Comparative Analysis of Informal Economy in Nigeria and Kenya

The Informal Sector in Nigeria and its Impact on Development is a book by Stephanie Itimi which is based on research on the informal sector in Nigeria. It focuses on three key areas namely employment, gender equality and tax evasion. Employment is looked at from the angle of the effect that the informal sector has on job creation. Gender equality merges with employment and is looked into by examining the role that the latter plays in empowering women financially. The author also provides an analysis of the complex relationship between the informal sector and the principle of tax evasion. This article aims at providing a comparative analysis of the informal sector in Nigeria and Kenya, based on the findings of the book, as well as those from research conducted on the Kenyan informal sector.

(Source: https://images-eu.ssl-images-amazon.com)

In Nigeria, the informal sector accounts an estimate of 70% of the total industrial employment. The country has the largest informal sector on the continent, which is enhanced by its population size as well as high levels of poverty. The Federal Office of Statistics (FOS) states that the informal sector creates 25,000 to 35,000 jobs each year. However, although this is highlights the job creation role of the informal sector, the author argues that with a country of 153.9 million people, the impact of the informal sector on unemployment is quite insignificant.

The Kenya Economic Survey 2017 indicates that the total number of new jobs created in the economy was 832.9 thousand. Of these, 85.6 thousand were in the formal sector while 747.3 thousand were created in the informal sector. The share of new jobs created in the informal economy represents a 5.9% growth from 83% recorded the previous year to 89.7%, or 13.3 million people. Nigeria outweighs Kenya’s working population by 66.33 million, however the significant gap is not reflected in the differences in the number of people in the informal sector between Nigeria and Kenya. This is due to Kenya having 89.7% of its working population in the informal sector, while Nigeria has only 34.6% of its working population in the informal sector.

In her book, Stephanie points out that the percentage of women in the informal sector of any economy is high, especially in developing and transition economies by referencing an ILO report which found that 46% of the informal sector in urban Nigeria was dominated by women. She states that the informal sector is seen as a major source of employment for women due to its suitability to their needs. The Micro Small and Medium Sized Enterprises Report 2016, released by the Kenya national Bureau of Statistics (KNBS), indicates that 32.2% of licenced establishments were owned by women, while 60.7% of unlicenced establishments were also owned by women. According to Bitange Ndemo, an associate professor at the University of Nairobi, these statistics mirror a global trend whereby women are over represented in the informal economy; a factor that is largely driven by survival, rather than the exploitation of an entrepreneurial opportunity. In terms of financing informal business, he argues that the problem faced is more of the cost of finance rather than it’s access.

On tax evasion as regards informality in Nigeria, the author notes that research has shown that there is a positive correlation between a rise in taxation and a rise in tax evasion, concluding it as a motivational factor for people migrating from the formal to the informal sector. However, factors such as an increase in tax evasion punishments such as heavy fines and prison sentences reduced the likelihood of people participating in the informal sector. Informal Sector and Taxation in Kenya is a publication by the Institute of Economic Affairs (IEA) that stresses the significance role that the informal sector can play in the quest to expand the tax base, noting that the intention of bringing the informal sector into the tax net is to facilitate the transition of these businesses to the formal sector and reduce barriers for all businesses. The paper shows that by extending the tax net to the informal sector, for example in the year 2008, the Kenyan government could have increased the tax base by approximately 7.66 percentage points, translating to revenue worth Kshs.79.3 billion.

In conclusion, as is the case in as far as data on the informal sector is concerned, the author indicates that one of the biggest impediments encountered during her research is its limitation which involved the omission of data in some years and unavailability of up to date research. To this end, she proposes that primary research should be conducted in to have a more up to date and realistic perspective on the topic. The part the informal sector plays in enhancing gender equality is restricted on just income, as female participants are able to easily obtain employment in the informal sector and adapt their job rule to their social and culture gender obligations. Also, government agencies should move from harsh approaches such as destroying informal market areas and increasing tax evasion punishments to more liberal approaches that empowers the activities of the informal sector through the provision of a conducive environment and inclusive policies which enhances productivity within the sector and enables taxation.

litualex@gmail.com

Informal Economy Analyst

 

 

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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.

(Source: https://pbs.twimg.com)
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

 

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.

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(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.

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