It used to be that "bigger is better": Governments and development agencies ran around trying to build ever larger dams, irrigation projects, factories and ports-- looking always for the "efficiencies of scale" that would increase living standards in developing nations. The search for higher labor productivity led to the importation of expensive machinery that would allow one man to do the work of dozens or even hundreds. And if the private sector could not do it fast enough, governments were happy to lend a hand--either intervening directly in the economy by forming state- owned industries, or indirectly by pumping billions of dollars of subsidies into the hands of international or national businessmen.
But these policies seemed to lead nowhere fast. Capital-intensive investment employed a few workers, but left many more outside the factory gate.
Faced with unemployment in societies in which general social benefits were virtually non-existent, these people turned to kinship networks, casual labor, and the production or provision of goods and services to those markets left open to them by the encroachment of the factory system--generally poor or niche market segments considered unprofitable by the large business community.
In the 50s and 60s this population, on the margins of the "modern" economy, became the focus of a number of charity organizations and international donor agencies providing rudimentary support services to supplement the meagre assistance--often in the form of basic food subsidies--given out by third world governments.
While this assistance may have helped the poor sustain their own economic survival strategies, the agencies wanted more: they wanted to see themselves as "developers" rather than just "distributors" of assistance. Not only does "development" sound like a much more important purpose in life, it is also a lot easier to justify to those who pay the bills: private benefactors in some cases; foreign governments in others.
But suddenly, the problem was not a problem. It was a solution! By redefining the "marginal" population as the "informal economy", and the survival strategies of the poor as "micro-businesses", "charity" organizations overnight became "development" agencies: they could have their cake and eat it too!
Overnight--well, actually, over a decade and a half-- mountains of studies, reports and opinions piled onto the desks of bureaucrats, telling them just what they wanted to hear.
First, they told them that the poor were not just surviving: they were developing businesses. They were, in fact, "entrepreneurs" who could look after themselves. What you had to do, then, was to make sure that they didn't become "dependent" on such things as subsidies and government handouts.
Second, they told them that the problems that these "entrepreneurs" faced were either their own fault--lack of training or ignorance about how to run a business-- or a simple matter of getting access to credit--loans, that is, not gifts (remember the point about dependence.)
Reading closely between the lines, government and IMF officials also saw something else: here was a segment of the "economy" that they hadn't counted yet and which they, therefore, had failed to tax! Yum, Yum! GNP figures magically jumped up and the IMF started to ask why tax funds from this segment couldn't be used to help balance national budgets.
The poor, instead of being a group in need of assistance, became a pot of gold to be mined. Like the noble classes of old, always assured that the peasants were hiding caches of gold in their straw mattresses, the new bureaucratic classes looked to the "Informal Sector" to provide the wealth needed to keep the country running!
Those who argued that the "informal" economic activities of the poor were simply a renewal of brutal forms of exploitation were listened to politely at innumerable academic conferences, and then politely ignored as the gravy train of the "micro-business sector" rolled steadily onward. "Exploitation" is a nasty word, as is "poverty". It is far nicer to use such words as "market imperfections" and "credit-strapped enterprises".
Strangely enough, the discovery that the poor were developing "businesses" became the justification for policies that steadily stripped them of basic subsidies while at the same time subjecting them to more vigorous tax collection.
The problem is that the earlier growth of the "informal economy" had occurred precisely because they had been able to use the subsidies to lower their living expenses while avoiding the attention of authorities who were focused on large businesses. In this way they were able to keep their costs low and their prices competitive.
And while their subsidies are stripped away, the subsidies for large businesses have continued apace. In Egypt, for example, there are 10 different laws or decrees that provide tax exemptions for different categories of businesses for 5 to 10 years. Not only are such procedures by their nature discriminatory against business owners who are too small to know about or afford to pay for the necessary legal assistance to obtain these exemptions, most of them are targeted towards big businesses anyway.
For example, tax exemptions may be obtained by moving the business to an industrial park or a new territory, but how many neighborhood businesses can do this and still keep their client base? I for one will not travel to 10th of Ramadan city to get my bike fixed! Obviously, these exemptions will benefit businesses that have mass marketing channels.
On the other hand, "smart" investors can easily obtain these exemptions even if their businesses have nothing to do with these areas. Private consulting firms can maintain their "main office" in a tax-sheltered area, even though all their real business is conducted in Zamalek or Mohandesiin.
In the meantime, people struggling to keep small stores and workshops open in inner city neighborhoods-- providing income for themselves and services for their communities--live in continual fear of regulatory authorities that constantly threaten to shut them down or tax collectors who arbitrarily assess them on the basis of a guestimate of how much they may have earned over the previous four to five years.
At the same time as their costs are being increased, their markets are being squeezed by reductions in basic subsidies that reduce the purchasing power of their primary consumer base: the poor.
In sum, instead of helping them, these policies are actually shifting the costs of maintaining society from the shoulders of big business to those of the enterprising poor.
If the government and international agencies truly wish to help the "informal sector", they have to do better than that. And they have to start by changing their mind-set.
They have to realize that these enterprises are not primarily businesses--they are first and foremost ways of making a living for their owners and their families. And they have to realize that these businesses are a vital part of neighborhood life--helping to integrate communities together by providing income, jobs, goods and services at the local level for local needs.
Except in specific cases where they present a hazard to the local neighborhood, then, they should be supported where they stand, and not forced to move in order to be able to compete on an even footing with businesses that can far more easily afford to move to tax havens.
In other words, if we want to give them time to grow and establish themselves, we should do something really radical, and declare a tax holiday for small and micro-businesses in poverty stricken neighborhoods until the tax and regulatory structures can be overhauled into a rational and fair fiscal instrument for the poor.
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