Increased urbanization and expanding cities have been shown to increase economic growth. Urban-based economic activities account for more than 85 per cent of Gross National Product (GNP) in high income countries and more than 70 per cent in middle income countries indicating a positive correlation between levels of urbanization and national economic development. Urbanization has been seen to reduce pressure from the available agricultural land by creating non-agricultural employment and business opportunities. While this can be seen to be a key factor that supports the proponents of urbanization, focus needs to shift towards developing rural areas in ways that promote the idle potential lying there.
According to a report, “The State of East Africa 2016” released last week by the Society for International Development, the informal economy is by far and large the biggest employer in Kenya with the Service industry overtaking the agricultural sector as far as contribution to GDP is concerned. Whereas the informal sector has grown in leaps and bounds over the last decade, there is a challenge in the quality of jobs created for most do not offer sustainable foundations to their dependents. Aspects ranging from the lack of access to social benefits by most businesses to a restricted access to capital and business support have spurred a quantitative and not qualitative growth.
Seeing as a huge percentage of the Kenyan population still lives in rural areas despite the rapid growth in urban centers, there needs to be a more concerted effort geared towards capacity building of businesses in the rural areas that would see them well equipped with skills that will enable them to have systems and structures to access and absorb credit from financial institutions. The credit constraints arising from the above setting operate in a variety of ways whereby most entrepreneurs tend to rely on self-financing or borrowing from friends or relatives. This lack of access to long-term credit for most informal businesses forces them to rely on high cost short term finance, for the few who are able to access these services.
Given the high growth rate experienced in the informal sector and its notable contribution to Kenya’s economy, policy makers in government should direct their focus towards developing strategies that look into ways of how to comprehensively accommodate small scale businesses. This would involve coming up with an incentive scheme to encourage informal businesses to formalize their operations. The resultant paradigm would be beneficial to both parties in that government would expand its tax base, while the small scale businesses would be in a better position to access facilities that benefit them.
There needs to be a demystification of the perspective that urban centers offer the best opportunities as regards income generation. Effort should be put into building a strong rural informal economy that will be the foundation for setting up a system that feeds local industries. It will go a long way in easing the pressure on urban centers while at the same time providing a sustainable solution for growth of the local industries.
Informal Economy Analyst