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.


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 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.

Informal Economy Analyst


The Politics of the Informal Economy

The informal economy has gradually been growing in size over the past few decades. The sector is a significant part of economies in developing nations, especially those in Latin America and Sub-Saharan Africa. In some parts of these regions, it accounts for up to 90% of the employment demographic and contributes up to 40% of GDP in others. While these statistics may look appealing at face value, a deeper understanding of the dynamics within the sector present a different picture.


At face value, the statistics on employment can easily be misconstrued as a representation of positive social development. In reality, a majority of those that are engaged in informal businesses venture into it due to the lack of options to earn a living. A commonality in the regions where the sector is a prevalent feature of national socio-economic parameters, issues such as a shrinking availability of formal employment opportunities as well as the high levels of poverty and inequality are prevalent.

Some factors that keep those that are engaged in the sector trapped in informality include poor access to finance that would facilitate the scaling of their businesses, the application of low level skills without upgrading these over time which affects their productivity and the lack of properly structured business records. A big percentage of business owners in the sector remain caged in poverty cycles which inhibit their graduation into prosperity. In this ecosystem, the status quo upholds a scenario whereby cheap raw materials and human resource are available for established formal enterprise.

It is interesting to note that myths about the informal economy are based on issues such as governance and taxation. One such misconception is that informal businesses are plagued by a lack of regulation. Most informal businesses operate through institutions whose basis of operation revolves around interest groups around which they tend to organise. In a policy brief paper, the Netherlands Institute of International Relations clarifies this by pointing out that the informal economy can be understood as an alternative mode of economic governance outside the state. The term “hybrid governance” is used to provide a more accurate depiction of actual economic governance in the sector, whereby the state has no exclusive regulatory authority over economic activities and non-state institutional arrangements provide a form of economic order.

Also, the myth about taxation of informal enterprises is that they do not pay taxes. The institute further acknowledges that cases of informal taxation of small traders exist whereby they pay a ‘special fee’ in return for a lower tax or protection from harassment by state agents such as customs officials or police officers. In Kenya, this scenario presents itself in cases where small traders pay cess fees to county governments under which they operate.

All in all, the informal sector is one that is seldom understood and often misrepresented. This can be attributed to its neglect by the governments under which it operates, mainly due to the fact that a majority of those that are engaged in the sector mostly consist of the financially disempowered members of the society. It is imperative that the interventions aimed at supporting this crucial sector of the economy are streamlined into public policy. Implementation of such strategy will provide a solid foundation upon which sustainable economic empowerment and financial inclusion can be achieved.

Informal Economy Analyst

The Kenyan Government’s Priorities for the Informal Sector

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


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

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

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

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

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

Informal Economy Analyst.



Formalising the Informal Sector

The informal sector consists of businesses whose operation falls outside of official government parameters for a number of reasons. This puts these entities at a disadvantage as they are often excluded from the benefits that come with formalisation. In this sense, they do not have access to vital support systems that cushion them from the shocks encountered while running a business. Efforts geared towards tackling informality have often been focused on looking for ways through which these businesses can be formalised. There are issues that have to be considered for this to be effectively achieved. Peruvian economist Hernando de Soto is of the view that many people join the informal economy because the red tape alongside the bribes that go with it, virtually make it impossible for them to operate legally.


One disadvantage of having a large informal sector is that it deprives governments of crucial revenue for most businesses in this portion of the economy do not pay taxes. Anzetse Were, a Kenyan development economist, is of the view that there are a couple of barriers that hinder the transition into formality which fall into two categories. The first is the expense of transition whereby business registration and licencing processes are laborious processes. The other is the fact that formality is linked to expensive compliance requirements such as complying to inspection standards, paying high wages and taxation. A clear case has yet to be made to informal businesses to convince them of the benefits they would accrue from formalising and entering the tax net.

In the quest to formalise informal businesses, there are factors that should be taken into consideration as well as a process that can be followed that will ensure sustainable business entities are developed. Some of the systems that need to be put in place revolve around strengthening operational capacity, productivity and profitability, legal support and lastly financing and mentoring.

In as far as strengthening the operational capacity of informal businesses goes, interventions should focus on training that is aimed at streamlining internal operations such as maintaining and updating business records, upgrading of skills and developing strategic business plans that demonstrate clear expansion strategies. Proper business records place these businesses in a better negotiation space when approaching financial institutions for collateral to expand their operations. Skills upgrading will enable informal enterprises to enhance the quality of their products and services by ensuring that products are uniform and standardised while the services are up to date and conform to industry expectations.

Working on improving the productivity and profitability component entails looking at factors such as access to skilled labour as well as a focus on marketing. Informal enterprises find it hard to attract and maintain high skilled labour due to their financial position, which negatively impacts their productivity. This is not the case for larger formal enterprises for they are better financially placed to attract this resource and can hence fully exploit economies of scale, thus enhancing their profitability.

The issues around legal support involve matters to do with conformity to labour laws and taxation rules in accordance with the law. Informal businesses need professional support when configuring their internal operational systems. They require guidance in this area so as to ensure that they fully understand labour law and taxation requirements. This will equip them with the information they need when interacting with the authorities that implement these laws, thus reducing incidences where they are extorted due to ignorance.

Last but not least is the component of financing and mentoring. Most informal businesses find it challenging to access funds to upscale their operations. Most financial institutions turn them away due to their high-risk nature. The most suitable approach to be used when thinking of financing these businesses should consider offering affordable and patient finance models. This can be in the form of interest free loans, concessional loans and grants. It is key to couple such interventions with mentoring programs with formal businesses in a process that equips the informal enterprises with the necessary experience and expertise.

It is vital to ensure that the aforementioned basic components are taken into consideration by policy makers when they consider employing interventions that are aimed at supporting informal businesses in a way that enables them to formalise. There is much more that can be done to ease this process which includes offering incentives to encourage formalisation such as offering introductory or subsidised tax rates for newly registered businesses. These will however need to be thoroughly thought through to minimise loopholes that can be taken advantage of by scrupulous businesses.

Informal Economy Analyst  

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.


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.

Informal Economy Analyst

Informality – Africa and Latin America

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

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.


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.

Informal Economy Analyst


Economic Inclusion in Africa and Latin America

Global development is an aspect that is at the centre of programs that are aimed at improving the quality of life of people around the world. Africa and Latin America are home to most of the world’s developing and third world economies where poverty is rife. In this sense, they are constricted in their growth by socio-economic dynamics that revolve around health, education, income and occupation among other factors. A majority of the societies that comprise the populations of these nations earn a living through the informal economy.


Hernando de Soto is a Peruvian economist who has for a long time been a champion of the informal economy. He has authored books on how governments should best interact with this crucial sector of the economy with the aim of harnessing its power and formalising their operations, with special reference to Latin American economies. In a review of his book ‘The Other Path: The Invisible Revolution In The Third World’, published in the New York Times, de Soto argues that Latin Americans need to look as much at their own societies as to the outside world for the causes of their poverty and insists that they are caught up in policy regulations that deliberately inhibit innovation and initiative.

He proposes that the way out of the situation lies in the region’s informal sector. Backed by research that he conducted in urban areas of Peru, he concludes that despite decades of effort to stamp it out, the informal sector is the most dynamic part of the informal economy for it accounted for more than half of the country’s production. In other countries in the region such as Argentina, Mexico and Columbia, he said the figure is at least one third of production.

The situation in Africa is not far from that in Latin America in as far as the size and dynamics of the informal economy. Estimates from the International Labour Organization put the average size of this sector in Sub-Saharan Africa as a percentage of gross domestic product at 41%. In Kenya, this sector contributes 35% of GDP and accounts for 89.7% of employment outside agriculture. Over the past decade, there have been interventions by governments in the region to address issues that the sector is grappling with such as access to finance and upskilling.

The establishment of programs such as the Women Enterprise Fund and the Uwezo Fund in Kenya were set up to target women and youth, who form the bulk of informal business operators in the country. Such interventions need to be backed by policy amendments that facilitate the business environment in which the informal sector operates in a way that allows them to grow in the long term.

By releasing the creativity and energies of millions of would-be entrepreneurs, Mr. de Soto believes that national economies in Latin America can be strengthened and the region can enjoy a spurt of growth. The same can be said for Africa. Entrepreneurs, he concludes, would join the mainstream economy, thereby improving their material status and gaining new opportunities, were they not prevented from doing so by a legal system designed to thwart them.

Informal Economy Analyst