Informalities of the global south: towards a research agenda.

TREES and the Program for the Economic Analysis of Mexico (PRAEM) of El Colegio de México organized three Brown Bag Seminars during the second half of 2023, to share agendas and progress of the research they are funding. As part of the Research component of TREES, the Brown Bag Seminars are intended to promote an interdisciplinary agenda, with different approaches, to explore the causes and consequences of inequalities in the region.  

The first Brown Bag Seminar entitled “The Informalities of the Global South: Towards a Research Agenda” was held on Friday, August 25 through the Zoom platform. Juan Camilo Cárdenas, Professor at the Faculty of Economics of the Universidad de los Andes and responsible for the Outreach component of TREES, and César Mantilla, Professor at the Faculty of Economics of the Universidad del Rosario, discussed the following topics how to address questions of informality in the global south.  

His seminar began with an introduction on informality, a structural and historical issue of countries in the global south. Cardenas commented on the possibility of approaching this phenomenon from new perspectives such as behavioral and experimental economics, as well as field observation. He also explained that approaching informality from a new perspective implies proposing new definitions and thinking about the possibility of the existence of virtuous informality, with benefits for society. 

The authors argued that labor relations incorporate more economic agents and elements than is usually thought. The interactions between owners, management and workers include elements that determine whether the relationship is formal or informal. However, The researchers proposed new components that move away from the formal/informal dichotomy, such as respect, dignified treatment and trust, among others.  These components are fundamental, but are not part of a formal contract. In addition, they pointed out that formal and informal arrangements can coexist within a single relationship, separating these concepts from legality. Adding new edges to relationships makes it possible to erase the dichotomous division between formality and informality and begin to think of them within a range of relationships. 

In the social exchange between two people, there are different factors that determine whether the interaction is virtuous or detrimental. Mantilla identified three trade-offs, i.e., the trade-offs that occur between costs and benefits, which are present when the labor relationship is more formal or more informal. The first has to do with compliance rules. On one side is the legal contract and formal rules. On the other, trust. A formal employment relationship is governed by the contract, while an informal one relies on the trust between the two parties. The costs of these extremes are: greater exclusion at the formal end and the risk of disproportionate or illegal mechanisms when trust fails and the agreed arrangement is not complied with. 

The second trade-off has to do with the reaction to uncertainty. At one end of the spectrum are social insurance mechanisms to protect the people who are part of the formal agreement in the face of any uncertainty. Rigidity, however, can generate costs to the relationship. At the other extreme is greater flexibility in the face of uncertainty, but at the cost of not having protection in exceptional circumstances. 

The last trade-off is related to the asymmetry of how information is acquired for the employment relationship. On the one hand, information is acquired through formal documents that function as selection mechanisms for choosing with whom to create a relationship. The cost of this extreme is the exclusion of those people who have not had access to formal mechanisms to confirm their value. The other extreme has a more horizontal communication mechanism, through hearsay and a “voice to voice” of personal reputation. The disadvantage on this side of the spectrum is the possibility of misinformation.  

Identify these trade-offs led Cardenas and Mantilla to propose that informality persists because, despite certain sacrifices, it also brings benefits to those who participate in these arrangements. For example, informality may be the best cradle for innovation because it is not constrained by the rigidity of formal arrangements.  

The researchers posed two methodological challenges. First, how to account for the creation or destruction of value derived from informal and formal labor relations? This value has to do both with losses or gains in economic efficiency, but also in fairness. Secondly, how to define and measure informality? This element brings the challenge of how to generate experiments with informal workers if they prefer not to become visible to the State.  

Cardenas and Mantilla proposed using the lens of behavioral economics to approach informality and explore what tools and prior knowledge are applicable in this research. Their agenda, then, consists of four elements. First, to improve the taxonomy with which we talk about labor relations and interactions between economic agents. Second, to stop viewing formality and informality in a divided manner. Thirdly, to explore how, through the trade-offs, Informality can generate economic value and justice. Finally, expand approaches to political economy and think about elements such as dignity, power, abuse and care. 

The session ended with a space for questions and interventions from the audience. Participants from Uniandes and COLMEX shared their own perspectives on what they have learned from informality and added factors to consider in research. Among the comments, the challenges of taxonomic creation and moving away from divisive concepts were mentioned. The inclusion of other actors in the picture such as the State was also proposed, along with an assessment of their power and scope. The researchers were grateful for the interventions and commented on the importance of having other perspectives to enrich their work.  

Access the full recording of the first Brown Bag Seminar here: