Schrödinger’s value and uncertainty in informal markets
In this telling, Schrödinger's value posits that a digital product for informal markets can be both valuable and valueless until its utility finds scale in community networks.
This is the first of a series on value, research and product utility in African informal markets. It is a learning project so searing criticism and constructive feedback are welcome.
Like any other market, informal markets love scale. Unlike formal business or virality of digital reach, scale in informal markets is built on people and small communities that are themselves connected in a random series of hubs and spokes. When you look at this from this perspective, it’s easy to see that informal markets are actually very formal, hierarchical and follow defined rules—even if they are mostly unspoken.
In fact, formal markets usually arise when hardy entrepreneurs recognise and are able to build processes around the organic patterns of distribution and how people consume. It is why “formal” mass producers like Coca-Cola thrive even in the most out-of-the-way places. To put it plainly, “the invisible hand” is very much alive in informal market situations and it is often at odds with pre-planned formal models. Co-evolved formality doesn’t always have this problem.
Why is the scale component of the informal market important? For digital products, scale or adoption rate is the market’s vote on the value of the utility of your product. In other words, your product is only useful when enough people use it to output and receive value. Every product in an informal market segment needs to be network-effect-first.
The art of communal networks
The Kariakoo neighbourhood is the largest market area in Dar es Salam, Tanzania. Originally planned as a residential area for African workers, Kariakoo has become the home to thousands of shops, street hawkers and vendors. The symbolic and geographic heart of Kariakoo is the main market, a three-storey concrete affair that was constructed during the socialist regime of Julius Nyerere to replace the market hall built by the German colonial government in 1914.
As a nod to the era’s socialism in design and operating principles, most shops in the upper section of the market were owned and run by state-owned parastatals and cooperatives. Only the agricultural wholesale market, located on the underground floor of the market, broke with the prevailing statist model.
At this level, agricultural produce traders built their businesses on the Mali Kauli informal credit system. Mali Kauli was essentially a credit relationship that manifested in informal letters of credit based on verbal promises. It enabled wholesalers to trade relatively large amounts of produce with little cash at hand. The Mali Kauli chain linked farmers, upcountry suppliers, and Kariakoo wholesalers. In some cases, it even extended to urban retailers, and end consumers.
It was simple, suppliers aggregated produce from rural farmlands and supplied them to wholesalers they trusted. When the wholesaler had disposed of the produce, they paid the supplier the earlier agreed-upon price.
Wholesale traders in Kariakoo by and large operated according to the mali kauli system. Immediate cash transactions were the exception, credit transactions the rule. Mzee Peni, a wholesale rice traders, started to work at the Kariakoo market in the early 1960s. He first traded potatoes, tomatoes, okra, and cassava leaves before he got into the rice trade when the new Kariakoo market building opened in 1975. He either waited at his market stall in the Kariakoo market building for upcountry traders, who handed their rice over to him on mali kauli basis, or he went to one of the rice- producing areas himself and bought rice from farmers and small-scale traders there when there was not enough rice being supplied to Kariakoo. In Mzee Peni’s case, he went to Ifakara in Morogoro region, at about 300 miles south-west of Dar es Salaam on a partially non-tarmac road. From there, he transported the rice to Dar es Salaam on one of the Asian-owned buses or lorries, and sold it at the Kariakoo market. He bought one kilogram of hulled rice in Ifakara for 300 Shillings and sold it in Kariakoo for 500 Shillings. Transportation costs ate up most of the 200 Shilling difference in price. Furthermore, he had to pay a small government tax at the Kariakoo market. Buying the rice in Ifakara on mali kauli basis, Mzee Peni’s initial costs were negligible. He only had to pay for part of the transportation costs and the tax. Once sold, he paid the rest of the transportation costs as well as the price for the rice in Ifakara. Mzee Peni boasted: “I could go to Ifakara even without any money at all, with nothing but my pants and my shirt and I could still do business.
— Brühwiler (2014).
My mother sold foodstuffs near the butcher section in the Mile 3 market in Port Harcourt, Nigeria. She was one of the largest snail traders in the market and supplied a few hotels in the city. Twice or thrice every week (depending on how well we traded), she travelled to the “bush markets” in Abua near Bayelsa to buy bags of snails. I distinctly remember her talking about the supplier “customers” she needed to repay on her next trip. Throughout my stay in the market, I saw this replayed.
It is a familiar part of doing business in informal markets.
Whether it is called mali kauli or not, the point is that informal markets have well-developed social rails on which they run. In the case of mali kauli the social rail on which it ran was trustworthiness or uaminifu. Uaminifu was something that could be cultivated, built and invested upon. It was not just a perception. In its purest form, uaminifu was the informal market’s intangible replica of what you would call creditworthiness. Those shared social rails exist in different forms throughout informal market verticals and no digital product or formalised system can succeed without understanding these different manifestations. They are the key to scale.
“You really need to know how these people work, from the bottom, their culture,” Salie Mlay, the NMB branch manager in Kariakoo, told researcher Benjamin Brühwiler in 2014.1 Mlay helped convince traders at the Kariakoo main market to switch to formal loans in the early 2000s.
Similarly, B2B payment firms for example can seek to understand push payments in informal markets, so that they don’t have to fight over the few big and formal SMEs, opening them to innovating for larger markets.
Schrödinger's art of communal networks is the challenge that faces digital product complements or substitutes in informal markets. If it does not enhance the network value and resilience, it will not gain scale, and if it does not gain scale, it is neither useful nor can enhance network value. Communication products like WhatsApp or even SMS are good examples of products that does this effortlessly.
It’s a pointer to the value of timely information in informal markets. Even so, there is much more than communication involved in the chain that moves products around in informal markets before reaching the final consumer.
It goes unsaid, but firms seeking to digitise 𝒙 in Africa will have to come to terms with the fact that they have to create—not carve out—their own market.
Caveat: Informal markets, like all markets, are often subject to external interventions that may distort the market. From touts who police market participants, to landlords who extract rent without creating additional value inputs, informal markets are shaped by what goes unsaid. It is the nature of operating in poorly governed spaces.
The silver lining here is that some of these externally imposed pain points are the fissures that present complementing opportunities for digital products. Seeking protection from these fissures is also partly why some informal markets operate the way they do.
Brühwiler, Benjamin, Trustworthy Trader or Creditworthy Debtor? Competing Moralities and Trader Subjectivities at the Kariakoo Market in Dar es Salaam (2014). ASA 2014 Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2415743