Factors affecting Productivity in the Informal Economy

Over the past ten years, the informal economy in Kenya has experienced tremendous growth in terms of the number of people engaged in it as a source of employment and livelihood. Most participants in this sector of the economy are women and youth who see it as a means of escaping the poverty, rising levels of unemployment amongst other tough conditions within which they live. However this growth has been characterised by low quality jobs which do not offer a viable means of scaling up the ladder in society. One of the main reasons that compound this situation is that the productivity of most of these jobs is low.

Some of the factors that affect productivity in this sector include the level of skills attained, access to financial support services, access to markets and a lack of cooperation amongst these businesses. According to the International Labour Organisation (ILO), many persons within the informal economy face substantial barriers accessing skills that would increase their potential productivity. One of the largest challenges concerns how to develop the skills and competencies of early school leavers and those who did not get the opportunity to go to school. There is a need to improve on the traditional modes of skill acquisition like apprenticeship to include a broader skill set such as book keeping.

A limited access to financial support services is another stumbling block to improving productivity in informal enterprises. A vast majority of informal businesses operate without any documentation or record keeping of their transactions coupled with a weak financial resource base. This makes it hard for institutions that offer financial support to calculate the credit worthiness of these businesses. The absence of records means that there is no documented history of business operations which in turn makes it near impossible for the financial support institutions to know whether such informal enterprises are on a growth trajectory or a downhill spiral. They are thus generally viewed as high risk clients.

Improving the access to markets for informal businesses will go a long way in raising their productivity levels. As is the case in most rural areas, poor road infrastructure raises the cost of transporting produce to potential markets by small scale farmers. This discourages them from increasing their output because a large percentage of them do not have substantial financial resources at their disposal. The money that could be channelled into farm inputs such as fertilizers is redirected to covering the transportation costs. This gives rise to situations, for example, where most of them tend to revert to subsistence farming.

The issue of lack of cooperation negatively affects productivity whereby small businesses within a given section of the informal economy operate on an individual basis thus lowering their potential returns. This is in contrast to forming groups that will place them in a better position when it comes to tackling the challenges which they face. By coming together, they can pool their resources that will place them in a stronger position when it comes to approaching and negotiating with potential investors. Also, under such umbrellas, it becomes easier for them to engage with organisations that offer capacity building to growing businesses through a variety of training programs.

Informal Economy Analyst


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