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.

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 

 

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.

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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

The link between counterfeiting and the Informal Economy

Trade in counterfeit products is a thriving business in areas with large informal economies for consumers are presented with products at substantially lower price points than the original products. The issue of aspirational satisfaction is another major reason why a good number of clients in informal economies opt to purchase counterfeit and pirated products. Also, most of the customers of these products in informal economies are usually faced with substantial budgetary constraints. Interestingly, the hazards that are associated with such products rarely feature on the minds of these customers. While looking at the issue of counterfeiting and piracy, clients that purchase these products either do so knowing that the products are counterfeit or are oblivious to the fact that the products are fake.

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It is important to note that counterfeiting and piracy steals market share from legitimate businesses and undermine innovation, which usually negatively affects economic growth. Criminal networks and organised crime thrive via counterfeiting and piracy activities. It is not surprising that such groups target informal markets as a means to distribute their products, given that these offer them higher profit margins. Also, given the unregulated structure of such markets, they encounter a lower risk of detection. Another factor that makes these markets attractive is their large nature, which offers manufacturers of counterfeit products a huge market in which they can trade, given the intricate distribution networks that exist therein.

A report by the Organization for Economic Cooperation and Development (OECD) that delves into the economic impact of counterfeits and piracy raises some of the key concerns in terms of the effects that these products have and classifies these into different categories. I would like to concentrate on some of the socioeconomic effects, with a specific focus on criminal activities and employment.

In as far as criminal activities are concerned, the report makes the point that counterfeiting and piracy transfer economic rents to parties which are often engaged in a variety of illegal activities, including tax evasion and drug trafficking. It can be assumed that a portion of the rents is eventually used to sustain further criminal activity, in a corrupt and organised manner. While I tend to agree with this point of view, it is important to add that informal markets have for long been driven by a sense of micro entrepreneurship that has birthed innovative ideas and products due to the cut-throat environment under which they operate, with the view of trying to remain afloat. Seeing as most businesses in the sector operate in areas that are intricately intertwined with poverty, the quest to make a quick buck will push most of them to disregard intellectual property rights and opt to sell products that are in demand.

Counterfeiting and piracy affect employment by shifting jobs from rights holders to infringing parties, which is where a large part of the informal economy comes into play. The shift has implications for the welfare of employees as working conditions in the sectors where these activities occur are often far poorer than those prevailing in the recognised firms that usually offer their employees better terms of employment and adhere to health and safety standards. Although OECD raises a fair point in this sense, it is of vital to take into consideration the fact that unemployment is a scourge that is bedevilling developing nations. The shrinking availability of formal employment opportunities leaves even highly qualified graduates with little option but to venture into informal business that are a huge driver for pirated products due to their higher unit profitability.

While trying to unpack the issues that arise from counterfeiting and piracy, it is crucial to unpack these by looking at both sides of the equation. Understanding the drivers of counterfeiting from an informal sector perspective is key to finding viable solutions to this vice. For example, companies that manufacture cosmetic products can produce smaller package units that are targeted at informal markets. This would enable them to tap into the consumer demographic in such economies. This strategy has been successfully implemented by some multinational companies that manufacture household consumables. Seeing informal markets as part of the solution instead of the problem will immensely contribute to the strategy aimed at combating counterfeiting and piracy.

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