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.

(Source: https://i0.wp.com/www.dhahabu.co.ke)

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.

litualex@gmail.com

Informal Economy Analyst.

 

 

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Lessons from China’s Economic Policy

Over the years, China has managed to turn around its economy by instituting certain reforms which have seen the country’s economy grow exponentially during the last 60 years into a global economic powerhouse. Most of these were done by recalibrating how they interacted with the informal sector in their country. The reforms first took shape in the agriculture sector with the household responsibility system (HRS) replacing the people’s commune system. Under this system, individual households were instituted as the basic unit of farm operation, as opposed to a collective team of 20 to 30 households in the past. The HRS gave individual households autonomy over production and farmers were given incentives to increase output.

(Source: http://media.philstar.com/images/the-philippine-star/business )

A study carried out by the Lancaster University Management School indicates that Between 1978 and 1984, China’s average annual growth rate of agriculture was 7.7%, after the introduction of the household responsibility system. The significant improvement in agriculture helped the country to release labour from land to industry and service sectors. This labour reallocation process was necessary as China’s agriculture was characterised by an egalitarian system of distribution of cultivated land with more than 200 million rural households, each cultivating less than 0.55 hectares. With the improvement in productivity in the agricultural sector, there was no need for a large number of people to stay on land. Agricultural employment as a share of labour force fell from more than 70% in 1978 to 60% in 1990 and 35% in 2011. The release of such a large number of economically active population from land hugely helped China’s development of the labour-intensive, low-skilled manufacturing sector.

In addition to the introduction of the HRS, China successfully re-introduced marketization. In implementing agricultural reforms, China first tried a dual-track approach. Under this approach, farmers were required to deliver a portion of their output to the state and allowed to sell the rest of the output on the free-market. With the newly earned profits, farmers set up or pulled resources into town and village owned enterprises (TVEs). These are communal organizations managed by managers on a contractual basis.

Town and village owned enterprise operate outside of the Chinese government’s apparatus and were highly market-oriented. Even though they did not enjoy preferential government treatment, they were also not subject to widespread state regulation. The study further notes that between 1979 and 1991, TVEs grew at an average rate of 25.3% in comparison to that of state owned enterprises which grew at 8.4%. Though TVEs were not private firms, since they were often owned by local governments or local communes rather than solely by private owners, they cultivated an internal culture of competition in the Chinese economy which helped stimulate efficiency of the state‐owned enterprises. It is worthy to note that TVEs were the major export drivers of China’s impressive export growth. For example, in 1999, the value of TVE exports of US$94 billion accounted for 48% of China’s total exports. Much of these were labour‐intensive products involving simple production techniques.

Another aspect that accelerated China’s growth and economic success can be attributed to privatisation. The study notes that the ownership structure of private firms was not properly defined until 1988. Private firms only became an integral part of the Chinese economy in 1997 and had their legal status established in 1998. The rapid growth of the private sector began with the introduction of the policy whereby the government not only lowered entry barriers in most sectors, but also pursued a policy of “grasping the big, and letting go of the small”. This meant that State Owned Enterprises were to only be kept in “strategic sectors” whereas small and medium sized enterprises (SMEs) were either privatised or their ownership transferred from the central government to local governments.

Lastly, the study shows that China’s development in manufacturing has also benefited from inward foreign direct investment (FDI) whereby the early years of China’s history of inward FDI was particularly dominated by the Chinese diaspora. Chinese diaspora-invested firms cooperated with TVEs and other indigenous Chinese firms and introduced them to international markets as well as freed them from domestic market constraints. In this sense, the diaspora-invested firms also helped indigenous Chinese firms to exploit the country’s comparative advantage in cheap labour and to translate its comparative advantage into international competitiveness.

Kenya is a country whereby about 75% of the population rely on agriculture for employment and livelihood. Outside agriculture, a vast majority of its citizens are employed in the informal economy, accounting for 90% of the employment demographic. The route taken by China is one which the country can borrow a leaf from when looking towards ways in which it can transform and grow its economy through agriculture and manufacturing.

litualex@gmail.com

Informal Economy Analyst.

 

 

 

Leveraging Informal Business

Considering the fact that sustained poverty coupled with subpar economic growth has continued to inhibit growth in the demand of locally manufactured goods, effective demand continues to shift more in favour of relatively cheaper imported manufactured items. In addition, the high cost of inputs informed by poor infrastructure which leads to high transport costs has led to high prices of locally manufactured products thereby limiting their competitiveness in the local and regional markets. With the view of looking towards ways in which this trend can be turned around to benefit locally manufactured products, certain aspects need to be taken into consideration.

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Working through the informal sector is one of the avenues that presents a huge opportunity when it comes to penetrating the local and regional markets. The sector has market networks that are vastly untapped. Formal firms need to venture further into fostering links with informal firms in a way that is mutually beneficial. In this sense, there are different ways in which this can be achieved.

The first and foremost aspect that formal firms should look into in order to get the right partners to work with in the informal sector is that of the business structure that is present in the informal business that they intend to partner with. The importance of ensuring that they establish this aspect is, among other factors to assist them in better understanding the client profiles of the clients serviced by informal firms.  Informal businesses have an access to clients that would not be readily available to formal businesses. Customers to their businesses often purchase goods and services that are at a lower price point. Tapping into the economies of scale from this angle will be a huge plus for any formal business that can avail their products and services that meet the needs of these customers. Unpacking this dynamic will assist in coming up with tailor made marketing structures around which they can upscale the production of their products and services.

Another thing to consider that is of importance in as far as fostering beneficial relationships relates to the different levels of  capacity present in the informal firms. These include, but are not limited to technical and financial skills. Most informal firms primarily under perform due the low levels of the above mentioned. Formal firms can work to improve the level of these skill sets which will go a long way in improving the quality of goods and services that they produce. Mentoring informal firms in this way will enhance their capability to deliver goods and services that are of a higher quality as well as enhance their systems of operation. This will further improve and strengthen the various aspects that are related to the operational systems of formal firms such as their chains of distribution.

An area that would be worth exploring for formal firms as they seek to establish formidable links with informal businesses is that of targeting businesses that are part of an association, be they in the form of Sacco’s or cooperatives.  Micro, small and medium sized businesses that are members of associations within their realms of operation tend to be more focused and better organized. This is due to the fact that they draw valuable lessons from each other on best industry practices. These sorts of associations provide a unity of purpose and act as a pillar of stability for informal businesses for it is through them that they can better interact with other bodies such as government bodies in cases of conflict resolution or even financial institutions whenever they require to access loans. Associations in this sense, offer security to the individual entrepreneurs, for it is through these that they can access loans to grow their businesses as well as better market their products.

Businesses in the manufacturing sector should look into value addition strategies that target the micro and small businesses that they intend to be suppliers of raw materials for their finished products. This is especially important for those that rely on agricultural raw materials. Partnering with small scale farmers for example, with a view of improving the quality of their yields, is a worthwhile investment. Promoting a culture of interacting with these farmers on best practices in crop and animal husbandry is a long-term investment that will ensure a long term consistent availability of good quality raw materials, as well as improve the incomes on both sides of the coin.

By looking into the above factors, formal firms can have a better understanding of informal businesses when trying to create partnership opportunities that grow their businesses. Working with the associations that informal businesses are a part of will enhance the capability of formal firms to choose credible businesses through which they can further harness their growth agenda as well as build the capacity of informal businesses.

litualex@gmail.com

Informal Economy Analyst

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.

Supporting Economic Transformation through Informal Economy

 

Last week, the Kenya Association of Manufactures (KAM) in association with the Overseas Development Institute’s (ODI) programme, Supporting Economic Transformation (SET) launched the Ten Policy Priorities for Transforming Manufacturing and Creating Jobs in Kenya. The document is a ten-point policy plan aimed at creating 300,000 jobs and doubling manufacturing in five years. According to the document, this will be achieved through two main ways;

(Source: http://www.kam.co.ke/KAM-2016/wp-content/uploads)

  1. The formulation of effective public policies and the regulation for manufacturing competitiveness by doing the following;
  • Creating a business environment that is conducive to manufacturing investment.
  • Enforcing a fiscal regime that supports manufacturing.
  • Making land ownership more affordable and accessible.
  • Securing affordable, reliable and sustainable energy.
  • Expanding access to long-term finance for all types of manufacturing firms.
  • Creating an exports push for manufactured products.
  • Developing worker skills as well as supporting innovation for increased labour productivity.

 

  1. Efficient and effective implementation through;
  • Creating a fit-for-purpose public service.
  • Developing a coordinated value chain approach.
  • Building trust and reciprocity for effective coordination and partnerships.

There is a proposed plan to inclusively target Informal industry or cottage industries. According to the document, there are several manufacturing sub-sectors such as agro-processing, metal works, furniture, and leather and shoe making. Following earlier research that has been carried out on the informal manufacturing sector in Kenya by Deloitte and The World Bank, four sub sectors have been singled out as having the greatest potential for growth and performance. The first is the arts and crafts which consists of homemade artefacts that are a popular product for tourists and residents.

The other strong informal manufacturing sub sector is that of furniture. The furniture market in Kenya stood at approximately $496 million in sales in 2013, whereby East African economies purchase $1.2 billion worth of furniture annually. Jua kali represent more than a third of sales in Kenya ($160 million). The jua kali furniture industry exhibits strong growth and manufactures world class ethnic furniture for niche markets in areas such as Lamu.

The third is the metal works informal manufacturing sector which produces a range of products such as charcoal cooking stoves, buckets, pans, kitchen utensils, wheel barrows, watering cans, gates and grills, and small tools for low-income clients. Products such as industrial sculptures and artworks target higher-income clients. Additionally, a few informal manufacturers produce a limited number of spare parts such as silencers, auto upholstery, and rubber bushings.

The last one is the leather industry under which the informal sector accounts for 10,000 of the 14,000 workers. Kenya is the third-largest livestock holder in Africa, so leather represents a potential area for economic growth and employment. In 2017, the Ministry of Industry Trade and Cooperatives (MITC) committed a KSh 130 million revolving fund for SMEs in the leather industry to build workspaces in all of the country’s 47 counties.

The ten-point plan further points out that despite this potential, there are challenges that the informal sector faces which include access to finance, limited access to land, corruption and labour productivity. With the successful implementation of this document, the informal manufacturing sector stands to immensely benefit from the catalysis of manufacturing in Kenya.

litualex@gmail.com

Informal Economy Analyst

Analysis of Political Party Manifestos

 

With slightly over one month to the Kenyan elections, the two major political parties released their manifestos for public scrutiny. These are the documents that detail the priority areas as well as proposed plans of action for the country when they get elected into office. Despite the political rhetoric contained therein, I read through the two documents with a view of deciphering the angles that each had taken in relation to the informal economy. This article looks into two areas covered under the informal economy, picking out the most relevant proposals in both manifestos.

(Source: http://www.standardmedia.co.ke)

The ruling coalition has proposed to create and fully implement a robust Small and medium enterprises (SMEs) development and support programme which would formalise the large number of informal businesses and support their growth from micro to small to medium enterprises, and eventually into large firms. They believe that this would catalyse the creation of at least one million jobs and contribute to tax revenues. One of the major sub sectors of informal business that they are targeting is the Jua Kali. They are targeting at least 1 million entrepreneurs in the Jua Kali sector to have become established as formal small or large enterprises by the year 2022. The sector employs 11 million Kenyans, 50% of the country’s workforce.

 

Their counterpart in the opposition promises to unleash the potential of Jua Kali entrepreneurs by establishing at least one industrial park per ward for micro- and small enterprises. They also look to set up workshops where these entrepreneurs can lease machine time, a move that is aimed at giving these entrepreneurs access to machinery and equipment that they cannot individually afford. In order to help MSEs to develop globally competitive products, they plan to establish incubators that will help them break into export markets.

In as far as the agricultural sector is concerned, the opposition coalition has proposed that it will establish a Cooperative Enterprise Development Fund (CEDF) that will invest in agro-processing enterprises jointly with farmers organized as cooperatives as an equity partner. Once the agro-processing enterprise is successful, the CEDF will divest by selling shares to farmers through the cooperatives. On the other hand, the ruling coalition plans to establish a Food Acquisition Programme (FAP) to create demand and stable market prices for products from small-scale farmers who will be encouraged to form cooperatives in maize, wheat and potatoes. Under this programme, they plan to buy 50% of government food requirements from small holder farmers.

There is a myriad of other initiatives that both parties have put across in their manifestos that target micro, small and medium sized enterprises. My concern is that all of these promises look good on paper but will become a challenge when the time to implement them comes. This view is informed by the historical evidence of politicians wooing the voting class just before an election and turning their backs on them as soon as they are elected into office. All in all, the idea of investing in the informal economy is long overdue.

litualex@gmail.com

Informal Economy Analyst