How Global Capital Incentivises Informality

The distinction between the formal and informal sector is a concept that is sometimes difficult to differentiate due to the fluid nature of their interactions. The multiple definitions of the informal sector have often not been precise, especially whenever it is looked at in relation to the formal economy, and not as a distinct entity.  It is with this in mind that the authors of the research paper “Informal Sector Dynamics and its Role in the Capital Accumulation Process” interestingly point out that the central meaning and relevance of this phenomenon of informality as a sector or workforce become clear only when considered in the light of the global capital accumulation process.

A significant part of the informal sector in the contemporary world is essentially an outgrowth of the formal economy in more ways than one. The activities in the informal sector are directly linked to and often constitute an essential part of the processes of production, exchange and accumulation in the capitalist economy both at the national and, increasingly, at global levels. In certain cases, the sector consists of industries that originated from basic units of production that are cemented in simple manufacturing processes and have evolved into factory forms with informal production and labour processes. It is common knowledge that in today’s world, this sector is an essential part of the global commodity chains.

https://i2.wp.com/www.queensu.ca/innovationcentre/sites/webpublish.queensu.ca.qicwww/files/images/shutterstock_715692881_REV-950x405.jpg

(Source:http://www.queensu.ca)

What is at the core in the interaction and dynamics between the two sectors is a range of flexibilities that can be ascribed to the informal sector or processes. In the current production and distribution networks, there is an array of operations that can be observed. These informal processes are visibly notable in global commodity chains whereby important stages of production and supply are located in third world countries. Factors that are common in informal circles such as the lack of a regulatory environment, the flexibility or absence of labour contracts and the ability to stretch hours of operation at ease are adopted by formal firms when they subcontract informal firms to perform some of their production and distribution jobs. It is this flexibility and managing to keep transaction and labour costs to the minimum, which is at the core of the dynamics of small enterprises that allows them to survive and provides them the competitive edge. This advantage is made use of by large multinationals in their pursuit of global profits.

As per the document, another way in which formal firms create informality is through their restructuring processes. This is done in whereby the formal firm downsizes its labour force and thus forcing people into the informal sector as a means of survival and source of livelihood. There are two distinct processes in which informalisation of employment takes place in formal sector firms. One is to employ labour without any permanent wage or employment contract or provide any employment benefit. The other is to contract out operations that were earlier performed by employees of the firm to smaller or ‘specialised’ enterprises. A particular form of this is to contract out operations to labour contractors or suppliers, where even if particular employees are regularly working in the principal firm, they are not considered the employees of the principal firm and are therefore denied any rights, which they would have otherwise got. The suppliers of such workers are often informal sector enterprises.

It is vital for policy makers and parties that are involved in drafting strategy to have a clear understanding of the definition of the informality as a means to getting to its root causes in a way that will enhance their engagement processes with the sector. This will assist them in moving away from instances where they rely on traditional definitions of the sector that have since evolved and thus be more specific in their goals for it.

litualex@gmail.com

Informal Economy Analyst.

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Labour Exploitation

In a research article published in the Arts and Social Sciences Journal entitled Economic Informal Sector and the Perspective of Informal Workers in India, the authors explore various dynamics that characterise the informal economy. Some of these include aspects covering job security, social security, rural urban migration, child labour, and exploitation of working women. They further point out a common phenomenon that is common with the informal economy whereby the lack of reliable statistics on the size, distribution and economic contribution of the informal sector has for long been a major constraint in providing a realistic understanding of its significance as well as working conditions in the sector. This has often led to its neglect in development planning.

(Source: http://www.worldpolicy.org/sites/default/files)

Most of those engaged in informal activities are mainly the underprivileged in society and opt into the sector as of an alternative source of employment and income, in a quest to better their livelihoods. The authors go on to say that some of the reasons as to why people choose to run businesses in the informal sector vary from the lack of a basic level of education and skill sets that enable them to get jobs in the formal sector, to the prevalence of poverty in the communities in which they exist. These factors, coupled with those such as rural urban migration that is driven by the quest for better living conditions and job opportunities, are drivers for the rapid growth of informal sector businesses in third world countries. The precarious situation that most of these individuals end up being caught up in involve working conditions that leave them vulnerable to various forms of abuse and exploitation.

According to a briefing paper by the Overseas Development Institute, the informal sector has its own obstacles, particularly for those working illegally or without registration. Some of these include inadequate access to credit, bureaucratic licensing requirements and regulatory restrictions, as well as overzealous policing which entails the removal of informal vendors, demolishing kiosks, confiscating stock and denying licences. In their view, informal work is a mixed blessing depending on context. On one hand it can be seen to offer an escape route from poverty in areas where informality is the norm due to the high demand for goods and services within such a community. On the other hand, instances where informal workers are more isolated exposes them to various systematic legal obstacles. This ideology is supported by the fact that urban areas differ in their economic diversity and their ability to respond to higher concentrations of consumers.

They argue that costs are likely to be higher in cities that are experiencing economic growth, because growth entails higher monetisation of basic services and other non-food items such as housing, transport, and informal payments to maintain livelihoods. While costs of living are higher in rapidly-growing cities, there may also be more income-earning opportunities. However, it is not necessarily clear that more opportunities translate into better working conditions or remuneration for the poor. Further, the flow of people into cities can be destabilising and push urban wages down. As a result, a growing number of migrants live in the informal sector, confined to unskilled, low-paid and low-security work.

It is clear that the informal sector is grappling with the issue of the wellbeing of workers that are engaged in it. Most importantly, giving a voice to the plight of those that are engaged in the sector with a view to actively engage governments and organizations in conversations on how to best address this challenge, is a positive step forward in seeking a credible solution to the problem.

litualex@gmail.com

Informal Economy Analyst

Lessons from China’s Economic Policy

Over the years, China has managed to turn around its economy by instituting certain reforms which have seen the country’s economy grow exponentially during the last 60 years into a global economic powerhouse. Most of these were done by recalibrating how they interacted with the informal sector in their country. The reforms first took shape in the agriculture sector with the household responsibility system (HRS) replacing the people’s commune system. Under this system, individual households were instituted as the basic unit of farm operation, as opposed to a collective team of 20 to 30 households in the past. The HRS gave individual households autonomy over production and farmers were given incentives to increase output.

(Source: http://media.philstar.com/images/the-philippine-star/business )

A study carried out by the Lancaster University Management School indicates that Between 1978 and 1984, China’s average annual growth rate of agriculture was 7.7%, after the introduction of the household responsibility system. The significant improvement in agriculture helped the country to release labour from land to industry and service sectors. This labour reallocation process was necessary as China’s agriculture was characterised by an egalitarian system of distribution of cultivated land with more than 200 million rural households, each cultivating less than 0.55 hectares. With the improvement in productivity in the agricultural sector, there was no need for a large number of people to stay on land. Agricultural employment as a share of labour force fell from more than 70% in 1978 to 60% in 1990 and 35% in 2011. The release of such a large number of economically active population from land hugely helped China’s development of the labour-intensive, low-skilled manufacturing sector.

In addition to the introduction of the HRS, China successfully re-introduced marketization. In implementing agricultural reforms, China first tried a dual-track approach. Under this approach, farmers were required to deliver a portion of their output to the state and allowed to sell the rest of the output on the free-market. With the newly earned profits, farmers set up or pulled resources into town and village owned enterprises (TVEs). These are communal organizations managed by managers on a contractual basis.

Town and village owned enterprise operate outside of the Chinese government’s apparatus and were highly market-oriented. Even though they did not enjoy preferential government treatment, they were also not subject to widespread state regulation. The study further notes that between 1979 and 1991, TVEs grew at an average rate of 25.3% in comparison to that of state owned enterprises which grew at 8.4%. Though TVEs were not private firms, since they were often owned by local governments or local communes rather than solely by private owners, they cultivated an internal culture of competition in the Chinese economy which helped stimulate efficiency of the state‐owned enterprises. It is worthy to note that TVEs were the major export drivers of China’s impressive export growth. For example, in 1999, the value of TVE exports of US$94 billion accounted for 48% of China’s total exports. Much of these were labour‐intensive products involving simple production techniques.

Another aspect that accelerated China’s growth and economic success can be attributed to privatisation. The study notes that the ownership structure of private firms was not properly defined until 1988. Private firms only became an integral part of the Chinese economy in 1997 and had their legal status established in 1998. The rapid growth of the private sector began with the introduction of the policy whereby the government not only lowered entry barriers in most sectors, but also pursued a policy of “grasping the big, and letting go of the small”. This meant that State Owned Enterprises were to only be kept in “strategic sectors” whereas small and medium sized enterprises (SMEs) were either privatised or their ownership transferred from the central government to local governments.

Lastly, the study shows that China’s development in manufacturing has also benefited from inward foreign direct investment (FDI) whereby the early years of China’s history of inward FDI was particularly dominated by the Chinese diaspora. Chinese diaspora-invested firms cooperated with TVEs and other indigenous Chinese firms and introduced them to international markets as well as freed them from domestic market constraints. In this sense, the diaspora-invested firms also helped indigenous Chinese firms to exploit the country’s comparative advantage in cheap labour and to translate its comparative advantage into international competitiveness.

Kenya is a country whereby about 75% of the population rely on agriculture for employment and livelihood. Outside agriculture, a vast majority of its citizens are employed in the informal economy, accounting for 90% of the employment demographic. The route taken by China is one which the country can borrow a leaf from when looking towards ways in which it can transform and grow its economy through agriculture and manufacturing.

litualex@gmail.com

Informal Economy Analyst.

 

 

 

Supporting Economic Transformation through Informal Economy

 

Last week, the Kenya Association of Manufactures (KAM) in association with the Overseas Development Institute’s (ODI) programme, Supporting Economic Transformation (SET) launched the Ten Policy Priorities for Transforming Manufacturing and Creating Jobs in Kenya. The document is a ten-point policy plan aimed at creating 300,000 jobs and doubling manufacturing in five years. According to the document, this will be achieved through two main ways;

(Source: http://www.kam.co.ke/KAM-2016/wp-content/uploads)

  1. The formulation of effective public policies and the regulation for manufacturing competitiveness by doing the following;
  • Creating a business environment that is conducive to manufacturing investment.
  • Enforcing a fiscal regime that supports manufacturing.
  • Making land ownership more affordable and accessible.
  • Securing affordable, reliable and sustainable energy.
  • Expanding access to long-term finance for all types of manufacturing firms.
  • Creating an exports push for manufactured products.
  • Developing worker skills as well as supporting innovation for increased labour productivity.

 

  1. Efficient and effective implementation through;
  • Creating a fit-for-purpose public service.
  • Developing a coordinated value chain approach.
  • Building trust and reciprocity for effective coordination and partnerships.

There is a proposed plan to inclusively target Informal industry or cottage industries. According to the document, there are several manufacturing sub-sectors such as agro-processing, metal works, furniture, and leather and shoe making. Following earlier research that has been carried out on the informal manufacturing sector in Kenya by Deloitte and The World Bank, four sub sectors have been singled out as having the greatest potential for growth and performance. The first is the arts and crafts which consists of homemade artefacts that are a popular product for tourists and residents.

The other strong informal manufacturing sub sector is that of furniture. The furniture market in Kenya stood at approximately $496 million in sales in 2013, whereby East African economies purchase $1.2 billion worth of furniture annually. Jua kali represent more than a third of sales in Kenya ($160 million). The jua kali furniture industry exhibits strong growth and manufactures world class ethnic furniture for niche markets in areas such as Lamu.

The third is the metal works informal manufacturing sector which produces a range of products such as charcoal cooking stoves, buckets, pans, kitchen utensils, wheel barrows, watering cans, gates and grills, and small tools for low-income clients. Products such as industrial sculptures and artworks target higher-income clients. Additionally, a few informal manufacturers produce a limited number of spare parts such as silencers, auto upholstery, and rubber bushings.

The last one is the leather industry under which the informal sector accounts for 10,000 of the 14,000 workers. Kenya is the third-largest livestock holder in Africa, so leather represents a potential area for economic growth and employment. In 2017, the Ministry of Industry Trade and Cooperatives (MITC) committed a KSh 130 million revolving fund for SMEs in the leather industry to build workspaces in all of the country’s 47 counties.

The ten-point plan further points out that despite this potential, there are challenges that the informal sector faces which include access to finance, limited access to land, corruption and labour productivity. With the successful implementation of this document, the informal manufacturing sector stands to immensely benefit from the catalysis of manufacturing in Kenya.

litualex@gmail.com

Informal Economy Analyst

Analysis of Political Party Manifestos

 

With slightly over one month to the Kenyan elections, the two major political parties released their manifestos for public scrutiny. These are the documents that detail the priority areas as well as proposed plans of action for the country when they get elected into office. Despite the political rhetoric contained therein, I read through the two documents with a view of deciphering the angles that each had taken in relation to the informal economy. This article looks into two areas covered under the informal economy, picking out the most relevant proposals in both manifestos.

(Source: http://www.standardmedia.co.ke)

The ruling coalition has proposed to create and fully implement a robust Small and medium enterprises (SMEs) development and support programme which would formalise the large number of informal businesses and support their growth from micro to small to medium enterprises, and eventually into large firms. They believe that this would catalyse the creation of at least one million jobs and contribute to tax revenues. One of the major sub sectors of informal business that they are targeting is the Jua Kali. They are targeting at least 1 million entrepreneurs in the Jua Kali sector to have become established as formal small or large enterprises by the year 2022. The sector employs 11 million Kenyans, 50% of the country’s workforce.

 

Their counterpart in the opposition promises to unleash the potential of Jua Kali entrepreneurs by establishing at least one industrial park per ward for micro- and small enterprises. They also look to set up workshops where these entrepreneurs can lease machine time, a move that is aimed at giving these entrepreneurs access to machinery and equipment that they cannot individually afford. In order to help MSEs to develop globally competitive products, they plan to establish incubators that will help them break into export markets.

In as far as the agricultural sector is concerned, the opposition coalition has proposed that it will establish a Cooperative Enterprise Development Fund (CEDF) that will invest in agro-processing enterprises jointly with farmers organized as cooperatives as an equity partner. Once the agro-processing enterprise is successful, the CEDF will divest by selling shares to farmers through the cooperatives. On the other hand, the ruling coalition plans to establish a Food Acquisition Programme (FAP) to create demand and stable market prices for products from small-scale farmers who will be encouraged to form cooperatives in maize, wheat and potatoes. Under this programme, they plan to buy 50% of government food requirements from small holder farmers.

There is a myriad of other initiatives that both parties have put across in their manifestos that target micro, small and medium sized enterprises. My concern is that all of these promises look good on paper but will become a challenge when the time to implement them comes. This view is informed by the historical evidence of politicians wooing the voting class just before an election and turning their backs on them as soon as they are elected into office. All in all, the idea of investing in the informal economy is long overdue.

litualex@gmail.com

Informal Economy Analyst

 

 

 

 

 

 

 

The Role of Informality in Urbanization and Industrialization

The Economic Report on Africa 2017 was released by The United Nations Economic Commission for Africa(UNECA). This year’s report looked into ways in which the continent can harness industrialization to better structure the fast pace at which urbanization is taking place. Given that Africa is the fastest urbanization region after Asia, the report puts emphasis on the fact that only under the right policy frameworks can this momentum be leveraged so as to accelerate industrialization.

Image result for urbanization and industrialization africa

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

Some of the proposed measures point to ways in which informal businesses can be made a part of this process. One such measure was to bank on the links between informal and formal sectors, for these are mutually beneficial and dependent. Those involved in industrial land use planning should consider the needs of informal enterprises, given their importance for job absorption and the challenges they often face in finding adequate premises for work.

One option is to try to meet industrial firms’ location-specific needs through Special Economic Zones (SEZs) and industrial zones. These will bring the most benefits if they are well connected to the urban economy, including the informal sector firms that can provide low cost inputs and use linkages as a path to growth and formalization. SEZs present opportunities for co-investment by formal firms and the public sector in infrastructure and technical and vocational education and training, which can broaden participation in economic growth and provide avenues for inclusion of critical workforce groups such as women and youth. These links to markets and skilled labour are critical.

The report further states that studies suggest that informal operators benefit from clustering through the various sectors in which they operate, and that they generally have a positive impact on their formal sector counterparts. It is with this in mind that agglomeration economies should be considered in the context of locational policies related to the informal sector and a path to formalization. Agglomeration economies can benefit the informal sector particularly through proximity to suppliers and purchasers.

Also, low-tech, labour-intensive infrastructure projects accessible to SMEs are a major opportunity for urban job creation. Lower-skilled labour-intensive technologies have high potential in some public investment sectors, including roads. A good example is that of Ethiopia whereby between 2005 and 2008 through a cobblestone roads and pavement programme, more than 90,000 jobs for young people were created. This led to the establishment of 2,000 small and medium enterprises. The project included backward linkages to domestic inputs—cobblestones—and labour-intensive skills in quarrying, chiselling, transporting and paving. The programme, implemented in 140 towns and villages, built around 350 km of road.

In terms of access to finance, Sudan has taken steps to improve this for industrial firms, including SMEs. Policy efforts in 2013 simplified the regulatory framework for financial access and new bank branches, and the central bank made preparations for mobile banking. These reforms targeted small enterprises, which make up 93 per cent of manufacturing firms, by requiring that commercial banks set aside 12 per cent of resources for microfinance. It is with this spirit that African countries must leverage the force of urbanization to drive and enable industrial development for a prosperous and equitable future.

litualex@gmail.com

Informal Economy Analyst