How to use technology to tackle poverty

Innovations in ICT could bring people in Africa out of poverty by enabling new business models in the informal economy and bringing more informal transactions into the formal economy. How can businesses, civil society groups and governments work together to make it happen?

In many developing countries, more than 80% of people work in the informal economy. The informal economy, alternatively known as the informal sector of the economy, refers to economic activity which is not included in official figures, subject to tax or otherwise monitored and regulated by the authorities.

Every country has some informal economic activity, such as barter or cash-in-hand work. But when the informal sector dominates the economy, it holds back efforts at poverty reduction. Taxes and social security contributions can be collected only from a narrow base, limiting the availability of public funds to invest in infrastructure and other public goods and services. Widespread informality undermines good governance and respect for law, increasing opportunities for low-level corruption. And informal workers tend to be more vulnerable to shocks as they lack access to financial services to smooth over periods of irregular income.

Africa has experienced phenomenal growth since 2000, but the effects on poverty reduction have been disappointing – in part because this growth has created very few jobs in the formal sector. Much has been centred on resource extraction, which is capital intensive and not labour intensive. For wealth to spread in Africa, we have to look to the informal economy.

Even in the West recently, the return of economic growth does not seem to be increasing job security or standards of living. Rising inequality and wage stagnation are forcing people to make ends meet through the so-called “sharing economy”, doing side jobs or renting their rooms and other assets. The sharing economy can be seen as an ICT-enabled informal economy. Clever use of social media has been key to unlocking new models, with mechanisms such as rating systems making it possible for peer-to-peer trust to develop and for people to feel confident dealing with each other rather than with established businesses.

Unlike the informal economy, however, the ICT platforms which enable transactions in the sharing economy provide a basis for them to be overseen by authorities. How this should be done is a question with which many Western governments are now grappling, as formal taxi and hotel businesses push for a regulatory level playing field with services like Uber and Airbnb.

ICT platforms could also revolutionize the informal economy in Africa, both by enabling new business models and by putting traditionally informal activities on a more formal footing. New kinds of well-funded entrepreneurs are beginning to enter spaces which have previously been informal and small-scale. For instance, informal slum schools have mostly been run by entrepreneurial slum families; Bridge Academies in Kenya is scaling them up by lowering overheads through technology and a tightly scripted teaching approach, improving the quality of education affordable to families living on $2 per day.

Mobile money applications such as Kenya’s MPESA and Bharti Airtel’s microinsurance products are helping people make a living in the informal economy by providing them with access to the financial services necessary to scale up and shield themselves from economic shocks.

Mobile money is also tackling the everyday corruption enabled by the informal economy. Nairobi’s matatus (minibuses) are currently installing contactless payment systems. When matatu drivers are not carrying large amounts of cash from passengers’ fares, there will be less scope for traffic police to demand discretionary payments.

Traditionally, governments have neglected the informal economy because its growth has been unlikely to increase public sector revenues. Paying by electronic transfer rather than cash also means transactions can be tracked and potentially formalized – i.e. brought into official figures and the tax system. While widening the base of taxation raises the challenge of taxing appropriately and wisely, it will ease the tax burden on the formal economy and give more people a financial stake in good governance. The ability to collect taxes from the informal sector will also give the government a stake in its growth, changing an attitude which has often been hostile and incentivizing more growth-friendly regulations.

Increasing use of ICT also opens up new opportunities for governments to subsidize more wisely, for example Nigeria’s introduction of smart cards to deliver fertilizer subsidies to subsistence farmers. Studies in Niger indicate that a farmer can raise incomes by 29% through ICT-enabled access to better information, even raising the question of whether subsidizing mobile phone towers would be a better use of public money.

How can emerging models for integrating the informal economy into the formal one be entrenched in ways that work for the poor and increase transparency and democratic accountability? How can governments, business and civil society overcome traditional mistrust to take advantage of the opportunities presented by ICT to grow and increasingly formalize the informal economy?

This piece is one of a number of individual perspectives from the Global Strategic Foresight Community of the World Economic Forum for the Annual Meeting 2015. To read more access the full collection.

Author: Julius Gatune is a Researcher and Policy Advisor with the African Centre for Economic Transformation (ACET).