ICTs and the informal economy: mobile and broadband roles
| Pages | 58-76 |
| Published date | 09 January 2017 |
| Date | 09 January 2017 |
| DOI | https://doi.org/10.1108/DPRG-02-2016-0004 |
| Author | Martha Garcia-Murillo,Jorge Andres Velez-Ospina |
| Subject Matter | Information & knowledge management,Information management & governance,Information policy |
ICTs and the informal economy: mobile
and broadband roles
Martha Garcia-Murillo and Jorge Andres Velez-Ospina
Martha Garcia-Murillo is
Professor at the School of
Information Studies,
Syracuse University,
New York, USA. Jorge
Andres Velez-Ospina is
based at the Faculty of
Economics and Business,
Universitat Autonoma de
Barcelona Economics,
Bellaterra, Catalunya,
Spain.
Abstract
Purpose –The purpose of this paper is to explore whether information and communication
technologies (ICTs) can move people from the informal to the formal sector. ICTs being multipurpose
technologies can provide people with information about education, employment opportunities and
government services that may potentially allow them to migrate to the formal sector.
Design/methodology/approach –The model includes variables that researchers have found to
contribute to the growth of informality, such as the state of the economy, the impact of excessive taxes,
the impact of regulation, the level of poverty and, of course, ICT metrics, specifically access to both cell
phones and broadband as the main two mechanisms through which individuals in the informal sector
can obtain information. The analysis relies on a multiple indicators and multiple causes statistical model,
to evaluate the hard-to-measure informal economy. A panel data set of 170 countries covering a period
of five years was used.
Findings –It was found that ICTs empower people, but such empowerment is not always positive for
society. So, while mobile phones reduce transaction costs of informal business, this leads to their
growth, as they are only a coordination technology. The empowerment that comes from broadband,
meaning greater and deeper access to information and resources, can help reduce this sector of the
economy and potentially improve these individuals’ lives as well.
Research limitations/implications –Measurement of the informal sector is a challenge to
researchers precisely because it is hidden. This, like other work in this area, relies on estimates from
indirect measures of the informal sector. The results are to be interpreted with caution. In addition, given
that this research relies on country-level data, any specific policy decision will have to take particular
circumstances into consideration to adapt these results to a specific context.
Practical implications –This study is important because of the more nuanced effect found between
narrow and broadband technologies with respect to the informal economy and because of its policy
implications. Given the results, governments should consider broadband as an additional tool to help
individuals make the transition from the informal to the formal sector.
Social implications –Once an individual who works in the informal sector begins to realize the
advantages of moving to the formal sector, it with the help of ICTs. This awareness could potentially lead
to a slow but steady migration away from the informal economy that can improve the economic
conditions of the population in these countries.
Originality/value –Scholars up to this point have been quite enthusiastic about the benefits of ICTs. In
this paper, it was found that the effects are not always positive; a mobile does not help people move
away from poverty and, in fact, supports the informal sector. It was found that only broadband can help
these entrepreneurs move into the formal sector.
Keywords ICTs, Informal economy, Transaction costs, Mobile, Broadband, Coordination technologies
Paper type Research paper
Juan[1] is the head of a small household consisting of himself, his wife and his two children.
He sells pirated CDs on the streets of Bogotá. He was forced into this situation after losing
a previous job as a truck driver and was unable to find a job because of his lack of
education. His current income is US$ (PPP) 7,748 a year. Up to this point, he has been
unable to afford a mobile phone, but he recently decided that it might be a worthwhile
Received 4 February 2016
Revised 29 July 2016
Accepted 7 October 2016
PAGE 58 DIGITAL POLICY, REGULATION AND GOVERNANCE VOL. 19 NO. 1, 2017, pp. 58-76, © Emerald Publishing Limited, ISSN 2398-5038 DOI 10.1108/DPRG-02-2016-0004
investment, as some of his friends in the informal sector have mobile phones, which seem
to make running a business easier.
While there have been numerous efforts, mainly by economic researchers, to try to identify
the sizes and causes of informal economies (Castells and Portes, 1989;Comola and De
Mello, 2011;De Soto, 1989;Gërxhani and Van de Werfhorst, 2013;ILO, 2012;Leal
Ordóñez, 2014;Loayza, 1997;Rama et al., 2013), few have explored the impact that
information and communication technologies (ICTs) have on these shadow economies at
the macro level. This is particularly important at this time, for two reasons. One is the fact
that ICTs are becoming more prevalent in our lives, including in less-developed countries.
Mobile phone penetration has increased substantially, and both mobile connectivity and
broadband connectivity have become important objectives for many governments, as is
evident by ubiquitous universal service programs and, more recently, their national
broadband plans and digital agendas. In Brazil, for example the National Broadband
program included among its five objectives the aim to expand access to broadband and
promote digital inclusion (Jensen, 2011). In Sri Lanka, the e-Sri Lanka initiative is the
primary government effort to expand access through Nensala, or knowledge centers,
through subsidies (Galpaya, 2011). In Morocco, the Government’s Digital Morocco also
includes among its four main strategic priorities broadband expansion and computerization
across small and medium enterprises (Constant, 2011). The other reason is that these
technologies have the potential to serve as tools promoting “re-entry” to the formal sector,
which can be added to the many other recommendations that scholars have made about
this problem (Perry et al., 2007). ICTs are general-purpose technologies that have the
potential to reduce barriers to entry for more complex businesses and to reduce the size of
the informal sector. Given the accessibility and capabilities of ICTs, can they, in fact, help
to reduce the informal economy?
Understanding the informal sector is critical because, as the literature indicates, it reflects
the economic circumstances and political conditions of a country. It is a reflection of a
government’s inadequate institutional arrangements, and, to a certain extent, its inability to
target poverty effectively. It should be noted, nonetheless, that these activities may be
technically illegal, but perhaps not because they are dangerous, entail coercion, addiction
or clandestine operations that negatively affect individuals and society, but because the
institutional arrangements are such that these informal operations fall outside the purview
of a legal framework, which in itself may not necessarily be legitimate (Centeno and Portes,
2006). Impediments to formal entry could be laws and regulations relating to trade, labor,
establishment of new firms and environmental compliance that involve significant costs to
potential commercial operations, making participation in the informal economy more
attractive (Portes, 1994). In other words, the costs imposed by laws and regulations, by the
bureaucracy associated with them, and by personal limitations, generate such significant
costs that they force entrepreneurs to start and continue operations in the informal
economy.
This paper’s econometric analysis found that mobile technologies, in fact, exacerbate the
problem, as they are primarily a coordination technology that facilitates connections with
other people, whereas broadband appears to have the desired benefit of reducing the size
of the informal sector.
We will use the story of Juan, introduced above, to present the literature about the informal
economy and its causes, which will then be used to develop the econometric model, and
we will conclude with policy recommendations.
What is informality?
Juan has a network of friends who also work in the informal sector. Some of them have small
enterprises that operate informally; others do not own their own enterprises, but are
VOL. 19 NO. 1 2017 DIGITAL POLICY, REGULATION AND GOVERNANCE PAGE 59
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