An Overview of the Informal Sector

The informal economy is characterised as micro and small businesses whose main reason for being established is that they offer an escape route from the tough economic conditions under which the entrepreneurs live. During the past decade, the sector’s growth has mainly been propelled by the shrinking availability of formal employment opportunities. This limited access to formal employment causes most of them to venture into alternative forms of self-employment as a means to making ends meet. As a result, there has been a change in the way people perceive the informal as being traditionally one that was the preserve of those who had attained a basic level of education. There has been a gradual shift in its perception whereby it was fondly referred to as the ‘Jua Kali’ sector, towards one which presents itself as an option for those locked out of formal employment opportunities.

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The Micro Small and Medium sized Enterprises (MSME) Survey 2016, a report released by the Kenya National Bureau of Statistics established that there were about 1.56 million licensed MSMEs and 5.85 million unlicensed businesses. The findings of the survey also show that total number of persons engaged in the sector was approximately 14.9 million Kenyans. Further, the Kenya Economic Survey 2017 indicates that the 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 in the informal sector. The share of jobs in the informal sector represents a 5.9 percent growth from 83 percent in the previous year to 89.7 percent, or 13.3 million people. The problem is that employment in the informal sector is characterised by numerous low quality jobs.

Some of the challenges that informal businesses face include low capacity in as far as financial and technical skills are concerned. This makes it difficult for them to access financial collateral from financing institutions and produce materials that are not standardised. Poor and substandard physical working environments as well as inadequate protective gear means that they are less advantaged when it comes to attracting customers to their establishments and are exposed to health hazards. Limited access to market opportunities is another hurdle that those engaged in informal businesses have to contend with.

The Rockerfeller Foundation puts the number of informal workers who live in extreme poverty around the world at 700 million people, contributing to their vulnerability to poor health. Most informal workers have few resources, which makes accessing health care a challenge as it requires leaving work, which reduces their income and adds to health care expenses. As alluded to above, some of the common problems that Informal workers face include poor working conditions which puts them at a high risk of getting injuries. Most employees in informal establishments have no sick time which accentuates their job insecurity, and a majority of them do not have health or social protection.

Another important element of the informal economy is small scale farming. There needs to be a more proactive approach geared towards making it a formidable employer as opportunities for growth in this area are immense. Making farming inputs competitively cheaper, as well as capacity development through the provision of access to technical services as is in the case of agricultural extension officers will go a long way in ensuring that small scale farmers attain higher quality yields. Another area that would be worth considering is that of supporting small holder out-grower enterprises that are in a dependent, managed relationship with an exporter. These include farmers who do not own or control the land they farm or the commodity they produce as they produce relatively small volumes on relatively small plots of land. A good example in this case is that of French beans farmers who sell their produce to horticultural export companies. This move will go a long way in improving product quality that will enhance the competitiveness of Kenyan produce in the export markets thus ensuring a sustainable and equitable growth in that sector.

 

An angle that clearly presents itself as far as the rapid growth of the informal economy is concerned is that of a focus on making the sector a formidable employer by raising the quality of its employment. This can be achieved by changing the societal stereotypes whereby students who pursue vocational training are seen to do so as a second option after failing to secure university admission. The role that tertiary institutions such as polytechnics play requires a keener rethinking in as far as their significance to the provision of a strategically skilled workforce for our budding industries in the informal economy goes. Also, training in financial skills is another key factor in building up these businesses in a way that they will be well equipped to manage their growth. By developing a culture of documenting financial dealings, informal businesses will be better placed to access loans and grants from financial institutions. Further, more can be done to make it easier for informal workers to access affordable healthcare.

There is increased recognition that much of the informal economy today is linked to the formal economy and contributes to the overall economy; and that supporting the working poor in the informal economy is a key pathway to reducing poverty and inequality. To maintain sustainable growth in this sector, there needs to be flexibility in the way government operates so as to accommodate and support a hugely untapped taxable avenue. Key issues that would have to be looked into revolve around the formalization and recognition of their business operations. That being said, given the proper support and plan, the informal sector in our economy will provide an avenue to the growth and development of indigenous industries.

 

litualex@gmail.com

Informal Economy Analyst.

Working Poverty

During the past decade, there has been a rise in the number of people pursuing alternate means to employment as a means of raising their living standards. This can be largely be attributed to the high levels of unemployment as well as the rising number of people that are engaged in poor quality jobs. The informal sector creates poor quality jobs and is an avenue for a large percentage of the population to find an extra source of income.

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In the light of this factor, the International Labour Organisation (ILO) has released the World Employment Social Outlook 2017 report. It focuses on trends in job quality, paying particular attention to working poverty and vulnerable employment. What come out clearly is the contrast in the growth of the regional economies over the past decade vis-à-vis the employment and poverty trends. The report states that Sub-Saharan Africa continues to report the highest rate of youth working poverty globally, at almost 70 per cent in 2016, while facing rapid growth in the number of youth in the labour force.

It further states that Sub-Saharan Africa’s unemployment rate is forecast to be 7.2 per cent in 2017, unchanged from 2016. While the unemployment rate remains stable, the number of unemployed is expected to increase from 28 million in 2016 to 29 million in 2017 due to the region’s strong labour force growth. Poor quality employment, rather than unemployment, remains the main labour market challenge in the region. With this in mind, the lack of productive opportunities for youth and adults alike meant that 247 million people were in vulnerable employment in 2016, equivalent to around 68 per cent of all those with jobs.

Statistics from the report show that an additional 12.6 million youth in the region will enter the labour force over the next four years. Due to growth in the working-age population, the number of people in vulnerable forms of employment is expected to increase by 14.6 million. Further, the outlook is particularly challenging for women, who are more likely to be in vulnerable employment, largely as contributing family workers. The share of female workers categorized as contributing family workers, at 30.6 per cent, is more than twice the rate for their male counterparts, at 14.0 per cent, with women additionally over-represented in informal non-agricultural employment.

The issue of vulnerable employment is linked to that of working poverty. The report adds that Sub-Saharan Africa continues to be characterized by elevated rates of working poverty, with 33.6 per cent of all employed people living in extreme poverty in 2016 – i.e. on less than US$1.90 per day – and an additional 30.1 per cent in moderate poverty – i.e. between US$1.90 and US$3.10 per day. This corresponds to over 230 million people in sub-Saharan Africa living in either extreme or moderate poverty.

These numbers are a strong indicator as to why the informal economy continues to consistently grow in the region. The downside to having a large informal economy is that those that are involved in the micro businesses cannot afford to access proper medical attention as well as other social welfare benefits. It would be prudent for policy and decision makers to look into and implement strategies that grow the capacity of informal businesses to enable them to become profitable entities. This will reduce the high levels of poverty by providing sustainable incomes to a vast majority of households.

litualex@gmail.com 

Informal Economy Analyst 

Improvements to aim for in 2017

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Informal businesses have often been perceived in a negative light. They are seen to be high risk ventures, a nuisance to formal enterprises and government as well as being of little assistance to the growth and development agenda of most nations. This is due to the fact that most of them have haphazard modes of operation and a majority are not registered and hence do not pay taxes. This sector has however registered rapid growth over recent years. In Kenya for example about 82% of those employed are engaged in informal businesses. The high levels of poverty has exacerbated this growth as a majority of people seek to make a living where jobs are hard to come by.

There are a wide range of issues that, if addressed, will see most of these businesses develop to a level where they will be even more positive contributors to the economy. A place to start would be offering financial literacy programs for those that operate these businesses. Due to the fact that a majority of them do not keep records of their day to day operations, it becomes difficult for financial institutions to offer any assistance because there is no clear basis from which performance can be tracked. The importance of basic skills like book keeping needs to be emphasized when developing capacity building programs for the sector.

Access to health facilities for informal workers is another area that can improved. In my experience while visiting various informal businesses around the country, most business operators have had to leave their work unattended as they try to seek medical attention whenever they fall sick. Most work under deplorable conditions without the required protective gear. The Kenyan government through the National Hospital Insurance Fund (NHIF) has launched a program that seeks to increase the number of informal workers who can access quality healthcare. The program aims to recruit 12 million Kenyans under a cover that sees them pay a monthly contribution of between Kshs 150 to Kshs 500 depending on their income status. This is a step in the right direction that needs to be replicated.

While interacting with businesses in the sector, a major hurdle that has consistently come up is the difficulty they face when trying to market their goods and services. Most do not have the skills required to widen their scope of customers. This is an area that should be considered by those developing capacity building programs for the sector. Another barrier has been the allocation of spaces they are given to operate their businesses. Most of these are in areas that potential customers cannot easily access and are often unattended to by those that collect revenue from them in terms of garbage collection. This considerably compromises the ability of the informal sector to attract clients and customers to their business.

Although information on those engaged in the informal economy is hard to come by, my experience indicates that the sector is ready for engagement; it is critical we tap into this goodwill. However, note that the Kenya National Bureau of Statistics (KNBS) released the Micro Small and Medium Enterprise survey in 2016. In as much as this is a move to be applauded, most of the players in the informal sector that I interviewed over the past few months feel that the report was inconclusive as it excluded a huge percentage of micro businesses. A proper census will need to be carried out to provide a clearer picture of where the sector stands. This will go a long way in better informing policy makers and those that would like to engage with the sector.

In conclusion, these interventions can be best leveraged through bodies such as the Micro and Small Enterprises Authority (MSEA), who have established a credible network around the country as well as various organizations and associations that work with the informal sector at the county level.

litualex@gmail.com

Informal Economy Analyst 

Interview with the Chairman of Jua Kali Association (Kamukunji)

Insights from the Jua Kali Sector

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I recently held a meeting with the Chairman of The Jua kali Association (Kamukunji), Mr Eliud Mbiyu in Nairobi to find out what growth opportunities lie in their way and the challenges they face when trying to achieve these. The association is a non-profit umbrella body that consists of 4,000 members from micro and small businesses predominantly dealing in metal works, blacksmiths, welders and fabricators.

Their greatest strength was the Sacco they had formed which provides its members with loans to further their business activities. The Sacco encourages its members to save money as a means of building and encouraging a savings culture. Most of its members are drawn from poor backgrounds who basically live from hand to mouth. A huge advantage of coming together is that they are able to source and service big orders which they achieve through a system of division of labour to its members. The challenge in this is that most of the work done is usually not of the same standard.

He added that the setting up of the Micro and Small Enterprise Authority (MSEA), which operates under the Ministry of Industrialisation has gone a long way in assisting them to achieve their goals which include sourcing of business, mediation of disputes that require government intervention and interacting with various government institutions such as the National Hospital Insurance Fund (NHIF), the National Social Security Fund (NSSF) as well as the County government of Nairobi. MSEA has for example, played a major role in assisting the association to attain the title deed for the two acre piece of land on which they operate.

The main form of training undertaken by businesses in this field is apprenticeship, as most of those joining this field of work have not attained basic education qualifications. This manual handcrafted labour needs to be improved through the introduction of new technologies such as mechanisation, as the former makes them underproductive and as mentioned earlier, leads to the production of unstandardized products. In this sense, due to the investment required in terms of machinery, there will be need to train the artisans on how to use the machines.

Another challenge that the association faces is the sourcing of finances from financial institutions. This is in part due to the lack of financial skills by the businesses they represent as most do not keep records of their day to day operations. Their main source of revenue is the membership fee paid by its members and proceeds that they get from leasing out a hall on their premises for meetings. He pointed out that due to the fact that they are an underfinanced organisation, they have a problem attracting and maintaining quality employees.

Moving forward, Mr Mbiyu pointed out that some of the key areas that the association needs to focus on include offering financial training for the businesses under their umbrella, upskilling for the artisans so as to improve the quality of their products, exchange programs that will equip the artisans with modern technologies and a stern approach by government when it comes to dealing with unfavourable competition from cheap imports. Despite the challenges they face, he was optimistic of the future of the sector due to the positive feedback that they have gotten from the national government in projects that they are undertaking which include plans to build a business complex. “There is a great need for a change in perception of the Jua Kali sector from one that produces inferior quality products to one that can be seen as a key instrument to achieving Kenya’s Vision 2030 Industrialisation plan”

litualex@gmail.com
Informal Economy Analyst
 

Healthcare of Informal Workers

Informal workers form a large percentage of the global working force. According to estimates by the Organization for Economic Cooperation and Development (OECD), they total more than a billion in developing countries and 1.8 billion worldwide, or 60% of the world’s working population. Of new jobs created in developing countries, most are in informal employment. The informal sector is thus a crucial component of development worldwide. Ensuring better employment conditions for them will translate to higher productivity and a greater contribution to the economy. Informal workers are susceptible to health problems due to the poor employment conditions and inadequate access to health care. Many types of informal workers face unsafe or poor working conditions hence accessing health care requires leaving work, which reduces the income and adds to health care expenses. However, most informal workers have few resources which makes it harder for them to access these facilities.

The Rockefeller Foundation puts the number of informal workers who live in extreme poverty, at 700 million people contributing to their vulnerability to poor health. Most informal workers have few resources, which makes accessing health care a challenge as it requires leaving work, which reduces their income and adds health care expenses. Some of the common problems that Informal workers face include poor working conditions high risk of injuries, exposure to toxins, limited access to training and protective gear, excessive working hours, no sick time, high stress and job insecurity and no health or social protection.

From the Kenyan perspective fifty-six per cent of the Kenyan population are poor by the World Bank definition, namely living on one dollar or less a day per capita. According to the national health accounts from the Ministry of Health, more than a third of the poor who were ill did not seek care, compared with only 15% of the rich. Fifty-two per cent of poor households cited financial difficulties as the principal reason for not accessing health care. Furthermore, 7.7% of poor households were faced with catastrophic health expenditure, i.e. out-of-pocket payments exceeding 40% of disposable household income. Expanding access to health care for the informal sector and the poor is therefore an important objective of the Kenyan health sector strategy.

The National Health Insurance Fund (NHIF) has set itself an ambitious target of recruiting 12 million Kenyans in the informal sector as it moves to roll out the second phase of its mass recruitment drive. It has so far recruited 3.5 million people from the formal sector and a further 2.5 million in the informal sector and is now planning to expand the membership. The drive is hinged on recent roll out of an ‘affordable’ care package which allows informal sector workers to contribute KSh500 monthly or KSh6,000 per year. This initiative, if properly executed will go a long way in ensuring that the development goal of attaining universal access to healthcare is met. Such initiatives need to be replicated, expanded and scaled up to ensure that the majority of workers, who fall under the informal economy access adequate healthcare.

litualex@gmail.com
Informal Economy Analyst