Tapping into the informal economy

Experience gathered while working as a salesperson shed light on the mode of operation of businesses that are classified as informal. Interactions with these entities were often riddled with out of the norm characteristics, an aspect that was key to their survival. Due to the fact that the ability to sustain businesses of such a nature is highly dependent on a mode of operation that infringes on the principles of formal business, it did not come as a surprise when I was exposed to business practices that would be otherwise not fall under the scope of formal business operation, but which were a determination of how well they performed.

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A common mode of operation that I was exposed to revolved around distribution businesses which only had one registered business for the purpose of legal conformity but had at least five other branches that operated informally, in that they were outlets that were drop off and collection points for their clients. In these predominantly rural markets, the subsidiary outlets were preferred due to the discounted rates that they offered that were mainly enabled by the volume of products that they pushed out into their wide market reach.

Ideally, the amount of revenue that could be collected from these by the respective county governments vis a vis the payments that they make to the county authorities pale in comparison. Which begs the question, why do businesses that generate so much revenue choose to remain under the radar in this sense? Beyond sealing such loopholes that rob county governments of crucial revenue, it is of the essence for a business environment to exist whereby levies and taxes charged match service delivery by governments to businesses.

When referring to service delivery, key issues that constantly came up included the physical business environment revolving around matters that deal with sanitation and security, repetitional levies charged across different counties as well as market infrastructure challenges such as proper road networks that enhance market access. These are crucial to building links with an informal sector that is highly undervalued and under rated, considering that as per statistics from the Kenyan Economic Survey 2018 released by the Kenya National Bureau of Statistics (KNBS), the sector accounts for 83% of employed Kenyans.

There are key systemic issues that need to be addressed, as they are in the most part responsible for businesses being considered too risky for financial institutions, while at the same time being a reason as to why they thrive. The lack of a financial track record hugely facilitates their being off the radar of government authorities. Also, the issue of collateral is a stumbling block for small businesses that are run by women, due to a discriminant property rights and inheritance system.

In a bid to improve livelihoods and reduce poverty rates in the country, tapping into the positive aspects of the ecosystem that is the informal sector will go a long way in achieving this goal. Issues that deal with business practices that enhance their viability for access to finance such as proper bookkeeping, ancient legal rights as well as the availability and access to health insurance options are vital for strategic growth of the sector.

litualex@gmail.com

Informal Economy Analyst.

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A sales person’s perspective to approaching informal markets

In my experience working as a sales person for different multinational companies in Kenya that dealt in fast moving consumer goods (FMCG), there are valuable lessons that I learnt in as far as sales and marketing is concerned. Different market segments respond differently to execution strategies. Understanding the demographic qualities of your target audience is key to determining the approach to be used.

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Given that I was often tasked with pioneering the introduction of certain products to rural markets in Kenya, it became paramount as time went by that I had to be innovative in my approach if I was going to succeed. This was a tough lesson as even the market segmentation strategies that I had been previously exposed to bore little fruit. Most of these looked good on paper but failed miserably upon their execution and deployment.

The most important lesson was that building relationships with the business owners and staff determined how well the product performed in informal retail markets. What came out clearly was the importance of the business owner to eventually perceive the sales person as a value add to their business. By this I mean that winning their trust to the point where they saw me as a manager of their business and consulted on matters regarding the adoption of business strategies was a game changer. The staff are a key element in this equation because they are the interface between your product and the customer.

Another strategy that worked well was tapping into the distribution networks that exist within these informal markets. Given the limited resources in terms of market coverage, establishing networks with smaller distributors within these markets and linking them with the established distributors emerged as a win-win situation. By going the extra mile to make initial visits to the smaller distributors and establishing and fostering linkages with the larger distributors through the negotiation of better profit margins for them broadened the market reach of the products I was selling.

Also, promotional materials that were provided by these companies are more valued in rural markets than urban ones. Leveraging these beyond the customer in these markets goes a long way in cementing brand royalty. As alluded to earlier, if successfully brought on board, the staff of small businesses will be key product ambassadors in a way that is cost effective for the company. A good example is that of providing them with tee shirts which they can use as uniforms. This enhances the strategic brand’s visibility and presence in those markets especially if it is coupled with product activations.

It would be wrong for me to paint a rosy picture of the gains made without pointing out some critical aspects that hampered the gains. It is with this in mind that the issue of risk management comes to mind. Multinational companies that are looking to make headway into African markets that are dominated by a huge informal sector need to factor in the risk angle into their operational budgets. This will help them mitigate some of the setbacks that are experienced while establishing market presence such as cases of business closure, poorly coordinated government policy; both at national and county level and the menace that is corruption.

litualex@gmail.com

Informal Economy Analyst  

Addressing Informality

The report “Women and Men in the Informal Economy” by the International Labour Organization (ILO) states that informal employment is the main source of employment in Africa, accounting for 85.8 percent of all employment, or 71.9 percent, excluding agriculture. Further, their research points out that 92.4 percent of all economic units in Africa are informal. An even more staggering statistic from the report is that 97.9 percent of the agricultural sector on the continent is informal.

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The growth in the size of the informal economy should send a signal to policy makers that therein lies an untapped opportunity in as far as reaping mutual economic benefits. By this, I mean that due to the fact that in Kenya this sector of the economy contributes about 83% of employment demographic outside agriculture and yet only accounts for about 30% of the country’s GDP. This indicates that there is a gap that could be exploited. Some of the factors that inform this scenario revolve around issues such as the low levels of productivity as well as profitability in the sector. On the other hand, there has been an increased push to try and unlock issues that the sector grapples with such as access to finance, which has been a key factor that inhibits them from scaling their operations.

In an effort to make informal businesses profitable entities that can increasingly feed into formal business value chains as well as reduce their high-risk profile to financial institutions that they approach for credit, there are a couple of points that need to be taken into mind. The first and foremost is that of ensuring that small businesses develop the internal structures that can be used to measure their operations. These include proper financial records through book keeping which involves maintaining well structured and up to date records of accounts and financial transactions. This will enable them to not only be in a better position when applying for credit, but also ensure that they absorb these funds for purposes that will help them to scale up.

On the issue of productivity, beyond access to finance are factors such as the level of skills and access to markets. In most cases, businesses in the sector are set up not as a first option but as a last resort and a means of survival. A good example is that of businesses that are set by people who cannot access the shrinking formal employment opportunities and thus pursue the option of setting up a business in an attempt to cater for their expenses. Such entrepreneurs usually do not posses the skills required to venture into the various business fields that they find themselves in. It is not surprising that most of these entities close shop within two to three years of operation.

Access to markets is a hindrance to the productivity of some informal businesses in the sense that it limits the output of their goods in instances where ready markets are not available. In the case of small scale farmers, a lack of markets for their produce makes them scale back on their production due to their inability to absorb the shock that comes from losses from wasted produce. Most opt to take the route of subsistence farming. Linked to this is the fact that most have to grapple with inadequate storage facilities that could mitigate such losses.

It is therefore prudent and timely for policy makers to implement a strategy that addresses the issue of informality as a priority. This will not only enable governments to comfortably widen their revenue source while, but also improve the livelihoods of people who are struggling to make a living.

litualex@gmail.com

Informal Economy Analyst.

Lessons from China  – Informal Sector Transformation

Different studies have been conducted to unpack the genesis of how China’s economy grew from an average of 5.3% GDP between 1960 and 1978, to an average of 10.4% in 2010. There are valuable lessons to be learnt from these studies and to which parallels can be drawn for countries with vibrant informal economies looking to spur economic growth. One such study that was conducted by Professor Franklin Allen of Wharton University indicated that in as much as China’s consistent economic growth over the past five decades has been spearheaded by state owned and publicly traded companies, the informal sector contributed immensely to this drive. While the former grew at an annual rate of 4% from 1995 to 1999, the latter grew at 19%.

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It further noted that rather than turn to banks for financing, entrepreneurs tended to raise capital through local community networks and investors from abroad through informal borrowing from firms and institutions. Linking this to the Kenyan scenario, I believe that the key to the success of such a path heavily lies with the strengthening of informal sector organisations such as Savings and Credit Cooperative Organizations (SACCOs) as these are the bodies that are used by players in the sector.

The Chinese government has facilitated the growth of informal businesses from small business units to a level where they have become profitable entities that have been the backbone of the country’s industrialization agenda. Another study by the Lancaster University Management School points to the fact that the introduction of a household responsibility system (HRS) in China gave individual households autonomy over agricultural production and were incentivised to increase output. The resultant improvement in agricultural productivity enhanced the release of excess labour from the agriculture sector and reallocated it to the industry and services sectors. This policy saw the share of agricultural employment fall from 70% in 1979 to 35% in 2011.

With farmers being more profitable, the extra disposable income was pulled and invested in town and village owned enterprises (TVEs), which were largely informal. It is interesting to note that although TVEs did not get preferential government treatment, they were not subject to widespread state regulation, an aspect that enabled them to grow faster than state owned organizations. Though TVEs were not private firms in the sense that they were owned by local communities rather than sole private owners, they cultivated a culture of competition which helped stimulate the efficiency of state owned enterprises. It is worthy to note that they were the major export drivers whereby for example, in 1999 their export value accounted for 48% of China’s total exports.

These two studies clearly highlight the importance of how concerted efforts to increase the productivity of small scale businesses lead to a government and its citizens reaping the fruits of economic growth and prosperity. It is not surprising that given such reforms, the World Bank indicates that the current poverty rate in China is under 2%, down from 90% in 1981 having managed to lift 800 million people out of the bracket. Clearly, they are doing something right which we can emulate.

litualex@gmail.com

Informal Economy Analyst.

The relationship between poverty and the informal economy

The number of people who are engaged in informal employment has been on a steady rise over the past decade, a phenomenon that is increasingly prevalent in developing and third world countries. A deeper delve into this issue reveals an intricate relationship between the level of informality in various regions of the world and the link to social inequality. That being said, it is interesting to note that regions with large informal economies also have a big percentage of the population living in poverty. This is not to say that all of those that are engaged in informal businesses are poor, but that poverty is a cardinal driver that accentuates informality.

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Given the diminishing opportunities of formal employment opportunities in these parts of the world, populations have been forced to look for alternative creative means to fend for themselves. This scenario has largely led to the growth of informality whereby businesses are haphazardly set up without prior planning or experience. Often, the jobs in this sector of an economy are of poor quality, meaning that they do not offer any social protection or terminal benefits. Business that are established this way often have internal operational systems that are a hindrance to their growth in the long-term. It is this sort of enterprises that have difficulty accessing potential financial investors due to the perceived high-risk nature of their operations.

The World Employment and Social Outlook 2018 is a report by the International Labour Organization (ILO) that focuses on the trends in job quality, paying particular attention to working poverty and vulnerable employment. A point that comes out strongly is the fact that in 2018 and 2019, unemployment in developing countries is expected to rise by half a million people per year. As alluded to earlier, the report points out the fact that the main challenges that developing countries continue to face include persistent poor-quality employment and working poverty. Two demographic groups that continue to be adversely affected by labour market inequalities are women and the youth.

According to the report, the outlook is particularly challenging for women as they are more likely to be in vulnerable employment and over-represented in informal non-agricultural employment. Further, this demographic group is often less eligible for social protection coverage due to their lower rates of labour force participation, higher levels of unemployment and greater likelihood of being in vulnerable forms of employment. These factors, coupled with the fact that women usually receive lower levels of remuneration, raise their risk of poverty. An interesting statistic that came across concerning youth aged 25 years and under is that their global unemployment rate of 13 percent is three times higher than the adult unemployment rate. The Northern Africa region recorded the highest rate with close to 30 percent of young people in the labour market being jobless.

Such numbers are a strong indicator as to why the informal economy continues to consistently grow. The downside to having a large informal economy is that those that are involved in micro businesses are excluded from the benefits that come with gainful employment. It would be prudent for policy and decision makers to look into and implement strategies that grow the capacity of informal businesses to enable them to become profitable entities. This will reduce the high levels of poverty by providing sustainable incomes to a vast majority of households.

litualex@gmail.com

Informal Economy Analyst

How Counties can leverage Informal Business

Devolved governance units that were introduced in Kenya following the promulgation of the new constitution have localised the delivery of essential national government services as well as offered different parts of the country the autonomy to make specific decisions that impact the areas under their jurisdiction. This has seen the initiation of programs and projects whose conception is based upon the most urgent needs of the residents of the different counties. In this sense, the introduction of devolution into the governance structure of Kenya has helped in the decentralisation of power from the national government to county governments. Counties are now responsible for the direction in which they choose to go for they can now legislate their own laws through their county assemblies. Further, Counties have come together to form regional economic blocs whose main aim is to bolster trade within the member counties by pooling their resources.

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Revenue generation has been one of the challenges that counties have been grappling with. This aspect is crucial as it will make these units to reduce their reliance on national government for operational and development financing. In a quest to collect revenue, county governments have had to pass legislation that enables them to do so. This has led to a situation whereby each county has come up with its own levies and rates. For businesses that operate between two or more counties, such as those that are in agribusiness, conducting business has become a costly affair with the introduction of a variety of cess fees. This is the case as most of these businesses have to transport their goods to markets that are not in their counties of origin. They are thus required to pay multiple cess fees for those goods across different counties. This replicative system of taxation is expensive and particularly burdensome for micro and small businesses.

An aspect that has come out strongly during some of my work when interviewing informal traders in different parts of the country is that of favouritism and tribalism, which has become pronounced with the inception of devolved governments. People who are not from communities that are indigenous to certain counties are finding it difficult to operate even small businesses. This comes out strongly in instances where these businesses apply for loans at various county offices and are frustrated on the basis of their tribal affiliation. This factor has become so deeply rooted and has even played out in various sections of the media, with certain governors calling for the legislation of laws that arm twist institutions and private companies into ensuring that staffing in their organizations is constituted of up to 70 percent of indigenous members.

Further, when it comes to the allocation of spaces within which they can work, small scale traders are often side lined and often find themselves playing hide and seek games with county authorities to the detriment of their businesses. It is with this in mind that a bill has been introduced in the Kenyan Senate to address some of these obstacles. The bill proposes the formation of a Hawkers and Street Vendors Authority that will be tasked with the registration, regulation and monitoring of traders in this sub sector of the informal economy. The bill also aims at ending tussles concerning the payment of prescribed fees and charges by small scale traders and proposes that county governments designate vending zones for them.

Some of these issues can be dealt with in a way that is beneficial to both the informal businesses and the respective county governments. For a start, counties should support small business as these are a means to building a base for the growth of industries in their regions. By this I mean that most industries would require raw materials for their operations which can be locally sourced. This facilitation should be in the form of harmonization of fees and levies across counties in the different economic regional blocs. Another way this can be achieved is through supporting the ecosystem that boosts the livelihoods of the county residents. A good example is that of the agribusiness, whereby making farm inputs easily accessible to small scale farmers and investing in market structures for their produce will improve household incomes of the residents.

litualex@gmail.com 

Informal Economy Analyst 

 

Housing Poverty in Kenya

The challenge of offering affordable housing has for long been an uphill task for many developing countries. As at 2016, Kenya had 22,000 mortgages in the country of 45 million people. A report by investment and real estate firm Cytonn further notes that the low uptake in mortgages can be attributed to the high mortgage interest rates offered by financial institutions, which puts the dream of owning a home out of the grasp of many citizens. According to the World Bank, Kenya has a housing deficit of over two million units which increases annually by 200,000 units. Alongside this is the fact that nearly 61 percent of urban households live in slums.

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With one the pillars in the President’s Big Four Agenda focusing on the issue of affordable housing, efforts that look into how low-income earners can own decent housing have come to the forefront of government policy. Considering that about 90% of Kenyans are employed in the informal economy, it is timely that these strategies are being geared towards this segment of the population. In this sense, providing decent housing will be a step in the direction towards curtailing the growth of informal housing settlements, while at the same time reducing social inequalities.

One way of reaping the benefits of inclusive growth is by Incooperating this aspect to the Big Four industrialization pillar. In a quest to develop our manufacturing industries, it is crucial to integrate the building of housing for low-income earners around the different Special Economic Zones (SEZs) into the infrastructure plans of such projects. In this way, workers in these SEZs will be provided with an opportunity to own homes which they can pay for as they work. Further, integrating micro and small enterprises (MSEs) into the supply value chains will provide a means through which they can strategically bolster their incomes in a way that enables them to afford the houses. Linking infrastructure to industrialisation in this way will provide a means through which the affordable housing agenda can be met.

Another way of accelerating home ownership, particularly amongst low-income earners would be by channelling such efforts through cooperatives and more so, Savings and Credit Cooperative Organizations (Saccos). Seeing as these are bodies through which most informal sector participants operate, it would be a positive move for government to get them on board this strategy by incentivising them in a way that would enable these to offer housing loans at cheaper rates. This would strengthen the sources of affordable credit to low income groups. This is an avenue if pursued, would widen the reach of this program to those that desperately need this intervention.

Given the difficulty in accessing affordable housing in the country, the deliberate move by government to make this pipe dream a reality is one that will have a positive impact and contribute to the country’s economy by not only having multiplier effect on job creation in the construction sector, but also developing an ecosystem of services that will provide employment for those that serve the residents of these housing communities.

litualex@gmail.com

Informal Economy Analyst