Servaas Storm, who’s always worth reading, has posted on the INET website a summary of a new working paper he coauthored. This issue goes way back with me—I first started looking into and writing about the labor rights/wage/trade/development nexus back in the 1980s. Working on my own, I had a lot of false starts, and I’m happy to see others digging much more deeply today.
I won’t comment on the substance of this paper, but I think an important piece is missing: how dual economies articulate, and in particular the role of clientelism.
Countries in which formal sector jobs are highly valuable but scarce, in a sea of abundant but unremunerative informal employment, have to have some mechanism for allocating them. Some classic economic models to the contrary, it never happens through lotteries. My hypothesis, based on what I’ve seen and read, is that the predominant mechanism is clientelism.
A brief digression: Most of the literature on clientelism appears in political science, where it refers to the exchange of votes for personally targeted services or transfers by politicians. I use the term to refer to a much broader phenomenon, the exchange of personally targeted benefits in return for the performance of loyalty between patrons and clients. Patrons have access to resources from which they can supply benefits to clients, while the extent of client loyalty is a determinant (but not necessarily the only one) of how many resources a patron can command. Conceptually, the client-patron relationship is a dyad, although clientelist systems are constellations of such exchange relations across whole populations: many dyads, multiple levels (patrons are clients of higher-level patrons), competing networks.
A large gap between formal and informal employment increases the tendency for clientelism to expand as an allocative system. Clientelism is not all bad—it can moderate frictions that market or formal administrative processes generate—but to the extent it replaces these “modern” alternatives it reduces social efficiency. For instance, allocating scarce formal sector jobs through client-patron exchanges is relatively harmless if the people getting the jobs are no less qualified than those left out of the system, stuck in the informal sector. If clientelist networks override formal qualification (administrative) or competitive performance (market) criteria, however, they degrade outcomes. It’s a matter of degree.