The Role of Informality in Urbanization and Industrialization

The Economic Report on Africa 2017 was released by The United Nations Economic Commission for Africa(UNECA). This year’s report looked into ways in which the continent can harness industrialization to better structure the fast pace at which urbanization is taking place. Given that Africa is the fastest urbanization region after Asia, the report puts emphasis on the fact that only under the right policy frameworks can this momentum be leveraged so as to accelerate industrialization.

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Some of the proposed measures point to ways in which informal businesses can be made a part of this process. One such measure was to bank on the links between informal and formal sectors, for these are mutually beneficial and dependent. Those involved in industrial land use planning should consider the needs of informal enterprises, given their importance for job absorption and the challenges they often face in finding adequate premises for work.

One option is to try to meet industrial firms’ location-specific needs through Special Economic Zones (SEZs) and industrial zones. These will bring the most benefits if they are well connected to the urban economy, including the informal sector firms that can provide low cost inputs and use linkages as a path to growth and formalization. SEZs present opportunities for co-investment by formal firms and the public sector in infrastructure and technical and vocational education and training, which can broaden participation in economic growth and provide avenues for inclusion of critical workforce groups such as women and youth. These links to markets and skilled labour are critical.

The report further states that studies suggest that informal operators benefit from clustering through the various sectors in which they operate, and that they generally have a positive impact on their formal sector counterparts. It is with this in mind that agglomeration economies should be considered in the context of locational policies related to the informal sector and a path to formalization. Agglomeration economies can benefit the informal sector particularly through proximity to suppliers and purchasers.

Also, low-tech, labour-intensive infrastructure projects accessible to SMEs are a major opportunity for urban job creation. Lower-skilled labour-intensive technologies have high potential in some public investment sectors, including roads. A good example is that of Ethiopia whereby between 2005 and 2008 through a cobblestone roads and pavement programme, more than 90,000 jobs for young people were created. This led to the establishment of 2,000 small and medium enterprises. The project included backward linkages to domestic inputs—cobblestones—and labour-intensive skills in quarrying, chiselling, transporting and paving. The programme, implemented in 140 towns and villages, built around 350 km of road.

In terms of access to finance, Sudan has taken steps to improve this for industrial firms, including SMEs. Policy efforts in 2013 simplified the regulatory framework for financial access and new bank branches, and the central bank made preparations for mobile banking. These reforms targeted small enterprises, which make up 93 per cent of manufacturing firms, by requiring that commercial banks set aside 12 per cent of resources for microfinance. It is with this spirit that African countries must leverage the force of urbanization to drive and enable industrial development for a prosperous and equitable future.

Informal Economy Analyst


Poverty mitigation through the Informal Economy

Poverty in Africa has for long been a problem that successive governments have grappled with. Different policies have been drafted and implemented to curb this menace with little impact. Most of these have been centred around job creation policies that have not achieved the desired goals. This is due to the short-term implementation programs which do little to change the lives of those that are targeted.


In an attempt to earn a living, those that are trapped in the poverty world look towards various avenues to sustaining themselves as well as providing goods and services that are affordable to the communities in which they operate. The high demand for low quality goods that are often not standardised further makes it difficult for them to sophisticate their operations. This demand and supply factor has seen a rapid growth rate in the size of the informal economy.

Considering that micro and small businesses are set up as a means of making money to get by, it comes as no surprise that the Micro Small and Medium Enterprises 2016 Report, a survey by the Kenya National Bureau of Statistics (KNBS) indicates that the three main reasons the operators of unlicensed businesses establish businesses were due to the lack of another alternative (23.8 per cent), pursuit of better income (23.5 per cent) and a preference for self-employment (13.1 per cent).

Due to the fact that most of these businesses are haphazardly set up, amongst other factors, a vast majority of these businesses have a short life span. The survey noted that 2.2 million small businesses shut down within the last five years. This is 46.3% of the total number of informal businesses. A substantial number of people who establish these sorts of ventures do so without prior knowledge of the fields that they get into with the main objective of starting the business being self-sustenance.

The lack of proper business operational structures as well as insufficient sources of finances to upscale accentuates this problem. As per the survey, the main source of capital for both licenced and unlicensed micro, small and medium enterprises (MSMEs) was through personal and family financing which accounted for 76.3% of these businesses. Access to capital to further grow their businesses is a big obstacle for small businesses. Most of them do not possess business plans due to the random way in which they are established. As mentioned earlier, the absence of internal business structures such as the unavailability of financial records makes it difficult for financial lenders to calculate their level of risk and are hence often turned away.

Policy makers need to dig deeper so as to come up with viable and long-lasting solutions to reduce the rampant poverty levels. A good place to start would be by looking into ways in which they can strengthen informal businesses for they are at the heart of the ecosystem of poor communities. Programs that target these sorts of businesses should focus on building their capacity in the areas of business and financial skills in a way that fosters their long term growth and development.

Informal Economy Analyst

How to develop partnerships between Formal and Informal Business

While exploring into some of the ways in which business linkages can be developed between formal and informal firms in a previous article, I looked into how both sides of the divide can take advantage of the opportunities within their realms to build symbiotic relationships. In this piece, I will highlight some of the approaches which formal firms should consider when trying to initiate and foster positive networks with the informal sector.


The first and foremost aspect that formal firms should look into 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 the informal firm.  This will help them come up with tailor made marketing structures around which they can sell their products and services.

The other aspect 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.

Further, the longevity of an informal business should be a point of consideration when looking into partnership opportunities. One of the weaknesses that informal businesses have is that of shutting down after short periods of operation. The Micro Small and Medium Enterprises (MSME) Survey 2016 indicates that 46.3 per cent of the establishments were closed within the first year of operation. The trend in closing rate slowed down with the age of the business which points to the fact that informal businesses stabilized with time. On average, it was observed that the age of establishments at closure was 3.8 years.

Another 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. 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 sort of associations provide a pillar of stability for informal businesses for it is through them that they can better interact with government bodies in cases of conflict resolution. Associations also give them financial security for it is through these that they can access loans to grow their businesses.

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.

Informal Economy Analyst





How to foster links between the Formal and Informal Economy

In a research paper published by the Kiel Institute for the World Economy (IFW) , the largest part of employment in Sub-Saharan Africa (SSA) is generated by informal enterprises. In Kenya, they account for 89.7% of the employment demographic. These enterprises often lack the financial means or the managerial and technological skills required to expand their activities. The paper goes on to point out that one way of overcoming these constraints is to establish links with the formal sector.

From a business perspective, linkages are channels through which enterprises influence each other’s performance in a relationship that ensures that they maximise benefits and minimise risks. The two major types are backward and forward linkages. The Business Dictionary defines backward linkages as channels through which information, materials and money flow between a company and its suppliers which creates a network of economic interdependence. Forward linkages on the other hand are the distribution chains that connect the producer or supplier with the customers.


IFW identified a couple of factors that encourage the formation of formal linkages. The first is that of primary production factors (capital stocks, employees), infrastructure (electricity, telephone), and access to credit. The expectation is that enterprises with higher endowments of the above are in a better position to establish formal linkages. Also, the experience as measured by the age of the enterprise is another factor. The expectation is that it takes time to build up business relationships hence enterprises that have been in business for longer periods are in a stronger position to form and exploit these linkages.

Another factor that influences the formation of linkages is that of the characteristics of the owner/manager of the enterprise (age, schooling). It points out that older and more educated owners are more likely to establish formal linkages. Being a member of a professional association also enhances the establishment of linkages. Contact with associations facilitates networking and thereby raises the likelihood of formal business relationships. This is fortified by the fact that these associations provide avenues through which businesses can share ideas on best work practices. They also provide an avenue through which the pooling of resources is encouraged, an aspect that strengthens their negotiating power.

The informal sector, when sufficiently supported, can gain a lot by pursuing this model of establishing linkages with formal businesses. The paper further suggests that formal backward linkages exert a positive influence on the productivity of enterprises in the informal sector. A symbiotic relationship of this fashion would be beneficial to both sides of the coin.

In addition, if formal enterprises are not able to procure goods from an independent supplier and lack the physical or human capital to produce the goods themselves, they will be restricted in their ability to introduce innovations to their production. More generally, it can be assumed that linkages facilitate the dispersion of technical innovation. 

Lastly, through the establishment of linkages with informal businesses, formal enterprises can take advantage of the markets that informal businesses have access to as a distribution channel for their products.

Informal Economy Analyst



Capacity Building for Informal Business

Efforts directed towards capacity building of micro, small and medium enterprises are yet to be well structured in a manner that ensures their sustainable growth. With their contribution to new jobs in Kenya standing at 90% and accounting for 35% of the country’s GDP, there is a gap that needs to be filled which will enhance their productivity. Most businesses in the informal sector continue facing steep hurdles that undermine their performance.


The European Commission’s Guide for Training in SMEs puts forward actions that will enhance the performance of businesses in the sector. Some of the interventions consist of factors that ensure the success of a business from which valuable lessons can be drawn. These include anticipation of skills, assessment, adoption of a collective approach, exploitation of opportunities as well as providing guidance and support.

The anticipation of skills and competence related to the needs of the market is crucial in order for a business to remain relevant and up to date in a rapidly changing economy. A good example is that of businesses having the skills necessary to work with new technologies that will increase their output and make them more productive. This factor enhances the longevity of a business in a way that it constantly adapts to the needs of clients.

In the area of assessment, it is important for businesses to constantly carry out a needs assessment. This will put them in a better position when it comes to assessing their requirements, and thus assist in the setting of objectives that facilitate the planning of their operations. More importantly, the evaluation and modification of the results regarding the chosen objectives is a crucial element of developing a permanent culture of assessment. This process enables them to become dynamic in the markets in which they operate.

A collective approach is important when engaging with the informal sector. Public institutions in the field of training, professional bodies as well as social partners such as development finance institutions need to be actively involved in the development and execution of strategies that are aimed at strengthening the sector. This collective investment will provide a solid foundation for building and qualitatively growing this sector of the economy.

The collaborative effort mentioned above should be governed by the principle of guidance and accompaniment. This approach points towards the mentoring of informal businesses in a way that helps them to overcome the obstacles that they face. This can be done by assisting them to put in place and strengthen internal organisational structures such as having detailed and updated financial records. Businesses in this sector of the economy can also learn a lot from each other by sharing practices that make them more productive.

Last but not least is that informal businesses need to be facilitated in a way that will enable them to maximise the opportunities within their field of operation. In the light of this, the right information such as local and regional market opportunities need to be availed to them. This has to be coupled with policies that facilitate their access to these opportunities. When correctly equipped and facilitated, informal businesses will grow due to these new economic and social opportunities.

Informal Economy Analyst





Economic Survey 2017

The Kenya National Bureau of Statistics (KNBS) released the Economic Survey 2017 which presents an analysis of the key sectors in the Kenyan economy. In relation to the informal economy, the survey only focused on the employment angle of the sector. The rest of data on the informal sector was extracted from the MSME 2016 Survey. Getting comprehensive up to date data on the informal economy is still a big challenge.


The 2017 survey 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 per cent growth from 83 per cent to 89.7 per cent or 13.3 million people. Wholesale and retail trade, hotels and restaurants industries continued to absorb the highest number of employees, accounting for 59.7 per cent of total employment, while the manufacturing industry had a share of 20.4 per cent in informal sector employment.

A continual growth of the informal sector can be attributed to factors such as the shrinking availability of formal employment opportunities as well as the resilience of the Kenyan citizens. Informal sector growth in the country is however a problem due to the fact that most jobs in the sector are of substandard quality. This is because most are characterised by low wages, no social benefits as well as poor working conditions such as the lack of protective gear in most labour intensive businesses and operating in areas with insufficient social amenities such as access to water and toilets.

There were a number of statistics on the informal sector that were not highlighted such as an updated position on the key sub sectors. It would be useful to have information on the number of businesses that operate in the sector, as well as the overall contribution made to the Gross Domestic Product (GDP). This will paint a clearer picture of the sector in a way that can enable policy makers to adequately formulate strategies that would be beneficial in enhancing qualitative growth of this crucial component of the economy.

One of the suggestions on how this can be done is by starting out with a pilot project in one of the counties with a vibrant informal economy whereby data collection focuses beyond sifting through the records at county offices. This will allow for the concentration of efforts towards the conducting of a deeper statistical analysis of each of the sub sectors. Once this has been achieved, it can then be used as a benchmark for conducting a similar program countrywide. The gathered data would provide a clearer way forward when it comes to making informed decisions on how to channel the efforts towards implementing a sustainable plan that deals with the informal sector.

Informal Economy Analyst