The Informal Economy as Infrastructure: What Street Markets in Addis Ababa Reveal About Trust, Exchange, and Economic Organisation

What the street markets of Addis Ababa taught me about trust, and why economists keep getting them wrong.

Walk through the Mercato in Addis Ababa, the biggest open-air market in Africa, and it looks like chaos. It isn't. Every trader there knows which patch of ground is hers. People lend each other money with no paperwork. A fight over a dodgy price gets settled in two minutes by someone everyone trusts. These are rules that apply everywhere, they are not written down.

We call this the “informal” economy, but that word is misleading. It makes it sound like there are no rules just yet. What this really means is that the government can’t see it, nothing registered, titled or taxed. That’s the whole argument of this whole blog, these markets aren't missing an economic system. They already are one. 

Dead Capital

The economist Hernando de Soto pointed out something important. Poor people aren't assetless, they own homes, shops, and land. The only problem is they own them informally, with no legal title. A house you can’t legally prove you own can’t be used to get a loan. De Soto called this dead capital, real wealth that can’t be put to work. His fix was quite simple: give people official titles, and their dead capital comes alive.

He’s partly right. Not having legal proof really does hold people back. But in much of Africa his fix keeps failing. Giving a farmer a title doesn’t make a bank lend to him, even worse when land suddenly gets registered, powerful people are best placed to get it which often pushes out the poor and especially women, whose claims were never on paper. So the change meant to help the poor can end up taking from them.

Rules without rulers

Elinor Ostrom won a Nobel Prize for showing that communities can manage shared resources on their own without a government forcing them and without private ownership. She found the same features again and again, clear rules about who’s in and who’s out, people watching each other, punishments that start small and get bigger, and quick ways to settle an argument. 

That’s the Mercato exactly. And underneath it sit systems like the equb, a savings club where members pool money and take turns receiving the pot, basically a bank with no building and the iddir, a group that help cover funerals, basically insurance. These aren’t quaint traditions, they’re the market’s banking and insurance, run entirely by the people in it. 

Trust does the work

So if there’s no contract and no court, what stops people cheating the system? The answer is that it's the same people every day. Cheat a stranger once and you get away with it, cheat someone you'll see tomorrow, and word spreads, and no one deals with you again. Your reputation is the contract. That’s cheap and it works.