The Link Between Poverty and the Informal Economy

In a document titled “Reasonable goals for the reduction of poverty in Africa”, the Institute of Security Studies points out that Kenya has been ranked sixth among top 10 countries in Sub-Saharan Africa with large populations living in extreme poverty. The country will not be able to combat poverty by 2030 unless radical measures are taken to rescue the 18 million people under the poverty line. It further states that promoting the pursuit of economic diversification, with a specific focus on those sectors that have the potential to support the poor, through the development of small and medium-sized enterprises will go a long way in achieving this goal.

The informal sector is characterised by micro and small businesses whose main reason for being established is that they offer an escape route from the tough economic conditions under which the entrepreneurs live. In other words, one will find that most of these businesses are located in communities where poverty is prevalent. The World Bank estimates that the share of urban employment in the informal sector is estimated to be around 75%. Rapid unplanned urbanisation coupled with high levels of poverty has given rise to the growth of informal urban settlements. Businesses are thus set up within these slums to cater for the poor populations that exist therein. A good example is that of numerous food and vegetable kiosks which are established as a means to providing sustenance to the families within these settlements.

It is a well-known fact that the reason most of these businesses find it difficult to upscale their operations is the difficulty in accessing financial collateral from financing institutions. A vast majority of informal businesses rely on very specific markets, which limits their potential to grow by not being able to explore a wider customer base. These businesses thus end up getting caught up in a vicious cycle that is difficult to escape from.

As mentioned above, working informally is often the only way to participate in the labour market for the world’s poor populations. Given that a large proportion of workers in the informal sector belong to the low-income category, increasing labour productivity in the informal sector may be crucial for reducing poverty, increasing income equality, and improving the living conditions of relatively poorer sections of society. Policies should consequently be geared towards trying to unlock these people from their low productivity activities, thus enabling them to be more productive and provide them with economic opportunities on fair terms. The introduction of new technology in metalwork artisans is one way of achieving higher productivity. Mechanising their operations will lead to the production of higher quality and more standardised products.

Specific recommendations include active labour market policies, such as training and skill development programmes, improving access to credit, business development services, as well as market access and knowledge for those who operate informal enterprises. Once policies that try to provide social assistance and other support to poor people are enacted, Kenya can fairly quickly enjoy a massive reduction of poverty while growing its economy and reducing inequality.

litualex@gmail.com
Informal Economy Analyst 

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