Grow the Pie

The unofficial economy, aka the parallel economy, second economy, informal economy, shadow economy, side-walk economy, etc. often provides heart warming stories of survival at the BoP, but nothing to be proud of.   93% of India’s jobs!  40% of Mexico’s and Brazil’s GDP!  In extreme cases like Benin, 95% of jobs and 50-60% of GDP!  Europe is not immune – wondered where Greece’s problems spring from?  The ‘Fakellaki’ or little envelope seems like a harmless tax evasion necessity – too bad about the tens of billions of dollars the government could have vs. having to borrow (with a steep interest).

Supporters of the unofficial economy are rooted on two myths:

  • First, they say that it’s a natural progression to go from the unofficial economy to the official economy as businesses grow.
  • The second myth is that the informal economy is the only way to provide jobs in rural to urban demographic shifts

Both of these myths are, of course, WRONG – tax evasion is huge and continues throughout the lifetime of many businesses and the informal economy is the cause not the solution to unemployment and underemployment – which all leads to corruption and its evil corollary, poverty (Rich nations have a lot less unofficial economy).


Hernando de Soto

Beauty queens are geniuses – we SHOULD fix global poverty – it kills, it enslaves it dehumanizes.  Maybe we can’t all be visionaries like Muhammad Yunus who founded Grameen bank and pioneered microloans to women villagers or Hernando de Soto whose ILD program has given property titles to more than 1.2 million families and brought nearly 400,000 firms from the informal to the formal economy.  But we can try.

Before we can expect a wave of social innovation to come from large corporations, they must also learn to do away with their unofficial economy – shadow intrapreneurs hiding in their offices performing tragic soliloquies or planning their escape to startup nirvana, ignoring a huge portfolio of skills and assets that the large corporation can bring to bear in launching innovative business models.

The conditions for formalizing the untapped potential of corporate entrepreneurship include:

  • The call for innovation
  • Culture of shared responsibility for innovation
  • Open market mechanisms
  • Internet connections and face to face conversations

The fringe and the core need not be disconnected or insouciant to each other.  Whether in emerging societies or within corporations, the goal should be to make people succeed because of the system and not despite of the system.   It’s not zero sum – It’s how we grow the pie.

One comment

  • Couldn’t agree more – let’s just have a closer look at Greece where the real economy and the government with its executed legislative ‘power’ basically promoted an environment where soft corruption and tax exempts were able to prosper – not the overall economy and small businesses.
    This case and the current efforts to overcome it and change it for the better, however, also demonstrates how complicated and time-consuming this endeavor can be. Nevertheless, the fact that people, despite suffering in the short-term, are willing to accept the changes and contribute to it might serve as an indicator that, at least some of them, understood that it’s better to have a) a small piece of a large pie than b) a large piece of a small pie.

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