By Dr John DaSilva Luiz, PhD, University of Sussex — The Conversation, 10 May 2022
In 2003 former South African President Thabo Mbeki described South Africa’s economy as being like a two-storey house: the top floor was plush, representing the modern diversified economy, while below was an informal economy where the poor were trapped in poverty, with little or no skills — and no interconnecting staircase between the two floors. This is a common problem in developing countries, including South Africa’s neighbour Zimbabwe, where the World Bank estimates the informal economy makes up approximately 60% of the total economy and roughly 90% of those considered ‘employed’ work in the informal sector.
Research on an initiative in Zimbabwe examined the role intermediaries are playing in connecting formal and informal economies. In agriculture, small-scale farmers cooperate in their villages through mutual trust, but this way of doing things does not extend beyond villages. They cannot borrow money to produce, nor produce to borrow money — trapped in a vicious cycle. That’s where an organisation like the private, for-profit entity Palladium can step in. Its approach is collaborative: it facilitates contract farming by connecting input suppliers with small-scale farmers, who agree to sell produce back at a pre-agreed future price. This addresses input financing and provides a guaranteed market for the farmers’ output. It also builds partnerships enabling mobile buying systems that free farmers from finding a market and ensure them a fair price.
All these interventions are better served by intermediaries rather than through bureaucratic government overreach. Governments can enable policies that support these intermediaries to function effectively, while big business must realise that maintaining dual economies delegitimises markets and results in lost opportunities. Without this kind of lateral thinking, countries like Zimbabwe and South Africa will continue to have two-storey houses with no stairway, leaving the majority of citizens stranded on the ground floor. Such structural inequality is unsustainable. This article has been republished under Creative Commons licence.