In Haiti, Are Informal Markets a Hope or Hindrance?

Anyone who has spent time in the markets of the developing world can tell you that entrepreneurship is not just for well-educated, venture-backed Americans. The hustle, creativity and cleverness of entrepreneurs in places I've been, from Uganda to Cairo, is always awesome to see in action. But as Haiti's informal sector explodes in the wake of crisis, it's worth asking whether this is a help or a hindrance for the nation.

The informal economy refers to economy activity that occurs outside the bounds of government regulation and control. In short, it goes untaxed (at least in a formal way). It has the benefits of mobility and flexibility, but for many involved, it lacks stability.

Global Envision wrote yesterday about how many who were once in the formal economy are now trying to make a little bit of money with informal activities in the street markets, such as charging cell phone batteries. On the one hand, such activities are a testament to the resilience of the Haitian people, and a reminder of how core markets and exchanges are to human societies.

On the other hand, the informal economy — particularly in a post-crisis situation — comes with its own set of problems.

One of the trends that often emerges after a crisis is that people decide certain things aid groups are supplying them with are more valuable to trade or sell than to use. In extreme cases, such as the flight of Rwandan Hutu's over the Congolese border after being driven out of power in 1994, such well-organized groups can use aid disbursements to seize economic and political power when society is most vulnerable.

Even when that doesn't happen, there are still long-term costs to a society from having too high a percentage of the workforce in the informal economy. This cost comes not only in the form of lost revenue from taxes, but also lost trust in the social contract between people and government.

Taxation — and governance as a whole — relies on people to trust the government to make fair decisions about how to allocate resources and which laws to enforce, among myriad other decisions. Participation in the benefits of society involves an implicit acceptance of the relationship between people and the government. But since most in the informal economy don't receive much in the way of benefits from government, moving to the formal sector and facing taxation seems like a cost with no gain. This is a kind of chicken-and-egg question: how does a government build trust around the social contract, if it has no resources or mechanisms to do so?

Even before the quake, an estimated 80% of Port-au-Prince's workers worked in the informal market. While it's great to see people find economic coping mechanisms, in the long run, more of Haiti will have to participate in the formal sector if the Haitian government is ever to have the trust and resources it needs to govern effectively.

Photo Credit: American Red Cross