Informality as a cost cutting measure

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Employment statistics from the Kenya National Bureau of Statistics indicate that the informal economy is by far and largest contributor, which stands at 82 percent of the total number of people that are employed. The quality of these jobs still remains low as most of them are operated in a manner that makes it hard for them to grow. Most of these businesses do not keep records of their transactions, which makes it hard for them to track the levels to which they have grown. It also makes it difficult for them to access support from financial institutions as there is no basis on which they can measure their financial track record.

Due to this mode of operation, informal businesses have for the longest time been viewed as being incapable of contributing to national development through payment of taxes. An angle that has not been looked into is that of those informal businesses that choose to remain informal as a means of escaping the cost that comes with being formal. This can be seen in instances whereby businesses have remained informal for long periods of time. They present a scenario where they compete unfairly because they can afford to offer lower prices for goods and services that they provide.

A good example of this is that of informal businesses that opt to open numerous micro firms instead of upscaling and growing one business. Such businesses would rather operate under the guise of informality due to the fact that most informal operations escape the radar of government scrutiny as tracking the evolution of such enterprises is difficult. It is an easier option for them to remain dishonest by not acknowledging when they are financially growing.  By going down that road, such businesses rob opportunities to new entrants by taking up spaces that could be used by those trying to get in.

Although this is not a widespread practice in the informal economy, it is such businesses that make government authorities approach legitimate informal businesses with a lot of scepticism. Entrepreneurs that choose to go down that road are often stable and make enough money from operating informally as they do not pay taxes. In this sense, the amount of lost revenue to the taxman is quite substantial. By opting to open up multiple micro firms, such businesses escape the dragnet of revenue collection and withhold money that could be used in growing the economy.

There needs to be a census of businesses in the informal sector that includes micro businesses, so that it will be easier for government to come up with policies such as those that indicate how long businesses can operate as informal. A good approach is that of setting a limit on the number of years that a business can be allowed to operate informally, with a graduation scheme that offers incentives for moving up the ladder. This will help curb instances where some businesses hide under the guise of informality. It will also go a long way in bridging the shortfall in government revenue collection due to the ability to know the number of businesses that will have graduated to a level which they can pay taxes. This move will also curtail the unfair competition presented by such businesses in a way that encourages new entrants into the informal sector to be able to do business.

Informal Economy Researcher


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