What is so tacit in the Hing ki Mandi?
The knowledge about the creditworthiness of traders is the most crucial element of the intellectual and social infrastructure of the Hing ki Mandi market. It enables simultaneously the division of labour and cooperation between shoemakers, traders and intermediaries. Thereby the knowledge is created, dispersed and employed in a polycentric fashion (Ostrom 1999). Commitment within the system is sustained by the high degree of information symmetry in the market and the quick transfer of information within the social cohesive cluster. The information channels include gossiping, chats, rumours and informal gatherings in clubs, festivities or sports activities. The group cohesion becomes amplified because of the prevalent caste system. As suggested, historically, most traders are Punjabis by caste, while artisans and labourers are either Muslims or belong to the backward castes (Jatavs). The caste members have conjugal alliances and are members of the same clubs and associations in which they have their social contacts. Moreover, if one looks at their dwelling pattern, traders reside in specific locations in Agra, and hence they meet often during local social meetings. The Jatav or Muslim shoemakers live in their own settlements and after work they get together for local drinks.
This internal cohesion of groups sometimes pits one group against the other. The usual narrative among the traders is that the shoemakers are a lazy lot and they would prefer to spend their money for gambling and drinking. The shoemakers lament how traders exploit them, squeezing them out. Such group loyalty builds fast-moving narratives that only grease the exchange of information within the groups. And it the pieces of tacit knowledge transmitted in the gossiping that are reassembled as a complete picture of the fitness of one’s business. It also enables dispute resolution to take place effectively. There is hardly any privacy because all activities at home, within the family, at weddings, visitors and guests, lost gambles and practically anything that has a material bearing on the business is known by anyone and everyone in the cluster.
Consequently, the discount rates of parchis go up if there is a news of non-payment or delayed payment, if people learn about consignments getting cancelled, or even if the wedding in a trader’s family is not as lavish than expected. Hence, market participants’ behaviour is extremely transparent, but can only be deciphered by embedded market participants. That explains why the local, informal arbitration (shoe trading associations) are very effective compared to regular courts, because a regular court could never decipher and assess the tacit information which is prevalent in the cluster.
For an outsider the information in the market cannot be accessed and assessed unless one becomes part of the market on a daily basis. This is what helps develop trust and which feeds into the building of the congenial human capital for dealing with the tacit knowledge. For that background it is no surprise that in all of our interviews we did not find a single first-generation trader or shoemaker. How would an alien person understand the market’s internal functioning, future projections, family networks, interest rates in the housing market, weddings in the family, sizes of prospective orders and many other pieces of (even personal) knowledge that may have any bearing on the creditworthiness of the trader.
One may wonder, why does a trader not run away, taking with him all the credit he has accumulated? The answer lies in the fact that the footwear industry in Agra is largely characterized by family units. A trader’s loans have always to be cleared by his sons and relatives, otherwise they will suffer from a bad reputation. The collective punishment frameworks, and the threat of future losses are so high that traders are effectively deterred from cheating. This sort of threat of sanctioning is similar to Greif’s (2006) concept of multilateral punishment. Thereby it is tacit knowledge that discourages from engaging in activities which are socially undesirable. That means that tacit knowledge contains also moral values which are essential for the functioning of markets and does not only reflect on price signals or possibilities for arbitration. Obviously, tacit knowledge becomes in informal markets a much broader array of applications.
Adaptation and resistance to change
It is not true that everything about this market has remained as it was during the country’s independence. Several things like technology or the ability to export have changed in recent decades. Yet, the parchi system and the relational contracting embedded in it, have remained immutable. By resisting institutional change, it has arrested the informal industry structure of the shoe cluster.
Research shows that when the necessary knowledge to do market transactions is moderately complex, socially proximate actors have the greatest advantage over distant actors in a marketplace (Sorenson et al. 2006). This fits precisely in the picture of what is happening in Agra, because deciphering market-relevant information for estimating the value of parchis is quite a complex matter. Our interviews conducted with families who have been in the trading and shoemaking business for more than four generations underscored this. Moreover, our interviews reveal that Lynch’s (1969) half-a-century old description about the parchi system, the migrant Punjabi communities and the untouchable caste of Jatavs in Agra continues to hold. ‘Today, instead of cash the Jatav frequently gets a credit slip payable after three months….since most of the producers work on a hand-to-mouth basis, they are forced either to sell the credit slip at a discount to a money lender, or they must buy new materials at a higher rate because they purchase on credit.’ (Lynch 1969: 37).
After independence in 1947 the next major shift for India took place in the early 1990s. It was the decline of the Soviet Union that triggered the liberalization of the Indian economy, including the opening of the Indian shoe market for imports and exports. The effect of trade liberalization was felt instantly. It led to a closure of a considerable number of production units in Agra. By 1996, as Knorringa notes (Knorringa 1999a) many firms had already closed down, because of the increasing international competition. Almost every shoemaking unit was affected in their customary manner of shoe production, and they had to lay off workers and concentrated more on domestic markets. The size of the Agra footwear cluster shrank, and its composition changed (Ibid., p. 1593–5).
Soon in this phase of surviving the gale from trade liberalization the Agra shoemakers began looking for new destinations for export by triggering new lines of products and marketing channels. The younger generation of shoemakers took the lead and improved the product quality. The shoe cluster was pushed to deliver higher quantities of shoes with a higher degree of standardization. The export units had to go through extensive audits and examination, and they fixed a good part of their production processes, mechanization, labour policies and business attitude. These changes led to an average improvement of the quality of shoes, an increased vertical cooperation with local suppliers of intermediate products, a higher speed of delivery, and more alternative export destinations besides the former Soviet Union; for instance now exports often go to Europe.
But while the market became more dynamic, the parchi system continued unabated. By some accounts in the interviews, it helped the shoemakers to extend credit lines and it gave access to liquidity when other possibilities as banks were not available due to economic crises.
Another impact hit the Agra cluster in the mid-2000s, when, as a result of trade liberalization and new rules on leather imports, and on FDI led Chinese importers and manufacturers to flood the Indian shoe market. Often the Chinese shoes were leather-lookalike and significantly cheaper. As a consequence, a considerable number of shoemakers had to give up their own business and to enter as an employee with some other business. But also many traders left the business. Many of these shoemakers and traders are now retired and the interviews with them revealed that this was a period when they pushed their college-going sons to look for jobs outside the shoe cluster. Those who remained, exhibited impressive agility. For example, they grudgingly adapted to produce synthetic leather shoes, or resorted to making leather shoes from waste leather from Kanpur, Kolkata and Chennai. This might be seen as some form of technological change triggered by market challenges.
But the parchi system remained as it is because the root of its functional channels is buried in the tacit knowledge. The impact that historical and technological developments haves had on the Agra shoe cluster, and the noticeable transformation in production process, relationships, customer base and quality, was possible because of their limited reliance on tacit knowledge.
Admittedly, from the interviews we learned that shoemakers have often felt that they are exploited through this system, particularly in times of distress. During the moments of crises illustrated above, the discount rates had spiked up, and hit the shoemakers economically. But they did not question the system as such or look for alternative forms of financing their business. There were also no alternatives offered to them. For instance, banks did not even attempt to finance the business of shoemakers. Banks, despite their lower cost of liquidity, are not able to offer credit to shoemakers because they lack the tacit knowledge which is necessary to estimate the credit default risk accurately and rather quickly. Accessing banks comes with high transaction costs. So, even if the interest rates are lower, effectively, they become unaffordable. Assessing the creditworthiness of shoemakers emerges from being an inclusive part of the market, rather than looking in the ledgers. Similarly, all kinds of small loans schemes as of the 1990s by the government were hardly utilized by the shoemakers, because the transaction costs of accessing those by the shoemakers’ schemes had become routinely high. In fact, the parchi simply eased the transactions, despite their higher interest. The same is true for microcredit, which has a much higher rate of interest than the discounts on parchi. That means, even new forms of credit cannot successfully compete with the incumbent parchi. The present central government has unleashed massive financial inclusion reforms, making it easy for people to open a bank account and access credit lines. Yet, shoemakers still prefer to sell the parchi to middleman, and traders still purchase shoes on credit, even when cash-purchases are cheaper.
Up the hill: Higher levels of institutionalization
The potential gains from a higher level of institutionalization could possibly outweigh the costs needed to make the shift. Indeed, if knowledge about the creditworthiness of traders was easily transferrable, a regular financial intermediary could emerge and exploit economies of scale in the credit business. Consider, for example, that the middlemen could come together and pool their risks in one fund, or, the government could initiate funding schemes that help poor artisans to receive loans at cheaper interest rates. One may also consider the vast possibilities of credit arbitrage. Parchis of trustworthy traders could be loaned out at a higher interest rate. New financial instruments could be invented, as for instance, parchis that become converted into collateralized debt obligations. An entire insurance industry might be carved out in the cluster, helping absorb some of the inherent risks in the system. Yet, no such institutional innovation takes place.
During our interviews we realized that people had indeed considered those institutional innovations but rejected them. A major hindrance was seen to be the difficulty of transferring relevant credit information ex ante from the shoemakers to the financial institution, but also to control and govern the credit relation between the parties ex post. As a result a financial institution from outside the cluster cannot adjust the default risk accurately and would require interest rates from the shoemakers which were structurally too high. Moreover, the loans would be processed with considerable delays whereas shoemakers and traders need cash instantly. Without economizing on the tacit knowledge of the market, financial intermediaries from outside the cluster cannot compete with the parchi.
In parallel to the resilience of the parchi system stands the unchanging nature of the caste system. Similarly, many minor things remain immutable, for instance labour relations, the spatial ordering of production units, the time and day on which trading and parchi-repayment takes place (payment dates are fixed to be every 5 days, starting on the 5th of every month). As a consequence, for Agra Jatavs footwear is not simply an occupation for making a living, but ‘It is a family affair and a way of life’ (Lynch 1969, p. 7). And the way of life hasn’t changed much over the last centuries. Obviously, taste, quality and production processes of shoes have visibly changed, but only within and through the parchi system, thereby recognising the informal rules of the cluster. It works like a social osmosis in which tacit knowledge interconnects cultural norms with technological skills and the customary financial routine. The difficulty of codifying it means that it is expensive to alter it and hence cheaper to follow it.
That is why little success was achieved when in the early 2000s, the provincial government proposed a number of plans to enable more spaces where shoemaking in Agra could take place, complemented by an official program that was supposed to offer credit and skills training. In the end the ambitious plans were never realised. From our interviews we learned that those to whom the plan was addressed were not interested at all in making use of the new possibilities, because their community networks not only prescribed other routines for opening and running a business, but also the government plans did not fit into the web of tacit knowledge prevalent in the cluster.
In the Agra shoe cluster the discount rates associated with the parchis vary on the basis of dynamic information about traders’ non-fulfilment of promises, delays in payment, exposure to high debt ratios, sustainability of business, or their liabilities outside the market (for example expensive marriages). The crucial factor to let the system work smoothly is thus the constant flow of information and its interpretation, but not in any recorded or coded manner, but purely by word-of-mouth, which makes it action driven, rather than principled or propositional. Factors that affect a trader’s financial soundness are embedded in this day to day functioning. And knowledge about the trader, his dealings inside and outside the market, including, for example, the circumstances about a trader’s personal life and that of his debtors and creditors is crucial. This sort of knowledge is extremely difficult to articulate in any conveyable form. That is also the reason, why more formalized ways of institutionalization cannot link to the parchi system and gradually change it. A formal system of providing financial capacity to the shoemakers would not refer to the tacit knowledge around. Hence, the specific form of tacit knowledge today prevalent in the cluster would be devalued. This is surely not in the interest of the people which have built their actual business on it. But the self-interest of people is only one reason that hinders taking the step to a higher degree of institutionalization; a different system of financial intermediation would also have to link to the caste system. While this is not a problem for an informal system as the parchi, it is a big problem for a formal system that seeks a higher degree of institutionalization and is acting independently from historical, cultural or religious prejudices. Moreover, a formal system would have to put large amounts of knowledge on paper, guarantee quick and equal access to justice and disregard customary rules.
Going beyond Agra - some policy implications
The lessons from this case are not particular to Agra alone. Patterns of tacit knowledge in trading can be observed in various kinds of informal markets which have long-held, community-based knowledge creation and dissemination. In fact, the Indian economy is dominantly characterized by geographical clustering of economic activity (Mukim 2012, Dwivedi and Arora 2019, Das 2005). Basole (2015) examines the weaving and textile cluster in Varanasi (India) and underscores the importance of tacit knowledge systems held through a culture of secrecy and family-based apprenticeships. Sundar (2018) explored India’s artisanal fisheries and the interplay of tacit knowledge embedded in their networks of caste, kinship and village-communities. Basile (2011) studies the silk weaving industry in rural south India and hints at the importance of community attributes that affect institutional change as the region becomes more industrialized. Haynes (2012) in his remarkable exposition of historical emergence of artisanal business clusters through India’s colonial history explores the design of tacit and community knowledge structures that have contributed to the continuation of these clusters even in situations of crises and rapid technological change. Of course, we do not claim that all business clusters always have their growth impeded due to tacit knowledge. We only suggest that they very well may, and therefore any policy measure merits careful scrutiny.
The impact of tacit knowledge in arresting institutional change is not limited to cluster-based upgrading alone. For instance, even as sex workers in Delhi begin getting independent and moving outside the red light areas, the need for the pimp has not declined, since they are the reservoirs of tacit knowledge with respect to clients, local gangs and negotiating with police (Goyal 2020). In fact, our anecdotal evidence suggests that trading in industries ranging from diamonds, medicines, steel scraps, groceries, trucking and even money laundering in India employs a credit rotation system as in Agra with considerable tacit knowledge embedded within. Even the coal mafia continues to infest some rich mines of India (notably in Dhanbad), despite the coal auction turning into an online e-auction. The mafia still controls the labour force in the mines, and it can be interpreted to be doing so by its power through tacit knowledge about the workers, that emerged by historical ties of community and patronage (Goyal 2018).
Neglecting the role of tacit knowledge causes policy failure in a variety of settings (Bathelt et al. 2004, Lovell 2019). For instance, for several years, the government of India has been making ambitious policies for skills development in cluster-based small-scale enterprises without entirely satisfactory outcomes (Government of India 2016). Scholars have highlighted that this is often because of ignoring cultural and socio-political practices as well as historical identities based on social institutions (all constituting the tacit knowledge infrastructure) which are central to the process of change of attitude (Gooptu 2018). Research also indicates that employing tacit knowledge to design training for many informal workers can be particularly useful (Pilz et al. 2015). This is particularly true in the case of informal street vendors. Consider for instance, that the promulgation of the Street Vendors Act 2014, which sought to formalize the sector, was actively supported by the street vendors themselves. Yet, little success has been achieved because the legal construction of the act neglected the actual nature of how businesses are operated on the edifice of tacit knowledge. Similarly, the massive financial inclusion scheme of the government of India has not been able to curtail the informal savings practice of Indians; Goedecke et al. (2018) show that this is an effect of the cultural norms and social institutions, which in turn are indeed the vehicles to carry and sustain tacit knowledge.