The Informal Economy

Recently, Alison and I have been making fundraising presentations about the Masomboly project. One of the most frequent questions we get is about how a small loan like $30 could really make a difference in these women’s lives.

The first thing to realize is that many of the women in our project are considered to be in “extreme poverty” making less than $1 a day. But what does an income of $1 a day really mean?

It is important to understand that the majority of people in a country like Madagascar do not have wage or salaried jobs. Instead, they work in something called the “informal market”. They aren’t showing up for a job, they are out on the street, selling their wares or agricultural products. At the core, these people are already self-employed entrepreneurs.

As you can see from these photos, this mass of informal market activity leads to a vibrant array of goods being sold everywhere you turn. As I mentioned in my last post about the diversity of our borrowers, Masomboly includes all sorts of businesses.

The key concept that ties together the success of a small $30 loan in this informal economy is the idea of liquidity. People living day-to-day off whatever profits they can make in the market do not have enough capital to invest in growing their business.

Take, for example, Rakoto who sells tomatoes in the market. Typically she wakes up in the morning and walks to a local village where she buys two handfuls of tomatoes, say $2 worth. Then she spends a few hours at her stand in the market selling the tomatoes for a total of $3. That is a profit of $1 that then gets spent on her family’s daily needs: food, cooking fuel, clothes, school supplies, etc.

So you see the problem. Capital of $2 yields only a $1 profit that is immediately eaten up by household expenses. But if we can provide her with more capital, say $30, she can buy a bag’s worth of tomatoes and begin to accumulate more profit for use 1) in household spending that improves her family’s daily life, 2) as capital for the next day’s bag of tomatoes and 3) to pay off the loan.

Just like in Newtonian physics, where certain laws no longer apply on very small (quantum physics) or very large (astrophysics) scales, the rules sometimes change when people are living off very small incomes in these informal markets. Thus a small loan of $30 can be used as a tool to make big changes in people’s lives.

It’s all about the ABC’s

My father-in-law once asked me what I thought the one intervention was that could really help the poor in developing countries. I told him education, without thinking twice. For someone like me studying and researching health policy, this might be a surprising answer. Even though my interests are health insurance, iron pills, mosquito nets, and anything else that can help improve the health of the poor, I still think education is the key to it all.

In the the literature, the link between health and income goes in both directions. By being healthy, a woman can go to the field, plant her rice and earn income for her family. This increases her income. Conversely, by having more income, a woman can go to the doctor when she needs to and get the care to become healthier.  Finally, there are other factors, like behavior, that affect both health and income. A woman who is not in an abusive relationship will be both healthier and able to pursue economic opportunities with the support of her partner.

There is evidence that all these different pathways matter. If so, then it’s really not clear what interventions we should focus on to promote health.

Yet, one thing is clear in the literature: education helps. Indirectly, education increases wages and therefore allows people to afford care. In a more direct way, education helps individuals make decisions that improve their health; more educated people are aware of the dangers of smoking and smoke less.  As a result, education has a two-fold effect on health, both directly and indirectly.

So, if there is any policy that we should be focusing on first, it should be the policy to get everyone to know their ABC’s.