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.

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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.

Informal Economy Analyst


How to foster links between the Formal and Informal Economy

In a research paper published by the Kiel Institute for the World Economy (IFW) , the largest part of employment in Sub-Saharan Africa (SSA) is generated by informal enterprises. In Kenya, they account for 89.7% of the employment demographic. These enterprises often lack the financial means or the managerial and technological skills required to expand their activities. The paper goes on to point out that one way of overcoming these constraints is to establish links with the formal sector.

From a business perspective, linkages are channels through which enterprises influence each other’s performance in a relationship that ensures that they maximise benefits and minimise risks. The two major types are backward and forward linkages. The Business Dictionary defines backward linkages as channels through which information, materials and money flow between a company and its suppliers which creates a network of economic interdependence. Forward linkages on the other hand are the distribution chains that connect the producer or supplier with the customers.


IFW identified a couple of factors that encourage the formation of formal linkages. The first is that of primary production factors (capital stocks, employees), infrastructure (electricity, telephone), and access to credit. The expectation is that enterprises with higher endowments of the above are in a better position to establish formal linkages. Also, the experience as measured by the age of the enterprise is another factor. The expectation is that it takes time to build up business relationships hence enterprises that have been in business for longer periods are in a stronger position to form and exploit these linkages.

Another factor that influences the formation of linkages is that of the characteristics of the owner/manager of the enterprise (age, schooling). It points out that older and more educated owners are more likely to establish formal linkages. Being a member of a professional association also enhances the establishment of linkages. Contact with associations facilitates networking and thereby raises the likelihood of formal business relationships. This is fortified by the fact that these associations provide avenues through which businesses can share ideas on best work practices. They also provide an avenue through which the pooling of resources is encouraged, an aspect that strengthens their negotiating power.

The informal sector, when sufficiently supported, can gain a lot by pursuing this model of establishing linkages with formal businesses. The paper further suggests that formal backward linkages exert a positive influence on the productivity of enterprises in the informal sector. A symbiotic relationship of this fashion would be beneficial to both sides of the coin.

In addition, if formal enterprises are not able to procure goods from an independent supplier and lack the physical or human capital to produce the goods themselves, they will be restricted in their ability to introduce innovations to their production. More generally, it can be assumed that linkages facilitate the dispersion of technical innovation. 

Lastly, through the establishment of linkages with informal businesses, formal enterprises can take advantage of the markets that informal businesses have access to as a distribution channel for their products.

Informal Economy Analyst



Economic Survey 2017

The Kenya National Bureau of Statistics (KNBS) released the Economic Survey 2017 which presents an analysis of the key sectors in the Kenyan economy. In relation to the informal economy, the survey only focused on the employment angle of the sector. The rest of data on the informal sector was extracted from the MSME 2016 Survey. Getting comprehensive up to date data on the informal economy is still a big challenge.


The 2017 survey 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 per cent growth from 83 per cent to 89.7 per cent or 13.3 million people. Wholesale and retail trade, hotels and restaurants industries continued to absorb the highest number of employees, accounting for 59.7 per cent of total employment, while the manufacturing industry had a share of 20.4 per cent in informal sector employment.

A continual growth of the informal sector can be attributed to factors such as the shrinking availability of formal employment opportunities as well as the resilience of the Kenyan citizens. Informal sector growth in the country is however a problem due to the fact that most jobs in the sector are of substandard quality. This is because most are characterised by low wages, no social benefits as well as poor working conditions such as the lack of protective gear in most labour intensive businesses and operating in areas with insufficient social amenities such as access to water and toilets.

There were a number of statistics on the informal sector that were not highlighted such as an updated position on the key sub sectors. It would be useful to have information on the number of businesses that operate in the sector, as well as the overall contribution made to the Gross Domestic Product (GDP). This will paint a clearer picture of the sector in a way that can enable policy makers to adequately formulate strategies that would be beneficial in enhancing qualitative growth of this crucial component of the economy.

One of the suggestions on how this can be done is by starting out with a pilot project in one of the counties with a vibrant informal economy whereby data collection focuses beyond sifting through the records at county offices. This will allow for the concentration of efforts towards the conducting of a deeper statistical analysis of each of the sub sectors. Once this has been achieved, it can then be used as a benchmark for conducting a similar program countrywide. The gathered data would provide a clearer way forward when it comes to making informed decisions on how to channel the efforts towards implementing a sustainable plan that deals with the informal sector.

Informal Economy Analyst