The Role of The Informal Economy In The Manufacturing Value Chain

The informal manufacturing sector has grown in leaps and bounds over the last decade mainly driven by work groups that fall under this sector which include metal works artisans and road side carpenters that consist of a huge shadow economy. These local industries need to receive proper support, as they will go a long way in feeding Kenya’s plan to become a middle income country by the year 2030.

The United Nations Industrial Development Organization (UNIDO) gives an in depth definition of the term ‘shadow economy’ as a broader concept than functional informality, including both functional and juridical informality. This includes the underground, second, cash or parallel economies. The processes operated in the subsection of the economy are not necessarily defective in the sense that no formal firm would operate them because their productivity is too low. Their human and physical capital intensities are suited to the markets they serve and are only informal insofar as the legal structure of the society defines them as such.

According to PWC, Kenya has a large manufacturing sector serving both the local market and exports to the East African region. Aspects that range from an improved power supply system, increased supply of agricultural products for agro processing, favorable tax reforms and tax incentives, more vigorous export promotion and liberal trade incentives to take advantage of the expanded market outlets through AGOA, COMESA and East African Community (EAC) arrangements, have resulted in an easier environment for sustainable business growth. It can be argued that this has also benefited the informal manufacturing sector in both creating a more positive business environment as well as strengthening linkages with formal manufacturing.

However, sustained poverty coupled with subpar economic growth has continued to inhibit growth in the demand of locally manufactured goods, as effective demand continues to shift more in favor 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 regional markets. However, the recent introduction of the EAC Customs Union provides Kenya’s manufacturing sector, the most developed within the region, with a greater opportunity for growth by taking advantage of the enlarged market size, economies of scale, and increased intraregional trade.

When the President signed the Special Economic Zones Act 2015 into law, initiatives that are envisaged include the Social Economic Zones (SEZs) that have been set up under Kenya’s industrialization roadmap. Enterprises that will be operating at the SEZs will enjoy several tax incentives. Some of the preferential tax terms will include value added tax (VAT) exemption on all supplies of goods and services to enterprises, reduction in corporate tax to 10 per cent from 30 per cent for a period of 10 years of operation and 15 per cent for the next 10 years. This is a step in the right direction for it aims at growing the local manufacturing industries. To what extent will informal manufacturing benefit from SEZs? Deliberate thinking of how to link informal manufacturers with SEZ initiatives is important.

Strategies need to be developed to enhance the capacity of informal manufacturers to better service the formal sector. This can include training, business mentoring and organizational development projects to better position the informal sector and their ability to meet orders by formal manufacturers. Doing so would better integrate them into the manufacturing value chain.

 

litualex@gmail.com
Informal Economy Analyst 

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