The impact of global economic trends on informal economies: addressing the challenges of land governance and new technology

The informal economy should not be studied in isolation; rather, researchers and practitioners should take into account global economic trends such as new technology-based business models and large-scale land investments. José Ruijter of Cordaid reflects on the interactive brainstorm on ‘Informal Economies in Fragile Environments: Exploring the links to justice and security’ organized by the Knowledge Platform Security & Rule of Law on 23 November.

What is the impact of global trends in the formal economy on the informal economy in fragile states? This was one of the questions that lingered at the back of my mind during the interactive brainstorming session. During the session, experts discussed various illicit economic activities, such as the drugs trade, and their impact on governance, security and political dynamics. However, an analysis of the dynamics of informal economies in relation to issues of governance, security and justice is incomplete without looking at some trends in the global economy that have a large impact on the societies and informal economies of fragile states. In this blog post, I single out two such trends.

New technologies can ‘informalize’ the formal economy

The first trend is the rapid worldwide spread of new technology-based business models such as Uber, an alternative mobile cab hailing service. In developed countries there is growing concern about ‘sharing economy’ business models such as Uber, Airbnb and others. These services are leading to the rapid informalization of the economy in the name of freedom of choice and freedom from state regulations, However, such services also contribute to massive capital accumulation by those who designed the apps for these services and lead to the erosion of the tax basis of national and local economies, as well as the deterioration of labor rights and health and safety standards – standards introduced by governments in developed countries following 50 years of political pressure by labor movements and social action groups.

During the brainstorming session, Tom Goodfellow of Sheffield University presented an interesting comparative study on the dynamics in the urban informal transport sectors in Kampala and Kigali. He showed that the very presence of tens of thousands of youth in a city working in the informal transport sector is a political factor in itself that needs to be taken into account, but that youth can also be manipulated and mobilized. He highlighted that it is mainly political factors – political will and the interests of political leaders and elites – rather than the technical capacities of state structures, that determine whether the informal transport sector is regulated or not – a decision that has had important consequences for political and physical security in these cities.

In the case of Uganda, mainly Baganda Muslims were allowed to handle urban transport in Kampala City as part of a political deal with the National Resistance Movement (NRM) after it attained government control. For over two decades, the NRM and politicians have had an interest in not regulating the transport sector. According to Angelo Izama, these same youth were mobilized by security agents in the early 2000s to curb the threat of urban terrorism. In Kigali in Rwanda, the central government has been able to regulate the urban motorcycle sector and is also using the sector to undertake surveillance in poor neighborhoods.

New technologies change local power dynamics in fragile settings

It is important to examine how the worldwide spread of new technology-based business models such as Uber are impacting on the local power dynamics in the transport sector in fragile settings, as well as on the quality of services, the distribution of benefits through the value chain and the position of entrepreneurs and workers in this sector. Given the very different scenarios that Goodfellow presented, one could try to analyze and possibly predict the response of political elites and state structures to these new business models in various settings, and their influence on local political and security dynamics. Are these business models reinforcing the power of certain political elites, or are they a tool for the democratization of power and resources?

Over the past year, the introduction of Uber and other such services in countries such as India and South Africa has provoked vehement protests from traditional taxi and rickshaw drivers and transport unions that feel threatened in their livelihoods by what they call unfair business practices. Their main point of contention is that Uber is using loopholes to dodge paying tax and to avoid complying with other regulations, which has spurred investigations by the national revenue authorities. The OECD and G20 countries are also concerned about the challenges that the rise of the global digital economy is posing to national tax systems in developing countries. As Uber is presenting itself as a technology company, rather than a transport company, another major point of debate is whether Uber drivers should be considered employees of Uber or whether they are independent transport operators and, therefore, responsible for securing licenses and the payment of taxes themselves.

Large-scale land investments affect the informal economy

A second global trend that needs to be looked into in relation to the informal economy entails large-scale agricultural and land investments in fragile states. These are also impacting directly on the informal economy, in particular on the livelihoods of local communities dependent on subsistence agriculture and other informal economic activities. There is global pressure to support the promotion of voluntary guidelines for good governance of land tenure (VGLT) in developing and fragile settings. Emphasis lies on concepts such as free prior and informed consent of local, affected communities, adequate compensation and the provision of grievance mechanisms.

An element that receives too little attention in the discussion on large-scale investments in agriculture and land is how these investments affect the local power dynamics and shape or reshape the power balance between traditional authorities, district authorities and central state authorities with respect to land governance and the management of the financial resources of the state. Disputes around control over land (and related water sources) are a major source of conflict in many fragile settings. Traditional chiefs, who are often ‘custodian’ of the land on behalf of the community, play a key role in the management of land-related conflicts among community members. With a hike in the financial resources at stake, tensions between traditional chiefs and community members can become more acute. In its current form, the influx of large sums of money from land lease fees, often for a period of 20 to 50 years, to local districts and traditional authorities, without adequate political and financial management systems in place, is a source of tension within and among local communities, as it feeds corruption and abuse of power by local elites. In international discussions on the implementation of VGLT, the role of the state is emphasized. However, it is worthwhile to unpack the notion of the state at the national and local levels, and examine the roles of the various bodies and their capacities.

Global economic trends influence the informal economy

To conclude, the informal economy does not operate in isolation, but is influenced by trends in the global economy. Research on the informal economy in fragile states can benefit from existing analysis of these trends and examination of the consequences for governance, security and justice in more detail. This would also help put issues of governance, security and justice on the mainstream economic development agenda.

Photo credit: Aaron Parecki via Flickr