economic bulemia.

Seeing this, compassionate folks around the world have begun to ask searching questions about just how good "the free market" and "international trade" could be, if they lead to such calamities. Many are led to conclude that it would be best if we stay home, chop our own firewood, grow our own chickens and prepare our own poultices as best we can, for trading is dangerous -- just look what it's done to poor Africa.

What such folks seem to have missed, however -- but the World Bank and the Ghanian peasants know only too well -- is that "exporting" is not the same thing as "trading". Trade is something that two parties do voluntarily, for their mutual benefit. Each trader ends up with something she values more that the thing given up. This is nothing like what has happened when Sub-Saharan Africa has engaged in "international trade". In return for their oil, their eight-hundred-year-old trees, their wildlife, their gold and gems, their crops, the African workers who produced such wealth have gotten nothing, nothing at all. That's not trading: that's giving.

But, of course, somebody does get something in return for those exports: those who own the resources, or the lands on which the exports crops are produced. They are a very, very small part of the population in each nation, but they weild influence in bureaucracies, write fancy reports detailing structural adjustment plans, and manage to achieve a tolerable degree of "modernization" in their personal lifestyles. The only problem is that they are so very few. The rest of the people are, alas, left pretty much to fend for themselves.

Under "structural reforms", the informal economy -- the peasants, peddlers, unregistered craftspeople and service-providers, the masses of people scraping together a living however they can -- was supposed to have been subsumed into the overall national economy, in a Western-type model. There was no way this could ever have happened, however, because of the demand for debt service, and the consequent pathological over-emphasis of export industries. National production in any realistic sense was simply not a priority for the people making economic decisions -- and in fact, their policies created dis-incentives to produce goods for domestic consumption.

Meanwhile: there are no jobs, but many people who need to make a living. There are lots of underutilized natural resources, but the regulatory environment is lax, erratic, corrupt, overextended, nonexistent, etc. People need to eat; they need to live somewhere. They will either produce these things for themselves, or die -- and overall populations have been increasing, so nothing else but the informal economy could have delivered the goods and services that enabled such widespread survival. That's not to say that those goods were delivered in a ways that were healthy, sustainable or just -- just that they were delivered somehow.

However, it ought to be pointed out that the distinction between the formal and the informal economy is political, not economic. There are risks and costs associated with any manner of producing things. When a lot of people, rationally assessing their options, decide that informal production costs less and rewards them better, then that is the situation; the masses haven't made a mistake. In economic terms there is nothing illegitimate or unreal about the informal economy; it is simply part of the range of options that present themselves to people trying to make a living. This fact has been shown repeatedly in various places with respect to monetary systems: if a crisis of confidence in a nation's currency develops, people will stop using it, substituting some other currency (or commodity). In such a situation, the "formal" money is legal, but it isn't legitimate.

I suspect that part of the reason that we refer to "the informal economy" with such a sterile and undescriptive term is that such survival-oriented activities are not useful to international financiers or to the third-world elites who are in bed with them. They would prefer that such people quietly die off -- or, better, not be born at all: hence the continual outcry over population growth, in nations whose people consume a pathetically small per-capita share of resources, and cause a tiny fraction of the per-capita pollution dumped out by the ZPG'ers of the West.

But: once we understand two vital facts, we can easily see that the "informal economy" is indeed the key to development and prosperity. These facts are:

  1. The foreign debt burden of HIPCs is unjust, undemocratic, cannot be repaid, and should be eliminated categorically. The fact that this is politically hard to swallow doesn't make it any less true. The people being compelled to pay off these loans had no say in contracting them and received no benefit from them. And as to the "rights" of the Western lending institutions, they must recognize that in market economies, people take risks. If governments want to subsidize their bankers' incompetent lending decisions, that is their affair, but it is not Africa's job.
  2. Prosperity does not trickle down. It never has, and it never will. Economies prosper and grow upward from the lowest sector of the labor market. When all workers, regardless of their level of skill, have an opportunity to make a living for themselves, then employers must pay them decent wages, and must invest in their productivity. In the HIPCs, of course, the great masses of workers have no viable employment opportunities at all -- we can see this by the prevalence of the underground economy. Development simply cannot occur under such conditions.

HIPCs do not continue to honor their foreign debts out of an overdeveloped sense of politeness or honor. They do so because that is the only way they can continue to sell their exports. They are locked in a vicious cycle that benefits only two players: the Western banks who do not have to write off their (nevertheless) bad loans, and the African elites who profit from exports while impoverishing their people, and raping their natural habitats.

None of these things are difficult to see if one looks soberly at the facts. Yet they are hard to recognize in another sense, for their clear implication is unthinkable. But let's think of it, anyway. To achieve just, sustainable development, an HIPC must:

  1. Refuse to pay its foreign debt
  2. Collect the rent of land and natural resources for public revenue, and abolish taxes on production and commerce.

It is always a mistake for land to be held in absolute private ownership -- for reasons of both justice and efficiency. It is egregiously wrong for great part of a nation's resources to be held by foreign corporations, or by a ridiculously small elite. These injustices can be redressed, and these inefficiencies eliminated, but the public collection of land rent. This point is well-known, at least, among advocates of this reform. But what is not widely understood is that these two steps in a nation's path to liberation are interdependent. It is only by unleashing this engine of equitable, sustainable economic growth that an HIPC can hope to survive its weaning from foreign capital.

How would that happen? What would happen to a nation that did these unthinkable things? Well, to begin with, it would immediately lose its export markets. Tariffs would be slapped; ships full of timber and cocoa would lie in port.

Conventional wisdom would, of course, call that a disaster. But for whom? Would it be a disaster for people in the informal economy, who do not produce export goods and get no benefit from a nation's exports? (In fact they are most often hurt by those exports, for when a nation devalues its currency, making exports more attractive and debts easier, it simultaneously makes imports -- including medicines and other needed items -- more costly!)

The fact is that in a very poor nation such as any number in Sub-Saharan Africa, production is so low, and the economy is so dysfunctional, that tremendous improvements in living standards could be made before such processes even showed up on the radar screens of those equipped to monitor the "formal" economy.

Refusing to pay the debt would be a disaster for the landowners whose lands are used to produce exports. But no matter: our hypothetical, enlightened state, affirming fundamental principles of human rights, would have appropriated the rent of land for public revenue. Those plantationeers would be slapped with a large holding cost for land, the produce of which is longer in demand! Will they not abandon those lands? (They will, if the government that took this step has any chance of longterm survival.)

Suddenly there would be a drastic increase in the amount of good land available -- even to those small, "informal" producers. Furthermore, with the disastrous tariff on imports removed, the incentive to acquire improved tools and equipment for small-scale production will have been greatly enhanced. You can do the math: the lives of the millions engaged in "informal production", whether rural or urban, will be improved -- and the government, now provided with a stable, non-inflationary, growing public revenue fund, will be in a position to contribute to growth by supplying long-needed infrastructure improvements. Slowly, "informal" will become "formal" because entrepreneurs will perceive a benefit in doing so -- just (as Hernando deSoto points out in The Mystery of Capital) as has happened in developed economies.

Of course, such a program would be very, very risky. It would be truly revolutionary -- a revolution with a realistic chance of actually delivering on its promises. As such it would be very threatening to the status quo, and would be strongly repressed. If it succeeded in one nation, there would certainly be a "domino effect"!

However, by identifying, so clearly, the root causes of suffering and deprivation in HIPCs, this reform could defend itself on unassailable grounds of justice and human rights. And by presenting a clear path to a workable remedy, it can, when courageously (and incessantly) presented, gain popular support.

Lindy Davies, February 20, 2002

What folks have been saying:

True - the people are not daft! However it is often corporations rather than rich individuals who are doing the ripping off. A lot of UK investment is done by pension funds. The beneficiaries are of course not poor, but not the richest people either. Still, it's time they kept more of an eye on their money - for their own benefit and other peoples'.
Diana E Forrest <[email protected]>
TODMORDEN, UK - Wednesday, February 20, 2002 at 16:53:49 (EST)
Well said, Lindy. I'm going to recommend this rant to a friend of mine who's an anti-globalization demonstrator. Sigh. The saner elements of the left and right each have real points; we who have seen the cat understand how their insights can be combined. Or so it seems to me, although from some perspective it might appear that Georgists grasp another partial truth.
Nicholas D. Rosen <[email protected]>
Arlington, VA U.S.A. - Sunday, February 24, 2002 at 11:32:20 (EST)
Redistribution of wealth by these means has been tried before with disastrous results. Forgiving debt may be practical but stifling free enterprise is not. The most intense effort has got to be made to marry these diagrammatically apposed ideas into one . And that is not what I hear being advocated. Remember, those "elites" are the very ones who know how to make a system productive, if they are given the ground rules which motivate them to work towards it. This is not done by jerking the land out from under them and placing less knowledgeable persons to make the program work. Russia has been our example for the last 60 years. I would ask Ms. Davies to view both parties as part of the solution and not play the academic who has very little knowledge of the real world but who wishes to see her self in print and work towards a solution that is "just" to every one. An economy growing from the ashes of another has no more promise of Justice than one molded from the other. Don't throw the baby out with the wash. The cause is very well stated. The solution not.
D. Hindle <[email protected]>
Merrill, WI USA - Tuesday, March 05, 2002 at 14:45:24 (EST)
It sounds as though you're not clear about what is being advocated here. Land should not be jerked out from under anyone. I never called for redistribution of land, but for public collection of land rent. Quite different. As for the elites in power understanding market efficiency, I see very little evidence of that. I invite you to spend a little time around this website -- perhaps even enroll in our course. Then, you will understand what I am advocating, and you'll be in a better position to critique it.
Lindy Davies <[email protected]>
- Wednesday, March 06, 2002 at 12:22:39 (EST)
If anyone has the opportunity, please check the CIA's website. There's an interesting report about a little island nation called SAO TOMEO. (It's off the coast of Guinea(sp?) in Africa.) There is the great possibility of massive untapped natural resources (i.e. - oil and gas) right off it's shores.....
Pia Francesca DeSilva <[email protected]>
JERSEY CITY, NJ US of A - Monday, March 11, 2002 at 13:37:40 (EST)
Hi Lindy, Just came across the thinking of HG last night though I've spent a lot of time reading/thinking about how to make life more equitable. I agree 3rd world countries should simply refuse to pay another cent on those debts. The principle was long since paid on probably most. To pay is national suicide. However, having been married to a Kikuyu guy, and been around a lot of African guys, there's no avoiding the jostling for position and power that takes place. I just think those all those lovely rents would be siphoned off in sufficient degree to trash that part of the plan. What might work instead? Too bad Africa is so male dominated. Women might get something done. As things stand though, they don't stand a chance. But first, stop paying the debt and I think some public works would start up again. Everyone wants better roads. Better sanitation pickup. Cleaner water. It probably doesn't matter what project the debt money is channeled toward, just give people some hope. Some trade would take place even if there were embargos. With the exception of Hawaii, doesn't all coffee and most sugar come from 3rd world countries. I think the first world needs products of the third world more than it knows.
Penny Kenyanjui <SimbasPeople>
Portland, OR USA - Thursday, March 14, 2002 at 22:58:16 (EST)
Very nice Lindy. The illumination about trickle up not down is a good point. Opportunity at the bottem is a viable access point for introducing people to Georgism. Thanks.
Jonathan Hall <[email protected]>
- Friday, March 15, 2002 at 20:21:45 (EST)
Aside from the obvious problem of the elites of an HIPC launching a counterrevolution (or the elites of the creditor nations launching an invasion), how are the new landowners going to "acquire improved tools" from foreign producers if those same nations are embargoing your exports, thus leaving you with nothing to trade for those foreign tools you desire?
David Barts <[email protected]>
Portland, OR USA - Saturday, March 30, 2002 at 17:37:26 (EST)
These excellent questions show that you've gotten the point, David. They aren't easy to answer -- but I think that the answers reinforce my argument that this is the only viable method for an HIPC to move forward. Indeed, the elites would try to regain control, because they could not afford to allow an experiment that had a good chance of succeeding! But I think there would be some significant factors that would complicate their task.

For one thing, the land-rent-as-revenue reform would have the effect of allowing widespread access to land for subsistence farmers. These people need very little capital to begin with. Many have migrated to cities precisely because no farming opportunities were available. Their current situation is so wretched in many places that they would be demonstrably better off just left alone, with access to usable land, than they are now -- and their survival would not depend on relief or credit: they would actually be producint their own subsistence.

Of course, primitive production of that sort cannot save a nation -- there would have to be access to capital. That is where some form of microcredit program would be enormously helpful. But it would also become conceivable to embark on a "microcollateral" program. People all over the place have built homes, collected tools, inventory, etc., to which they have no formal title. A rent-as-revenue system that secured basic property rights in wealth that is created by human labor would amount to the creation of an asset base, upon which people could borrow. As has been shown for years by the Grameen bank, very small loans of this sort can make a very big difference in people's ability to support themselves and their families.

Finally, the creditor nations would embargo your exports, to be sure. But exports would cease being the overwhelming priority that they once were. It is unlikely that all exports would be stopped. The price of the modest stock of tools and equipment that people would need to get started would not be unaffordable. And, remember, many of these nations hinder their own imports with huge tariffs! This reform would wipe out that hindrance, immediately -- effectively increasing the value of existing exports by the amount no longer wasted on that tariff!

These are complex issues, of course, and nobody knows (yet) how all these factors would work out in real life. That's why we have created a simulation exercise, in which the West African nation of Alodia has enacted these reforms! Check it out at Alodia: Building a New Paradigm.
Lindy Davies <[email protected]>
- Tuesday, April 02, 2002 at 12:28:10 (EST)

A very interesting reading. Does one see poor countries freeing themselves from the scourge of poverty when i) they are enmeshed in international giving instead of international trade; ii) they do not have the leverage to negotiate for meaningful trading relations, not even in such forums as the wto - unequipped with negotiating skills as spending on education is getting increasingly stifled (so that they can reach the HIPIC completion point and qualify for debt relief); at which point can these countries disentangle themselves from the mesh? Thank for the interesting article. Gordon.
Gordon L S Ngilangwa <[email protected]>
Ottawa, ON Canada - Friday, April 12, 2002 at 20:54:19 (EDT)
What steps are being taken to get through to people --- apart of this? What about joining forces with the rationalists, humanists, Tom Paine societies and all those people who have given up voting?
Leonard Tooke <[email protected]>
Portsmouth, England - Monday, April 22, 2002 at 11:04:11 (EDT)
Any chance that Robert Mugabe might be listening? He has certainly been actively engaged in burning his bridges to the fromer colonial power and the Washington Consensus crowd. He also seems to have ample faith in Zimbabwe's ability to "take care of itself" if only all those light-skinned "second citizens" -as he recently designated them- will get out of the way and let the locals exploit the best lands for local needs, rather than for (cancer-causing) exports, like tobacco. Argentina and Venezuela would also seem to be ripe for a little Georgianism -and Chávez has instituted a tax on "unproductive" agricultural landholdings, as I understand it, which would be a timid first step. I found your distinction between "exporting" and "trading" quite illuminating. Without any substantive knowledge of real-life data, I have - nevertheless - a strong feeling that "poor" and "middle income" countries could help themselves substantially by trading a lot more amongst themselves (particularly if they did it through barter, or through some currency they all jointly supported and used) rather than all fighting for the crumbs off the table of the strong currency G-8ers & Co (Denmark, Holland, Austria, & the like). In other words, how many shovels, wheelbarrows, tractors or water pumps are African nations buying in India or China, as opposed to Europe or the US?
Santiago Hileret <[email protected]>
NYC, NY USA - Tuesday, April 23, 2002 at 16:45:29 (EDT)
This is not exactly new knowledge but what is new is the need to spread it. Now true education is by the student asking the right questions and that takes time and patience on behalf of the teacher. To spread knowledge about the workings of our macroeconomic system by means of the land rant is fine but somewhat limited. What is needed is a popular means of spreading knowledge - how about by the use of price reductions for questions correctly answered? But the first need is to "generate" some money by the small loans mentioned above. In many respects these excellent observations about Africa have been said before and we should not just be praising this expression but encouraging their common distribution, as suggested here by the means of micro-economic packaging.
David Chester <[email protected]>
Petach Tikva, Israel - Thursday, May 02, 2002 at 00:20:24 (EDT)
I'd like to mention that I don't think that international trade is the problem. Third World countries that became prosperous, like Japan, South Korea, Hong Kong, and Chile, did it by being more or less open to trade, not by pursuing strategies of isolation. The problem is with debt, especially government debt to which the vast majority of the population does not consent, and with bad advice from the IMF. I don't think the IMF is the agent for a conspiracy of capitalist bloodsuckers battening on the labor of the poor, by the way; instead it sucks blood from Western taxpayers, and pressures the governments of poor countries into accepting its "austerity programs," throwing laborers out of work, and exacerbating poverty while benefitting nearly no one.
Nicholas Rosen <[email protected]>
Arlington, VA U.S.A. - Saturday, May 25, 2002 at 18:21:24 (EDT)

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