On the issue of deformalisation and the ‘missing gap in the middle’ of West Africa’s economic opportunity landscape, there is a strong ‘classical’ school of thought, which is of the view that most entrepreneurs in the major economies of West Africa are primarily concerned about escaping the tax net and therefore that such observed features of business in places like Ghana and Nigeria (i.e. the tendency to focus on either high-end customers or low-end patrons with little in-between) are little more than quirks of the macro-economic environment.
I am not too sure.
At a much more granular level, it is clear that the effect of ‘brand collateral’ (including how ‘trust’ lowers overall borrowing costs) on a business and the degree to which ‘optimisation’ requires formal structures can lead to behavior that diverge from macro-trends.
For example, I personally struggle to see how a dry cleaning company that wants to handle sensitive garments, suiting material etc. can go far without investing in stuff that emphasises ‘attention to detail’ and ‘stability’.
We use to have hundreds of ‘charcoal box iron’ entrepreneurs when I was growing up in Ghana. Folks would take crumpled clothes to them and then return to find pressed shirts and pants smelling a bit of soot. They got swept away when electric irons became all the rage and folks started to do pressing at home. There were also ‘oyeadeaye’ folks who carried ‘sewing machines’ on their shoulders as they went about town looking for nit and tuck work. They have have also been largely swept away by the China-trade in cheap clothing from most of the major cities. The China-trade folks now have the second-hand clothing merchants in their targets.
Yet, you will also find the china-trade folks doing little to spread properly between Accra’s ‘ridiculous ‘fashion boutiques’ and the second-hand folks. This is what has led to Mr. Price nearly doubling its return on floor space since its earlier incarnation, and even they are not fully covering the niche. The jury is still out on self-operated laundromats catering to the laundry needs of students and young professionals and operating at any significant scale in Ghana anytime soon.
The real insight is however in the fact that those who buck the trend do validate the opportunities in the neglected middle.
We have betting companies that openly advertise and have all the trappings of formal enterprises in Accra (fears about tax notwithstanding) busily making mincemeat out of all the shady banker-to-banker and underground gambling syndicates in Accra right now. Come to think of it, a multicoloured taxi is actually more exposed to the tax man, including the municipal tax authorities, than a private saloon car rental operator.
Entrepreneurs ruling out ‘pricing’ as a strategic advantage clearly requires a more anthropological treatment. Tax-net evasion alone cannot adequately explain the trend we are seeing.
And that trend is clearly that people are abandoning the effort to grow their businesses through investing in superior management systems and attracting the talent capable of delivering robust business models (which can offer competitive pricing), and rather growing their social capital so that they can survive from deal to deal and ‘break’ to ‘break’, sometimes hand-to-mouth.
Surviving from deal to deal in turn leads to ‘posturing’ and ‘high end fakery’ (all those basic clerical businesses that insist on being called ‘management consulting’ shops so that they can charge ridiculous ‘training fees’) as a way of covering up the low price-efficiency and the hidden costs of low scale. West Africa’s mega-economies are becoming giant HUSTLING OPERATIONS.
Unbundling this ‘reality’ reveals so much more of real interest than does the classical ‘macro-economy’ framing of the issue. We need to keep unpacking and unbundling.