The latest Regional Economic Outlook: Sub-Saharan Africa is a survey conducted and released twice a year by the International Monetary Fund (IMF). The latest was made public in April 2017 and highlights the importance of the informal economy as being a key component of most economies in Sub-Saharan Africa, contributing between 25 and 65 percent of GDP and accounting for up to 90% of jobs outside agriculture. This includes household enterprises that are not formally registered.
Estimation of the size of the informal economy is done by looking at indicators such as the tax burden, institutional development and unemployment rates amongst other factors. According to the paper, a larger tax burden is likely to encourage more economic activity to remain in the informal economy. The level of institutional development is another indicator whereby the lack of respect for the law encourages informal activity. Higher unemployment rates are an indicator of poorly functioning labour markets with labour not being absorbed into the formal sector.
The IMF indicates that the average share of informality in Sub-Saharan Africa reached almost 38% of GDP during 2010 – 2014. This is surpassed only by Latin America and the Caribbean at 40% of GDP and compares with 34% of GDP in South Asia, and 23% of GDP in Europe. In member countries of the Organisation for Economic Cooperation and Development (OECD), the informal sector is estimated to account for 17% of GDP. Their findings suggest that informality seems to fall with the level of income, likely reflecting higher government capacity and better incentives towards formality in higher income economies.
In terms of the experience of its populations as entrepreneurs, Sub-Saharan Africa has the highest rate of early stage entrepreneurial activity. However, about a third of the new entrepreneurs in the region report that they chose to be entrepreneurs out of necessity. Despite this, the region has the most positive attitude towards entrepreneurship. The policy change proposed in this regard is to create an environment in which small firms in both formal and informal sectors can thrive and grow, one that is supportive of SMEs.
As far as informality and productivity is concerned, high levels of informality in the informal sector have significant implications on productivity. This in turn negatively impacts economic performance. The paper draws certain conclusions from World Bank Enterprise Surveys which indicate that the productivity levels of informal firms are significantly lower than those of formal firms. On average, the productivity of informal firms is only 25% of small formal firms and 19% of medium sized formal firms, based on real output per employee. This reflects a lower level of physical capital and skill levels of informal workers.
In regard to tax policy, the document proposes that relatively high VAT thresholds are recommended for developing countries, with licences and fees for businesses below the VAT threshold. Such a move would reduce the number of small businesses that are discouraged from registering with the tax administration. As a result, the increased growth and transition into formality would allow small enterprises to grow to a size above the tax threshold, generating higher fiscal revenue. The benefit for formalisation would be better access to finance and public services, which would exceed the tax cost.
Moving forward, countries in the region need to focus on developing strategies that will not only foster and support the positive growth of informal sector activities, but also go further to incentivise their graduation into the formal sector. The importance of capacity building initiatives in the areas of technical, financial and management skills as well as those that are centred around technology adoption as a means to increasing their productivity cannot be overlooked if this is to achieved.
Informal Economy Analyst.