“In many countries, informal economic activity accounts for more than half of all employment—and nearly all of the risk.”
— International Labour Organization
Walk through any mining town or rural trading post in the global South, and you’ll see the beating heart of the informal economy: women hauling produce without permits, youth selling minerals by weight on mobile scales, buyers negotiating prices on the edge of legality. These transactions power global commodity markets, yet they exist in the shadows—unrecorded, untaxed, and unprotected.
The challenge is not simply economic; it is moral and political. Informality traps workers in precarity and prevents governments from building systems that work. For millions of smallholder farmers and artisanal miners, the informal economy is not a choice—it’s the only available option. The real question isn’t why these markets are informal, but why we have failed to design formal systems that serve them.
Why Formalization Fails (and What Actually Works)
A recent study by Abeberese and Chaurey (2021) offers fresh insight into this enduring dilemma. Published by the Center for Development Economics and Policy at Columbia University, the paper investigates how firms respond to different types of incentives for formalization. The authors find that formalization rates remain stubbornly low even when governments offer substantial tax reductions or administrative streamlining.
Why? Because the perceived costs—bureaucratic hurdles, harassment, and the risk of increased scrutiny—often outweigh the tangible benefits of joining the formal sector. Informal actors aren’t simply resisting formality; they are making rational choices in flawed systems. And too often, formalization campaigns are designed from above, with little input from those operating below the line.
What the research underscores is that formalization must go beyond top-down mandates and instead reimagine the very nature of formal systems—making them more inclusive, transparent, and responsive to local realities.
Commodity Markets as a Case in Point
The global commodity trade relies heavily on informal producers: an estimated 90% of mining labor in Africa is artisanal; the majority of coffee, cocoa, and palm oil is produced by smallholder farmers. These producers are the foundation of billion-dollar industries, yet they are excluded from the protections, price guarantees, and financing tools available to larger market actors.
Recent formalization efforts—such as traceability platforms, digital registries, and voluntary sustainability certifications—have made progress. But they often prioritize compliance over collaboration, favoring international buyers and regulators rather than the communities doing the hard labor on the ground.
In the Democratic Republic of the Congo, for example, efforts to register artisanal cobalt miners through digital ID systems have improved traceability but also triggered new forms of exclusion, where miners without smartphones or documentation are pushed further into illegality. In Ghana’s cocoa sector, formal cooperatives have enabled better access to credit—but only for farmers able to meet rigid documentation and volume thresholds.
Formalization should not mean replicating the barriers of existing systems. It should mean recognizing and legitimizing the economic activity that already exists—and designing institutions that work with, not against, these actors.
Toward Smarter Formalization: A Strategic Imperative
If we are to create more just, transparent, and functional commodity supply chains, we must fundamentally shift how we think about formalization. Based on both the research and real-world experience, here are three principles that should guide future reforms:
- Start with incentives, not penalties. Formalization should increase the value proposition for informal actors. Offer tangible benefits—access to finance, market contracts, training—not just legal obligations.
- Design with empathy. Build systems based on human-centered design principles that recognize the lived realities of small producers. Simplify documentation. Use mobile tech, but ensure analog backups.
- Formalize through inclusion. The goal isn’t to bring people into rigid state systems, but to create new forms of hybrid governance—through cooperatives, digital marketplaces, and public-private partnerships—that offer both flexibility and accountability.
The transition from informal to formal markets is not a technocratic fix. It is a political commitment to inclusion. It requires recognizing the dignity of labor, the legitimacy of survival economies, and the immense value that informal actors bring to global commodity markets. Bringing these markets out of the shadows is not just good for trade—it’s good for democracy.
Reference
Abeberese, A. B., & Chaurey, R. (2021). Formal Sector Incentives and Informality. Center for Development Economics and Policy (CDEP), Columbia University. https://cdep.sipa.columbia.edu