COVID-19 and the value of relationships in informal economies

Project Active from to Firms and Trade

Governments in many developing countries have put in place restrictions to economic activity and mobility to curb the spread of the coronavirus. This is true also in Uganda, where public transport and non-essential businesses were closed from early April to June. While firms were closed, there were reports of workers leaving cities and traveling back to their home villages. This proposal aims to study the resilience of relationships in informal economies to external shocks like the coronavirus. In informal economies, there are usually no written labour or trade contracts. If relationships hold little value and there is a cost to re-match (e.g. workers traveling back to the city), relationships will be disrupted by the lockdown: firms will hire different workers as they reopen, or trade with different partners. If instead relationships are valuable, these will restart despite costs to re-match, even in the absence of formal contracts.

Our starting point is a representative survey of 1,000 SMEs and their employees that we conducted in 2018-19. We propose to re-survey this sample to understand which relationships have been disrupted and why. For instance, if a worker is not re-hired, we will know whether this is because the firm did not have enough work, or because the worker could not afford to travel back to the city. Understanding this is crucial for formulating policy responses, such as considering subsidies for firms vs. income support for unemployed workers. Moreover, we hope to make a novel contribution to the literature on relational contracts in developing countries, which so far has focused primarily on supply-chain relationships involving large firms (Macchiavello and Morjaria, 2015).