There has been a steady rise in rhetoric on the informal economy during the last decade around the globe. African countries have some of the highest rates of informality in the world with 85.8% of employment on the continent being informal, according to the ILO. Whereas this conversation taking center stage is a laudable effort, the approach being taken by most players trying to intersect with the sector has been a top-down one, whereby instead of looking into the issues on the ground, governments and organizations often come with tailor made solutions that do not often meet the strategic needs of informal traders.
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An example of this can be seen in instances where the type of financing and investment targeted towards businesses in the sector is often not easily accessible by these. As Development Economist Anzetse Were aptly puts it, “Formal larger businesses have the ability to mobilize financing and support to expand their wealth creation while informal business don’t. One side continues to get the attention, money and support while the largest employer on the continent gets basically nothing and thus never gets to grow incomes” She reiterates that, “Until investment and an ecosystem of support is deployed to informal businesses to increase their productivity and profitability, income inequality in Africa will continue to expand”
The sort of ecosystem of support that is required to drive informal enterprises towards higher productivity and profitability can be looked at from two angles; the first is the issue of the type of financing that would be best deployed. It is crucial for financiers to structure loans in a manner that allows them to be accessible at cheaper rates. A viable option in this sense would be to deploy the blended finance option whereby development funds and philanthropic funds such as grants are used to mobilize private capital flows into emerging markets, resulting in positive results for both investors and communities (Wikipedia).
The second issue is concerned with offering technical support to informal businesses in a way that would enable them to strengthen their internal operational structures. This can be done in a phased manner, whereby initial engagement should be geared towards the imparting of basic financial skills such as bookkeeping. It has been an uphill task whenever these businesses approach financial institutions for credit as they are considered high-risk clients due to poorly maintained books of accounts, if any. Further engagement should focus on developing their internal organizational structures in way that allows them to be more attractive to prospective investors.
For as long as informal businesses remain in this conundrum, we will continue to see a growth in the number of informal businesses, for these remain the primary source of income for low income households as well as the rising number of unemployed people on the continent. Looking at it from this perspective paints a clearer picture as to the survivalist mentality that is behind the spike in the number of informal businesses that are set up without an entrepreneurial background.
Infomal Economy Analyst