Leonard makes machines in Kamukunji, Nairobi. He labors each day carefully crafting and assembling each part so he can provide a meager sum of USD 1.80 for his family's welfare. Leonard faces fierce competition from similar small enterprises, as well as large Indian-run businesses in the nearby Industrial Area. His two-man shop is not eligible for credit to expand. Unprotected by legal contracts, he faces uncertainty in agreements. And from time to time he worries that his entire industrial area will be razed, as government urban renewal initiatives have done in other areas. In great resolve, Leonard relies on informal mechanisms of production and trade. He borrows money from friends, uses social relations of trust, and depends on creativity and ingenuity to advance himself and his business.
Leonard is one of millions of entrepreneurs who rely on informal mechanisms in Kenya, where the informal sector comprises a full three quarters of the non-agricultural economy and produces over 90 percent of new jobs annually. Under severe material constraints, they are forced to improvise solutions to everyday problems that, from time to time, result in game-changing innovations that better address local needs. Informal artisans who engage in the production of goods are known as jua kali (Swahili for "hot sun") and have established entire ecosystems of production, from scrap sourcing to repair. The most advanced jua kali like Leonard have designed and built capital goods, such as lathes, that propel indigenous production forward. The jua kali have been largely ignored by formal institutions, regarded as a second-rate economy. Yet their drive for innovation, understanding of indigenous networks, and ability to work under extreme constraints make them ideal agents of industrialization.
Informal enterprises tend to be lean and specialized. A metalworker will start out specializing in one product--typically one he was trained to produce through an apprenticeship. He will source scrap materials from local vendors and sell them to traders often with expansive networks throughout the country. If he saves enough capital over time, he may take on apprentices of his own and purchase a welding machine, so he can scale up and expand his product line. Perhaps in time he will be fortunate enough to find a loan with suitable terms so that he can purchase a lathe and perform services for all the enterprises in the immediate region.
The dynamic among such specialized enterprises is known as clustering. Within a geographic region, producers and traders will emerge--either organically based on replication through apprenticeships or forcefully through government relocations of enterprises. With the rise of these enterprises come supporting services like materials suppliers, hardware shops, and financial services. Enterprises form linkages with reliable suppliers and clients, building their social capital and reducing transaction costs through relationships and trust. You should now be getting the idea that it is not just each enterprise that operates efficiently, but the whole network! This is the idea behind collective efficiency, the competitive advantage gained from cluster activity and joint action. As opposed to the modern approach of integrating vertically so that all operations are consolidated within one organization, the jua kali tend to operate in smaller units, each one performing its own task resourcefully. It follows that the geographic cluster, comprised of an intricate web of relationships and transactions, operates with its own collective efficiency, so long as there are minimal losses in the connectors--usually guaranteed by close proximity and established social relations.
The principles of collective efficiency can also be applied in the global North, where technological integration is the dominant modus operandi and corporations have lost a sense of place. Linkages can be enacted particularly in the creative economy, where businesses tend to be smaller and embed themselves in the community. Providence, Rhode Island, for example, has recently made strides in building profitable "cottage industries" like print shops, electronics labs, and wood studios which provide co-working space, offer services to the public, and coordinate operations through referrals and subcontracting in a way that achieves collective efficiency. For example, Providence's Steel Yard--a metalworking collaborative--offers space and subcontracts jobs to its network of artists. Clustering in the North has been further enhanced by the rapid expansion of ICT and social media, which further reduces transaction costs. This way of working signals an important postindustrial shift, whereby new modes of production mimic pre-industrial clusters of Africa.