Abstract
Why do informal markets resist formalizing, even when the gains of doing so outweigh its costs in the long run? While a number of responses to this question have been advanced, we discover that part of the reason could be located in the tacit knowledge (attributed to Polanyi, Hayek) embedded in the marketplace, on which market institutions run. This factor is not fully explored yet. Tacit (idiosyncratic, inarticulate, nonconscious) knowledge is acquired personally through experience and cannot be transferred or conveyed to anyone. This is the knowledge we use to act without knowing it in a propositional form. We present the case of one of India’s largest informal footwear cluster, located in the city of Agra. We show that informal markets, hinged on tacit knowledge, cannot evolve easily and therefore may remain locked-in, despite external pressures or incentives to formalize. The study shows that efforts to overcome informality and reaping the benefits of formalized market structures cannot be done without taking cognizance of the sticky intangible knowledge on which these markets rest.
Highlights
The tacit dimension of knowledge, largely attributed to Polanyi (1958, 1967) and Hayek (1952, 1967), has become a central category for understanding the role that knowledge plays in society
To obtain a deeper insight into the conundrums of informal industry clusters we study the evolution of institutions in the Agra footwear cluster, and uncover the peculiar role of embedded tacit knowledge as a crucial factor for the persistence of informal institutions
We are interested in the institution of trade credit and how (a) the market is crucially hinged around it, (b) the tacit nature of knowledge that is needed to maintain the institution of trade credit, and (c) how the difficulty of formalizing knowledge prevents the cluster from escaping the shadow economy
Summary
The tacit dimension of knowledge, largely attributed to Polanyi (1958, 1967) and Hayek (1952, 1967), has become a central category for understanding the role that knowledge plays in society. Even when structural transformation of industries takes place through exogenous shocks, it often leaves many informal practices untouched (Harriss-White and Sinha 2007) This contribution undertakes the attempt to shed more light on the nexus between the institutional rigidity of informal market clusters and tacit knowledge. In this study we extend the analysis of tacit knowledge beyond the formal firm and industry level by focusing on small-scale shoe manufacturers and their symbiosis with informal financial intermediaries. This will involve examining the notion of upgrading in informal clusters, something that has been largely ignored for local firms with no global linkages.
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