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.

(Image source: https://www.redpepper.org.uk)

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.

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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%.

(Image source: https://wun.ac.uk)

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.

Value Chain Development in the Informal Sector

A value chain is defined as the full range of activities that are required to bring a product or service from conception, through the intermediary phases of production and eventual delivery to final consumers. Value chains can be local, national or global, linking rural producers with traders and consumers worldwide. Their role in determining the quality and cost of a product and service cannot be overlooked for it is through them that effective competitiveness can be achieved.

(Source: https://images.theconversation.com)

It is hence important to understand the role value chains play in the route to market trajectory of any service or product. Thus, a value chain analysis at both firm and sector level is key to developing strategies aimed at improving the competitiveness of a product or service. At the firm level, this sort of analysis would be important for formal businesses to understand how much informality is in their value chain, as this will help them pin point areas through which they can fine tune the process in a bid to achieve quality standards in a cost-effective manner. At a sectoral level, it would provide information as to where informality sits in each sector and thus give a better understanding of which sectors have the densest or least levels of informality in their value chains, with the view to increasing their overall efficiency and competitiveness.

Considering that sustained poverty coupled with subpar economic growth has continued to inhibit the growth in the demand of locally manufactured goods, relatively cheaper internationally manufactured goods continue to gain the local market share. In this sense, locally manufactured goods are limited in their competitiveness. For example, value addition strategies that target micro and small businesses would greatly improve the quality of locally produced goods. In its strategy on decent work in the informal economy, the International Labor Organization (ILO) proposes that one way of improving the sustainability of informal enterprises may be to link them in cooperatives where jointly owned input supply, credit and marketing services can be organised without compromising the autonomy of the individual entrepreneur.

In markets that are dominated by very powerful players, small producers tend to be highly disadvantaged by being arm twisted into accepting lower income for their produce. A good example is in the agricultural sector where small-scale farmers have little control of market dynamics, hence cannot reap the full financial benefits due to issues such as the lack of proper storage facilities, market information and access to inputs. This leads to post-harvest wastage and losses brought about by hurriedly selling their produce at lower prices than if they had stored it for sale when demand is higher. It is with such issues in mind that the ILO stresses the importance of the improvement of value chain competitiveness, as it is seen as a powerful approach for generating growth and reducing poverty in developing countries, where roughly 75 percent of the population live in rural areas.

In a quest to integrate micro and small-scale enterprises into formal value chains, understanding their level of involvement in these is key to formulating policies and implementing strategies that contribute to the overall efficiency and competitiveness of locally manufactured products. This sort of analysis will benefit all the players along the value chain.

litualex@gmail.com

Informal Economy Analyst

Integrating the Informal Sector into Government Policy

Given the most recent statistics on the Kenyan economy which indicate that the informal economy accounts for the lion’s share of job creation outside agriculture, it is important to gain a deeper understanding of the sector dynamics. As per the Economic Survey 2017 released by the Kenya National Bureau of Statistics, the economy created a total of 832.9 thousand new jobs. Of these, 85.6 thousand were in the formal sector while 747.3 thousand were in the informal sector. The share of new jobs created in the informal sector represents a 5.9 percent growth from 83 percent during the previous year, to 89.7 percent or 13.3 million people.

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The sector has sub sectors that fall into three main sub categories, namely agriculture, services and manufacturing. In line with the government’s big four agenda, it is imperative to align and in cooperate the informal economy into this strategy in a way that enables businesses in the sector to reap the benefits of the economic empowerment program. The step taken to merging the Youth, Women and Uwezo Funds into the Biashara Fund is a plausible move in that, if properly managed it will enhance the coordination of activities aimed at supporting micro and small enterprises.

In as far as the manufacturing agenda is concerned, the jua kali sector which employs wood and metal work artisans, should be at the forefront of target initiatives. Efforts to ensure that issues such as standardisation of their products and access to wider markets should be addressed. Also, improving their working spaces and conditions will go a long way in making sure that they can attract more clientele to their premises, as well as minimise work related hazards. Implementing skills upgrading programs are one way to deal with the low levels of productivity in this sector. Further, both county and national government need to work through the various micro and small enterprise associations to sub contract them for projects by prioritising them in tendering processes.

The agriculture sector is not only important for the provision inputs in the form of raw materials for various industries, but is also the cornerstone that would ensure that the goal of achieving food security is achieved. For any meaningful progress to be attained, interventions for this sector should be channelled through existing cooperatives and Saccos to target the provision of farm inputs such as seeds and fertilizers, extension and training services, marketing, including processing, consumer services such as local shops, credit and sharing of farm machinery.

The importance of working through these bodies is that since most of them comprise membership of small scale farmers, the government will reach this crucial segment of the Kenyan populace in a way that enables them to improve their livelihoods. These cooperatives are a vital go between in that they increase the negotiating power with market intermediaries, improve post-harvest services, provide marketing logistics and information, facilitate investment in shared structures such as processing plants, bulk purchase of farm inputs and most importantly, facilitate micro-credit schemes. They are also an important link in growing the demand and supply value chain.

The emerging commonality in the approach that should be taken in addressing the engagement of the informal sector by the different levels of government is that of working through their associations. For effective implementation of the various programs to occur, pre-qualification processes would have to be carried out. These bodies ought to be readied by being taken through capacity building initiatives in the areas of financial skills such as book keeping practices, technical skills upgrading as well as sales and marketing skills. By propping them up in this manner, they will not only be better placed to qualify for and absorb the funds that are channelled in their direction, but also exponentially develop the individual business entities of their members.

litualex@gmail.com

Informal Economy Analyst

 

 

Jobless Growth in Africa

Despite the fact that East Africa remains the fastest-growing sub-region in Africa with an estimated growth of 5.6 percent in 2017, up from 4.9 percent in 2016, it still grapples with low job growth rates. The African Economic Outlook 2018 by the African Development Bank Group (AFDB) further notes that it is imperative for sustained economic growth to create jobs which positively impact poverty reduction and lead to more inclusive growth.

(Source: https://www.afdb.org)

According to the report, the combination of high economic growth and low job creation has given rise to the claim that Africa is experiencing jobless growth. The findings of the document point to the fact that in the last decade, faster-growing countries in Africa actually generated fewer jobs than countries that grew more slowly. The slow job growth has mainly affected two demographic groups; women and youth aged between 15 to 24 years. Estimates of African population data indicate that it had 226 million youth in 2015, a figure projected to increase 42 percent, to 321 million by 2030. Its labour force is also projected to rise from 620 million in 2013 to nearly 2 billion in 2063.

In an effort to sustainably reduce poverty, economies must create more productive jobs, which are better remunerated and better-quality jobs. For this to happen, AFDB recommends that countries engage in structural transformation, which is a process whereby capital and labour is shifted away from low-productivity sectors toward higher-productivity sectors.

Structural transformation has encountered slow implementation due to a couple of reasons. First, the agricultural sector remains the dominant source of jobs in Africa, accounting for about 51 percent of employment in these countries, most of it in subsistence agriculture. The document highlights that almost 84 percent of Africa’s poverty is a result of employment in agriculture and services sectors. Second, the shift to manufacturing has been focused toward a comparatively small sector, which has the third-lowest relative productivity level after agriculture and services. Also, the labour resources that left agriculture have shifted toward wholesale and retail trade, much of which is characterized by low-productive informal activities.

As per findings of the report, the informal sector remains a key source of employment in most African countries, accounting for approximately 70 percent of jobs in Sub Saharan Africa and 62 percent in North Africa, with 93 percent of all job growth in Africa in the 1990s being accredited to the informal sector. The last factor that has slowed down the implementation of structural transformation is the fact that the public sector has generally been the main source of higher-paying formal sector jobs in many African countries. Fiscal constraints and demographic change have combined to limit the future scope of the public sector as a driver of formal sector employment growth.

One key policy recommendation that was proposed on the way forward as a priority for African governments is to encourage and embrace a shift toward labour-absorbing growth paths. In this sense, they should put in place programs and policies aimed at modernizing the agricultural sector, which employs most of the population and is typically the main step toward industrialization. A second priority is to invest in human capital, particularly in the entrepreneurial skills of youth, in an effort to facilitate the transition to higher-productivity modern sectors.

In as far as reversing the fortunes of the manufacturing sector, it is proposed that emphasis should be placed on light manufacturing, which is typically considered key to job creation in Africa. Doing so requires developing export capacity, given the continents small domestic markets. The interrelated nature of agriculture and manufacturing is crucial to achieving job creation as both are labour intensive. In the highly heterogeneous service sector, the way forward is to develop modern services while improving the productivity of informal activities.

Seeing as informality is a key component of African labour markets in that it accounts for an estimated 50–80 percent of GDP, 60–80 percent of employment, and up to 90 percent of new jobs on a continent where more than 60 percent of the population performs low-paid informal jobs, policy makers should avoid burying their heads in the sand and recognize the diversity and importance of the sector as a profitable activity that may contribute to economic development and growth.

litualex@gmail.com

Informal Economy Analyst.

The Kenyan Government’s Priorities for the Informal Sector

It is a welcome development to see that the prolonged electioneering period has come to an end, for it was characterised by the slow down and even stagnation of certain businesses that has had a negative effect to the economy. As the new administration comes into office, it is interesting to note that it has prioritised aspects of the informal sector in its agenda. These are articulated in their campaign manifesto, some of which were prioritised by the president during his inauguration speech.

(Source: https://i0.wp.com/www.dhahabu.co.ke)

In their manifesto, the current administration aimed to create and fully implement a robust Small and Medium sized Enterprises (SME) development and support programme which would formalise the large number of informal businesses and support their growth from micro to small to medium sized enterprises, and eventually into large firms. By doing so, they aim at catalysing the creation of at least one million jobs and consequently contributing to tax revenues.

The two main demographic groups that characterise the informal sector are women and youth. Between 2013 and 2016, 12,000 Micro, Small and Medium sized Enterprises (MSMEs) have received training in entrepreneurship and management. The manifesto states that a total of Ksh25bn has been transferred to MSMEs through Youth, Uwezo and Women enterprise funds providing support to close to 15 million people who have been enabled to set up businesses. The plan to establish the Biashara Bank by merging the Micro and Small Enterprises Authority, the Youth Enterprises Development Fund, the Women Enterprises Fund and the Uwezo Fund as a means to coordinating the delivery of affordable financing and support for business development is a move that will enhance the focus on the lack of capital as an impediment to the establishment, growth and development of informal businesses. Notably, through the Women Enterprise Fund, women have demonstrated that they are a highly bankable and reliable borrower with a repayment rate of 92%.

Further, providing low interests loans to youth owned enterprises to enable them to grow their businesses has seen an increase from Ksh4.9bn accessed by 407,793 young people in 2006, to Ksh11.8bn disbursed to 893,438 young people in 2013 under the Youth Enterprise Development Fund. As alluded to above, coordinated efforts towards targeting the relevant demographic groups will fine tune the government’s focus. This should include policies and systems that track the growth and performance of businesses that receive funding with a view of informing the direction to be taken during capacity building initiatives.

The manifesto points out the fact that about 80% of the Kenyan population relies on agriculture for employment and livelihood, and that the sector contributes approximately 27% to GDP, about 40% of government revenue and more than 60% of the total export revenue for the country. The plan to establish the Food Acquisition Programme (FAP) that is aimed at creating market demand and stabilising prices for products from small-scale farmers. Under this programme, the government will buy 50% of it’s food requirements from small holder farmers. The fact that Kenya is a major agricultural exporter and that only 16% of all exported agricultural output is processed, the move by the President to target the creation of 1,000 Small and Medium sized Enterprises in agro-processing is a welcome move.

Efforts to construct the Kenya Leather Park in Machakos for over 7,000 SMEs, the setting up of the Leather Cluster Common Manufacturing Facility in Kariokor as well as increasing the number of Export Processing Zones (EPZs) during their previous term is a step in the right direction. However, to ensure sustained growth of these industries will require that Kenya fine tunes its approach towards agriculture as a base requirement for the setting up of light manufacturing. Key to this is setting up collection points for hides at abattoirs, making beef farmers and pastoralists aware of the right cows to breed for higher quality hides, increasing the productivity per acre for agricultural produce as well as setting up sufficient storage facilities that minimise post-harvest wastage.

litualex@gmail.com

Informal Economy Analyst.

 

 

Informality – Africa and Latin America

In the last article, I gave an overview of the informal sector in both Latin America and Africa while looking at the general features that characterise them. In this piece, I will delve into the similarities and differences in their operation while putting into perspective the opportunities and challenges that they face in line with the environment in which they operate. It is interesting to note that data on this sector of the economy is scanty and shallow in most cases. This signals to the side-lining of this area of the economy despite the magnitude of its existence. The fact is that there needs to be more investment into ventures that will provide a strong foundation for urgently needed interventions in the sector.

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In as far as opportunities are concerned, the informal sector provides employment for the millions who miss out on formal employment opportunities. In Kenya, it contributes 90% of the employment demographic outside agriculture. In this sense, it acts as a social safety net by providing a source of income to a majority of households. The sector also presents a crucial access to market for large formal firms due to its proximity to a wider population network in both rural and urban markets.

One of the biggest challenges that arise from informality is the low levels of productivity in firms that operate in the sector. An analysis conducted by the International Monetary Fund (IMF) shows that on average, the productivity of informal firms is only one fifth to one quarter that of formal firms in Sub-Saharan Africa. Some common factors that conceive this phenomenon include difficulty in accessing finance, as well as the use of manual techniques in their operations. The latter presents a challenge in the form of producing non-standardised goods and reducing the amount of output while the former makes it difficult for them to scale their operations. Other challenges range from poor access to markets, insufficient entrepreneurial to regulatory barriers.

It is interesting to note that the IMF analysis puts the average size of the informal economy in Sub Saharan Africa between 2010 and 2014 at 38 % of Gross Domestic Product (GDP), only surpassed by Latin America’s, which stands at 40% of GDP. Between 1991 and 1999, the average size of the same was 45% for Sub Saharan Africa and 43% for Latin America. The fact that there has been a reduction in the size of informal economies in the two regions may indicate that there have been some efforts by policy makers to pay attention to the some of the challenges that informal businesses have to contend with. This can be seen by the increasing number of initiatives that target this sector of the economy by successive governments.

One of the demographic groups that form a large part of informal sector dynamics is the youth. It is with this in mind that the Latin American Economic Outlook 2017 focuses on youth, skills and entrepreneurship. The report stresses the importance of skills and entrepreneurship from the perspective of these being used as tools to empower the youth in the region to develop and engage in knowledge based economic activities in a way that boosts the region’s productivity. SMEs in the region account for 80% of employment and more than 90% of firms. However, formal firms contribute 70% of GDP in the region, which highlights the issue of productivity in the informal sector, a phenomenon that is not exclusive to the region.

(Source: http://www.latameconomy.org)

One of the key recommendations that the report proposes to policy makers is that it asks them to go a step further by providing the necessary support tools to implement theoretic policies that revolve around financing, services and capacity building, market creation, regulatory framework and the diffusion of an entrepreneurial culture. It notably articulates the importance of the private sector in supporting start-ups by stressing the importance of strengthening the link of young entrepreneurs with business networks by supporting mentoring programs.

What comes out clearly is that the challenges that businesses in the informal sector are similar in these two regions of the world, given the environment in which they operate. Considering the magnitude of the sector in these two regions, interventions that are aimed at harnessing its potential should be embraced and seen through the lenses of it being a viable driver of economic growth.

litualex@gmail.com

Informal Economy Analyst