The synergy between formal and informal businesses is a factor that should be leveraged upon by those looking to improve and strengthen the business environment on the African continent. 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.
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It is common knowledge that in today’s world, the informal sector is an integral and essential part of global commodity and value chains. What is at the core of the interaction and dynamics between the two sectors is a range of flexibilities that can be ascribed to informal sector processes.
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.
Also, formal firms further accentuate informality through their restructuring processes. This is done in cases 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.
What comes out clearly is that there are two distinct processes in which informalisation of employment takes place in formal sector firms. The first is to employ labour without any permanent wage or employment contract or provide any employment benefit. The other is to subcontract operations that were earlier performed by employees of the firm to smaller or ‘specialised’ enterprises. A particular form of this is to subcontract 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 thrust of the idea is to highlight the point that solutions on how to better engage and improve the informal sector can only be effectively implemented by working through formal firms that constitute a crucial part of their value chain. 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.
Informal Economy Analyst.