Informal enterprises require formal partners to emerge from poverty

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Did you know that La Carpio and Talamanca have inclusive markets? These types of markets are informal and their potential to generate economic and social development is the central theme of the first DIA Social Innovation Summit –democratizing innovation in the Americas. In VIVA Idea, research results were shared on a number of success stories in the creation of inclusive markets.

One of them is the one developed in the largest urban marginal neighborhood of the Central Valley, La Carpio. The market for imported used clothing from the United States, popularly known as “American clothing”, was studied there. It was concluded that this business is a solution found by several people-excluded from the formal economy – to meet their basic needs.

Study of Living Idea

The study analyzed the success factors of the informal market in La Carpio; while in the case of Talamanca, the collaborative process between the food producer Gerber and the indigenous Bri-Bri community in the production of organic bananas was studied.

In the latter case, the research focuses on how a multinational included in its value chain actors from an Indigenous community, who represent strategic value at the commercial and social levels.

As Felipe Symmes, a researcher with VIVA Idea, explained, the aim of this type of study is to generate information on best practices and models of functional collaboration that serve as exemplary cases and inspire other leaders to create inclusive markets or value chains.

” It is necessary to strengthen the connections between poor and informal zones and rich and formal zones in order to achieve a bilateral relationship that makes us understand that in poverty there is value and that it is possible to recognize and generate business opportunities in a context of poverty, ” concluded Symmes.

With urgency of change

For the expert, the problem in Latin America is in the legal frameworks that are usually not inclusive and exclude people with limited resources:”the benefits of belonging and generating legal enterprise are very expensive and do not clearly see the benefits of belonging to these legal frameworks.”

“The solution we support is to promote market connections between formal enterprises and informal actors. In this way entrepreneurs who have poverty and informality are able to recognize business opportunities, although they do so from informality, in this way they begin to emerge from poverty and after they leave poverty they can be formalized,” said Symmes.

“In the end, what happens is that these companies choose not to be registered with the government in order to survive. If the Costa Rican state asks a person who starts in La Carpio to pay a 15% tax when his enterprise barely gives him a chance to live, it means that the formality is not including that actor. On the contrary, it is excluding it,” explains Symmes.

The case of La Carpio vs. the Gerber case

For the researcher, ” what our research has yielded is that before we question informality, we have to work the connections. For example, in the case of the sale of American clothing, they can be formalized within some time. They’re barely surviving at first. So the question is not whether to formalize or not, but when to formalize. Many times these formalization programs are ahead of the time they have to. They try to formalize entrepreneurs who are barely trying to survive and design formalization programs that are a failure.”

According to the researcher, the solution they reached is to promote market connections between formal companies and informal actors, thus entrepreneurs who have poverty and informality are able to recognize business opportunities. When they already have someone formal to buy them they are formalized because they already have a way out of poverty and can pay the costs of formalization.

For example, in the case of La Carpio they are informal jobs, they buy from the importer and the importer sells them formally, while then they go to La Carpio and sell informally. While in the case of Talamanca, the indigenous cooperative is formal. Those who are informal are the producers who are in the cooperative.

In both La Carpio and Talamanca, what the research showed is that more opportunities are needed for them to carry out their projects and get out of poverty. Symmes says that ” you can’t get to the state bureaucracy where people live in poverty. They must first be brought out of poverty with successful endeavours.”

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