Informal activity is central to the economies of most African countries. By some estimates, around 50 percent of economic output and 85 percent of employment in Africa are generated in the informal sector, mostly through agriculture and trade. It’s no surprise, then, that governments and international donors target the informal sector with policy interventions — from microcredit schemes to business training for small firms, from tax registration to financial inclusion for informal workers.
Though this sector invites scholarly and policy attention, there’s no consensus on the definition of informality, and the sector is poorly understood. Is an informal firm “informal” because it lacks a business license or tax records? Or is informality defined by the absence of an employment contract or regular work hours for workers?
Shelby Grossman’s new book is a particularly timely addition to our understanding of informality in Africa. In “The Politics of Order in Informal Markets: How the State Shapes Private Governance,” Grossman examines how business associations can provide a stable environment to support economic activity in urban markets. She argues that these trade associations develop and maintain institutions that support trade not in the absence of government — but rather in response to active government interference. In doing so, she challenges an increasingly common but apparently inaccurate perception: that trade thrives in emerging markets when overbearing governments and predatory politicians step out of the way. Grossman’s analysis also makes clear that trade in urban markets is not the hotbed of chaos economists assume it to be — in fact, market associations and their leaders provide strong systems that organize traders and maintain order.
Grossman surveyed 1,179 randomly selected traders from the more than 50,000 shops she counted across 199 markets in Lagos, Nigeria. It is remarkable that Grossman, then a PhD student with a small team of research assistants, was able to conduct a comprehensive trader census in a city of more than 20 million, and Africa’s most populous city. International donors with far more resources to undertake elaborate surveys (such as the 2009 World Bank Enterprise Survey) encompassed “ … just ten microenterprises in each state” (p.36) and “use[d] a city-block sampling strategy in which enumerators are instructed to stand at the corner of a specific city block, face north, and approach the fourth shop on the left” (p.37). A comparison with Nigerian government surveys should also prove interesting.
Three insights jump out. First, market associations play an instrumental role in maintaining order in urban markets. In an environment of weak property rights and poor contract enforcement, market associations oversee private governance. Lagos market associations have a high participation rate — about 91 percent of traders and street vendors in the city’s markets belong to an association. Yet policymakers often miss the critical role of these associations in decisively shaping trade and economic activity. Indeed, market associations are rarely incorporated into prevailing studies on Africa’s informal sector, which instead focus on business training and access to finance.
A second insight is that group leaders play a catalytic role in whether these market associations enhance — or retard — trade. Grossman disputes prevailing scholarship that mechanisms for rule enforcement (rewarding good behavior and placing sanctions on offenders) and information sharing will organically emerge in these markets without leadership. Rather, she argues that group leaders consciously act in ways that promote or retard business growth. Trade-promoting policies include policing the behavior of association members by punishing dishonest actions such as selling defective goods, incentivizing information sharing about unreliable traders outside the group, and even organizing boycotts of these offenders. Overall, group leaders determine whether their market associations provide critical local public goods within largely informal environments. Across the markets Grossman surveys, these trade associations have similar structures and functions: an executive committee, a constitution or other documented rules, a leader elected for a fixed term or for life, membership fees and an expectation to represent member interests.
And third, the trade-promoting function of market associations and their leaders only happens under certain conditions. Grossman finds that when the government threatens to intervene — by evicting traders to “modernize” old markets, imposing new taxes, conducting random inspections by regulators or sending in the police — this motivates trade promotion by market leaders. Lagos’s Ore Akin market is one example of a well-governed market whose leaders schedule regular monthly meetings to share information and protect traders from extortion.
They take these steps because they face consistent threats of government interference from a regulatory agency. However, these threats only catalyze trade-enhancing action when there is internal cohesion within the market association — when the leader can control the group’s internal affairs and members aren’t engaged in hypercompetitive behavior that frustrates attempts at collective action.
In contrast, the Dabiri market was threatened by government interference, yet remained poorly governed because the association and its leader are weak. Do other external threats such as criminal groups, global forces, new technologies or economic shocks exert the same effect? Grossman convincingly discounts these alternative explanations.
Overall, Grossman advances our understanding of the informal trade that is so ubiquitous in African economies, using a commendable and ambitious research strategy. She treats the market traders she surveys with dignity, recognizing the need to offer something beneficial (such as business etiquette information). The traders are not just “subjects” of a one-way data extraction exercise. This rigorous and respectful research approach warrants emulation by other researchers conducting surveys across Africa.
Grossman, however, leaves unaddressed the question of market leader strength. Throughout the book, it’s unclear what factors specifically determine a market group leader’s willingness and ability to act in response to government interference. Is it the leader’s social embeddedness within the community, their skills and training, their life experience or even idiosyncrasies? Perhaps future research could address this pertinent question.
This fascinating book sits at the intersection of informal trade, urban governance, institution building and business management, offering important clues for both scholars and policymakers. Crucially, Grossman dismantles a false binary: that private governance mechanisms thrive best in the absence of government. In fact, the two are inextricably linked: private governance mechanisms of informal trade emerge precisely in reaction to the dysfunctions of government, market failures, and economic crises.