Earlier this month I was interviewed by The African Investor on Kenya’s Informal Economy.
In a research paper published by the Kiel Institute for the World Economy (IFW) , the largest part of employment in Sub-Saharan Africa (SSA) is generated by informal enterprises. In Kenya, they account for 89.7% of the employment demographic. These enterprises often lack the financial means or the managerial and technological skills required to expand their activities. The paper goes on to point out that one way of overcoming these constraints is to establish links with the formal sector.
From a business perspective, linkages are channels through which enterprises influence each other’s performance in a relationship that ensures that they maximise benefits and minimise risks. The two major types are backward and forward linkages. The Business Dictionary defines backward linkages as channels through which information, materials and money flow between a company and its suppliers which creates a network of economic interdependence. Forward linkages on the other hand are the distribution chains that connect the producer or supplier with the customers.
IFW identified a couple of factors that encourage the formation of formal linkages. The first is that of primary production factors (capital stocks, employees), infrastructure (electricity, telephone), and access to credit. The expectation is that enterprises with higher endowments of the above are in a better position to establish formal linkages. Also, the experience as measured by the age of the enterprise is another factor. The expectation is that it takes time to build up business relationships hence enterprises that have been in business for longer periods are in a stronger position to form and exploit these linkages.
Another factor that influences the formation of linkages is that of the characteristics of the owner/manager of the enterprise (age, schooling). It points out that older and more educated owners are more likely to establish formal linkages. Being a member of a professional association also enhances the establishment of linkages. Contact with associations facilitates networking and thereby raises the likelihood of formal business relationships. This is fortified by the fact that these associations provide avenues through which businesses can share ideas on best work practices. They also provide an avenue through which the pooling of resources is encouraged, an aspect that strengthens their negotiating power.
The informal sector, when sufficiently supported, can gain a lot by pursuing this model of establishing linkages with formal businesses. The paper further suggests that formal backward linkages exert a positive influence on the productivity of enterprises in the informal sector. A symbiotic relationship of this fashion would be beneficial to both sides of the coin.
In addition, if formal enterprises are not able to procure goods from an independent supplier and lack the physical or human capital to produce the goods themselves, they will be restricted in their ability to introduce innovations to their production. More generally, it can be assumed that linkages facilitate the dispersion of technical innovation.
Lastly, through the establishment of linkages with informal businesses, formal enterprises can take advantage of the markets that informal businesses have access to as a distribution channel for their products.
Informal Economy Analyst
Efforts directed towards capacity building of micro, small and medium enterprises are yet to be well structured in a manner that ensures their sustainable growth. With their contribution to new jobs in Kenya standing at 90% and accounting for 35% of the country’s GDP, there is a gap that needs to be filled which will enhance their productivity. Most businesses in the informal sector continue facing steep hurdles that undermine their performance.
The European Commission’s Guide for Training in SMEs puts forward actions that will enhance the performance of businesses in the sector. Some of the interventions consist of factors that ensure the success of a business from which valuable lessons can be drawn. These include anticipation of skills, assessment, adoption of a collective approach, exploitation of opportunities as well as providing guidance and support.
The anticipation of skills and competence related to the needs of the market is crucial in order for a business to remain relevant and up to date in a rapidly changing economy. A good example is that of businesses having the skills necessary to work with new technologies that will increase their output and make them more productive. This factor enhances the longevity of a business in a way that it constantly adapts to the needs of clients.
In the area of assessment, it is important for businesses to constantly carry out a needs assessment. This will put them in a better position when it comes to assessing their requirements, and thus assist in the setting of objectives that facilitate the planning of their operations. More importantly, the evaluation and modification of the results regarding the chosen objectives is a crucial element of developing a permanent culture of assessment. This process enables them to become dynamic in the markets in which they operate.
A collective approach is important when engaging with the informal sector. Public institutions in the field of training, professional bodies as well as social partners such as development finance institutions need to be actively involved in the development and execution of strategies that are aimed at strengthening the sector. This collective investment will provide a solid foundation for building and qualitatively growing this sector of the economy.
The collaborative effort mentioned above should be governed by the principle of guidance and accompaniment. This approach points towards the mentoring of informal businesses in a way that helps them to overcome the obstacles that they face. This can be done by assisting them to put in place and strengthen internal organisational structures such as having detailed and updated financial records. Businesses in this sector of the economy can also learn a lot from each other by sharing practices that make them more productive.
Last but not least is that informal businesses need to be facilitated in a way that will enable them to maximise the opportunities within their field of operation. In the light of this, the right information such as local and regional market opportunities need to be availed to them. This has to be coupled with policies that facilitate their access to these opportunities. When correctly equipped and facilitated, informal businesses will grow due to these new economic and social opportunities.
Informal Economy Analyst
The Kenya National Bureau of Statistics (KNBS) released the Economic Survey 2017 which presents an analysis of the key sectors in the Kenyan economy. In relation to the informal economy, the survey only focused on the employment angle of the sector. The rest of data on the informal sector was extracted from the MSME 2016 Survey. Getting comprehensive up to date data on the informal economy is still a big challenge.
The 2017 survey indicates that the total number of new jobs created in the economy was 832.9 thousand. Of these, 85.6 thousand were in the formal sector while 747.3 thousand were created in the informal sector. The share of new jobs created in the informal economy represents a 5.9 per cent growth from 83 per cent to 89.7 per cent or 13.3 million people. Wholesale and retail trade, hotels and restaurants industries continued to absorb the highest number of employees, accounting for 59.7 per cent of total employment, while the manufacturing industry had a share of 20.4 per cent in informal sector employment.
A continual growth of the informal sector can be attributed to factors such as the shrinking availability of formal employment opportunities as well as the resilience of the Kenyan citizens. Informal sector growth in the country is however a problem due to the fact that most jobs in the sector are of substandard quality. This is because most are characterised by low wages, no social benefits as well as poor working conditions such as the lack of protective gear in most labour intensive businesses and operating in areas with insufficient social amenities such as access to water and toilets.
There were a number of statistics on the informal sector that were not highlighted such as an updated position on the key sub sectors. It would be useful to have information on the number of businesses that operate in the sector, as well as the overall contribution made to the Gross Domestic Product (GDP). This will paint a clearer picture of the sector in a way that can enable policy makers to adequately formulate strategies that would be beneficial in enhancing qualitative growth of this crucial component of the economy.
One of the suggestions on how this can be done is by starting out with a pilot project in one of the counties with a vibrant informal economy whereby data collection focuses beyond sifting through the records at county offices. This will allow for the concentration of efforts towards the conducting of a deeper statistical analysis of each of the sub sectors. Once this has been achieved, it can then be used as a benchmark for conducting a similar program countrywide. The gathered data would provide a clearer way forward when it comes to making informed decisions on how to channel the efforts towards implementing a sustainable plan that deals with the informal sector.
Informal Economy Analyst
The Kenya Industrial Transformation Programme (KITP) is an effort by the government to create an industrial hub in the country through sector specific initiatives in agro processing, textiles and apparel, leather, fisheries, services and SMEs (small and medium enterprises). With the SMEs sector being the fastest growing business segment of the economy accounting for 83% of the total employment demographic, I will highlight some of the strategies that have been proposed to make it more productive.
Some of the challenges that the sector faces include a lack of understanding of basic business practices such as book keeping and marketing. These limit their growth when it comes to accessing finance to expand their operations for they are seen to be high risk clients by financial institutions. The recent interest rate cap has negatively affected them as fewer can access loans from banks. Their level of human capital is also low due to a lack of formal education amongst most of the workers engaged in the sector. Most SMEs also have little knowledge of other markets which puts them at a disadvantage when it comes to approaching the export market.
Proposed initiatives in KITP aimed at uplifting the sector include the setting up of a fund to provide low cost financing to SMEs. The fund is to be set up as a credit guarantee system or as an investment in private equity funds with contribution from both government and development finance institutions. It is targeted at those SMEs with promising business plans as well as those that demonstrate potential for growth.
The strategy also plans on establishing communication and training between large companies and SMEs so as to facilitate subcontracting. This move is meant to increase the share of large corporations in the country sourcing from local SMEs to 30%, while building the capacity of SMEs to meet these needs. This will also look into ways of improving the capacity of the large companies to identify and manage suitable SMEs.
Another intervention is that of enhancing MSE’s (Micro and Small Enterprises) competitiveness. This will be done through a competition in every county where 5 products from entrepreneurs engaged in the manufacturing and agribusiness sub sectors will be selected to have their products available on supermarket shelves. The process will involve conducting quality, packaging and branding training to get their products certified by the Kenya Bureau of Standards (KEBS). The winner of this competition will receive a prize of Kshs 1 million aimed at improving their operations.
Further, there are plans to establish a metal fabrication centre of excellence in Kariobangi, Nairobi, aimed at upgrading the existing Jua Kali metal fabricators by providing common user facilities, training programmes and incubation facilities. This will improve the quality and quantity of the products that these artisans produce, as well as equip them with technical skills which will include knowledge on how to operate modern machinery.
The KITP should not be one of those policy documents that are drafted, launched and eventually gather dust on the shelves of libraries and institutions. It is a noble initiative that needs to be fast tracked and implemented as it will translate to the improvement of the lives of the millions of Kenyans that are engaged in micro, small and medium sized economic activities.
Informal Economy Analyst
During this past week, the Ministry of Industrialisation and Enterprise Development organised an exhibition in Nairobi which was aimed at bolstering the sales of apparels that are manufactured at the Export Processing Zones (EPZ). Cabinet Secretary, Adan Mohamed announced that government had decided to avail up to 20% of goods and apparels manufactured by companies at the EPZ to the local market at affordable prices but for the same export quality. He added that some outlets will be opened around the country by small and medium sized enterprises where Kenyans can access the items after the exhibition.
This is an interesting development considering that EPZs were set up with the initial intention of producing goods for export only. The government also intends to set up Special Economic Zones (SEZs) in key urban centres in the country whose main goal is to diversify manufacturing activities and create employment. Pilot programs for this project are currently ongoing in Mombasa, Lamu and Kisumu. As a means to fast track the establishment and growth of SEZs, the government exempted all supplies of goods and services to companies and developers in the zones from VAT and reduced the corporate tax rate for enterprises, developers and operators to 10 per cent for the first 10 years and 15 per cent for the next 10 years.
Considering the fact that sustained poverty coupled with subpar economic growth has continued to inhibit growth in the demand of locally manufactured goods, effective demand continues to shift more in favour of relatively cheaper imported manufactured items. In addition, the high cost of inputs informed by poor infrastructure which leads to high transport costs has led to high prices of locally manufactured products thereby limiting their competitiveness in the local and regional markets.
This is a move that if properly executed, will be an avenue for sustainable business growth and development for micro enterprises that operate in the agriculture, manufacturing and tourism sectors. This is the right time to look at value addition strategies that target the micro and small businesses that will be suppliers of products and services to the SEZs. In its strategy on decent work in the informal economy, the International Labour organization (ILO) suggests that one way to improve the sustainability of these informal enterprises may be to link them in cooperative structures where jointly owned input supply, credit and marketing services can be organized without compromising the autonomy of the individual entrepreneur.
It will be interesting to see the extent to which informal enterprises will benefit from SEZs. Deliberate thinking on how to link informal manufacturers with the SEZ initiatives is important. Strategies need to be developed to enhance the capacity of informal manufacturers to better service the formal enterprises that will be operating from the industrial parks. Such measures should include, but not limited to training, business mentoring and organizational development projects to better position the informal sector and their ability to meet orders by the established formal organisations. Doing so would improve their capacity to deliver quality products and thus better integrate them into the value chain.
Informal Economy Analyst
We live in an age where access to information is at its highest level. With the onslaught of digital technology, the internet has become a vital source of unlimited information. This has been hastened by the increased availability of smartphones, which have made it possible for people to get onto the internet from wherever they are through these mobile devices. This technological advancement has transformed the lives of many people by making it easier for people to access various services from the comfort of their palm.
The effects of this advancement in technology has changed the way business is conducted by the introduction of new and innovative ways of reaching out to clientele. Micro-businesses have embraced the use of mobile payment technology in their operations. They view this mode of conducting business as an easier form of cash delivery to their suppliers and business partners and accessing loans as it is a system which is relatively affordable, personal and can be used anywhere and at any time. These factors have fast tracked its growth.
A study conducted by Internet World Stats indicates that Africa accounts for 16.6% of the global population and has an internet penetration rate of 26.9%. In comparison, the penetration rate in Latin America and the Caribbean is 59.4%, 56.5% in the Middle East, 76.7% in Europe and 88.1% in North America. On the African continent, Nigeria leads with an internet penetration rate of 47.9%, which is 27.4% of the continent’s total internet usage. Kenya is ranked third with a penetration rate of 66%, contributing to 9.5% of internet usage. Population size was a major variable that was considered when conducting the study.
The penetration rate on the continent presents an opportunity that can be exploited as a means for businesses to reach a wider audience. The Kenya National Bureau of Statistics latest survey of Micro Small and Medium Enterprises indicates that 43.1% of MSMEs do not use Information and Communication Technology (ICT) because they don’t think that it is vital to their operations. 14.3% thought that it was too costly while 4.5% cited a lack of access to electricity as the reason. There is a need to educate MSMEs on the importance of ICT as a means to growing their businesses.
The survey also looked at the type of ICT equipment available in licensed businesses. 40.7% of the MSMEs had a mobile phone, 15.0% had a radio while 10.5% of the respondents reported not having any ICT gadget. Availability of the fax machine, tablet, digital / video cameras was reported by less than 5% of the respondents. This is a clear indication of the importance of mobile phones as a gateway to interacting with small businesses. A lot more can be done to facilitate business transactions in the informal economy considering that only 49.3% of the businesses surveyed use mobile money platforms. It is a platform that is yet to be fully exploited as it is often underrated as an avenue to develop business capacity.
Informal Economy Researcher