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.

(Source: http://www.povertyactionlab.org/sites/default/files)

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.

litualex@gmail.com

Informal Economy Analyst

The Role of Informality in the Kenya Industrial Transformation Programme 

The Kenya Industrial Transformation Programme (KITP) is an effort by the government to create an industrial hub in the country through sector specific initiatives in agro processing, textiles and apparel, leather, fisheries, services and SMEs (small and medium enterprises). With the SMEs sector being the fastest growing business segment of the economy accounting for 83% of the total employment demographic, I will highlight some of the strategies that have been proposed to make it more productive.

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(Source:https://issuu.com/kamkenya/docs/kitp_short_version_20150910__1_)

Some of the challenges that the sector faces include a lack of understanding of basic business practices such as book keeping and marketing. These limit their growth when it comes to accessing finance to expand their operations for they are seen to be high risk clients by financial institutions. The recent interest rate cap has negatively affected them as fewer can access loans from banks. Their level of human capital is also low due to a lack of formal education amongst most of the workers engaged in the sector. Most SMEs also have little knowledge of other markets which puts them at a disadvantage when it comes to approaching the export market.

Proposed initiatives in KITP aimed at uplifting the sector include the setting up of a fund to provide low cost financing to SMEs. The fund is to be set up as a credit guarantee system or as an investment in private equity funds with contribution from both government and development finance institutions. It is targeted at those SMEs with promising business plans as well as those that demonstrate potential for growth. 

The strategy also plans on establishing communication and training between large companies and SMEs so as to facilitate subcontracting. This move is meant to increase the share of large corporations in the country sourcing from local SMEs to 30%, while building the capacity of SMEs to meet these needs. This will also look into ways of  improving the capacity of the large companies to identify and manage suitable SMEs.

Another intervention is that of enhancing MSE’s (Micro and Small Enterprises) competitiveness. This will be done through a competition in every county where 5 products from entrepreneurs engaged in the manufacturing and agribusiness sub sectors will be selected to have their products available on supermarket shelves. The process will involve conducting quality, packaging and branding training to get their products certified by the Kenya Bureau of Standards (KEBS). The winner of this competition will receive a prize of Kshs 1 million aimed at improving their operations.

Further, there are plans to establish a metal fabrication centre of excellence in Kariobangi, Nairobi, aimed at upgrading the existing Jua Kali metal fabricators by providing common user facilities, training programmes and incubation facilities. This will improve the quality and quantity of the products that these artisans produce, as well as equip them with technical skills which will include knowledge on how to operate modern machinery.

The KITP should not be one of those policy documents that are drafted, launched and eventually gather dust on the shelves of libraries and institutions. It is a noble initiative that needs to be fast tracked and implemented as it will translate to the improvement of the lives of the millions of Kenyans that are engaged in micro, small and medium sized economic activities.

litualex@gmail.com

Informal Economy Analyst

 

Lessons from informal business

Formal employment opportunities have been on a steady decline. Over the past two years, a number of institutions in Kenya have laid off staff as a cost cutting measure. This coupled with a constantly increasing level of unemployment, especially among the youth, has resulted in the mushrooming of small businesses that enable those that are caught up in such circumstances to make a living in the tough economic times. Most have opted to start-up small businesses which are predominantly informal in their mode of operation that enable them to provide for their families.

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(Source:http://www.the-star.co.ke/news/2016/11/10/msmes-need-facilitation-not-regulation_c1452719)

Despite the fact that a vast majority of informal businesses are perceived in a negative light due to reasons such as a good number of them not paying taxes, inadequate social security structures as well as poor internal financial infrastructures, there are lessons that one can learn from their operations.

Unity of purpose is one of the ways in which informal businesses have managed to grow and stay afloat. Given the scarcity of resources that they have to contend with, be it financial or technical, majority of them pool resources so as to achieve their goals. A good example can be found in instances where such businesses come together to form associations through which they tackle problems that they face. These range from interacting with government authorities and financial institutions to sharing skills and equipment. Interacting with government authorities and financial institutions in this manner puts them in a stronger bargaining position when it comes to negotiating for better terms of engagement.

Also, informal businesses are often pioneers when it comes to innovation. The growth in the rate of unemployment is one factor that has led to the growth of the informal sector. This, coupled with increasing poverty levels has pushed the informal economy to become the top employment segment in sub Saharan Africa. In Kenya, it accounts for 81% of the total employment demographic. In a bid to remain relevant and competitive, those that are engaged in informal businesses develop products and services that enable them to stay in business. Given that a majority of those engaged in informal businesses tend to be the youth, they contribute new and innovative ideas and technologies to industries that have for long remained traditionally rigid.

Another aspect that can be learnt from informal businesses is their resilience. This can be seen in their widespread presence. In Nairobi for example, if you need to have your car fixed quickly, there is always a garage around the corner. Supermarkets and grocery stores have been overtaken by the numerous “Mama Mboga” shops.  In the beauty and cosmetics industry, informal salons are currently available in every neighborhood. This factor has contributed to the exponential growth of this sector.

With all this said and done, the informal economy is still largely characterised by the presence of poor quality employment opportunities. Efforts should be made to support businesses in this sector of the economy as it will be a huge step in the right direction in easing the burden of poverty.

litualex@gmail.com

Informal Economy Analyst 

 

Hawking In Nairobi

The quest for people to engage in activities that generate money in an environment where formal employment is a limited option has caused many Kenyans to pursue options in the informal economy. In a country where the cost of living is constantly rising coupled with increasing poverty levels, most are forced to conduct small scale businesses that are often not well thought out, but provide the income that is necessary to sustain their families. One of the most common fields that people from low income households venture into is that of hawking.

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(Source:https://pbs.twimg.com/media/CGLVq6sVAAImyZH.jpg)

Hawking in Nairobi has become a challenge to the Nairobi County in that not enough measures have been taken to ensure that those that are involved in the trade are provided with sufficient areas within which they can operate. It is this untamed approach that has led to an uncontrolled growth of this section of the informal economy. A huge setback that has arisen from this growth is that it poses a security risk to the city of Nairobi. There are a number of gangs that have been known to have networks within hawkers. They often use the hawking business as a front to conduct illegal activities such as drug peddling.

Another challenge that these informal traders present is that in that of contributing to the garbage accumulation within the city. Since most of them operate from temporary stations, they leave the residue from their activities such as the packaging of wares that they have sold lying on the streets.

I recently interviewed an informal trader who makes a living from selling bottled water and soft drinks in one of the parks in Nairobi. During the time I spent with him, I learned a lot on the mode of operation of businesses in this sector of the economy alongside the challenges that they face. On average, he makes Kshs 2,000 in profits from the business per day. He has to part with Kshs 500 on a daily basis to bribe officials from the county to enable him operate without disruption of his operations.

Those who do not bribe these officials often end up playing a cat and mouse game with these officials. He noted that for a person to comfortably operate the sort of business he does, it is a better option to pay the daily bribe as the fine one has to pay if arrested is Kshs 3000 which is accompanied with the confiscation of the vendor’s goods. This has fuelled this system of corruption as it is easier for the vendors to pay the bribe so as to comfortably make a living.

Sufficient measures have to be taken so as to come up with a sustainable approach to handling and accommodating this section of the informal economy. One such way would be the allocation of suitable areas within which they can conduct their businesses without harassment from the relevant authorities. This is a sector that if properly structured will be an additional avenue for revenue collection. It will also provide a sustainable source of income for those that come from low income households.

litualex@gmail.com

Informal Economy Analyst 

 

Small Scale Farming

Farming has long been the main economic activity in most rural settings. It is the backbone that provides most households with a source of livelihood. This is one of the reasons why most African communities see land as a major asset for it provides a form of stability when it comes to providing basic essentials for survival and existence. The Economic Review of Agriculture (ERA) 2015 states that the agriculture sector is the backbone of Kenya’s economy and the source of livelihood for majority of the rural population. The sector contributes about 26 percent of the country’s GDP and employs about 75 percent of the population.

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(Source:http://www.ipsnews.net/Library/2013/07/kenyafarmers.jpg)

 

Most rural small scale farmers still have to contend with unpredictable weather patterns, inadequate access to technical expertise, outdated farming tools and techniques that tends to reduce their productivity as well as the high cost of farm inputs. In the long run, this pushes their costs of production to levels that make their ventures unprofitable and unsustainable. They also have to contend with poor infrastructure networks that make it difficult for them to access the markets that they serve in instances of heavy rains that make roads practically impassable.

 

The Food and Agriculture Organization states that the potential contribution of the agricultural sector to poverty reduction, improved livelihoods of rural households and greater food security in Sub Saharan Africa is undisputed. Yet growth in the sector remains challenged by an uncertain policy environment and poor infrastructural development that limit market access, increase post-harvest losses and raise the cost of trade. Thus food prices in the region remain high, which impacts negatively on food security, particularly given that most small scale producers are still net buyers of food products.

 

According to Juhudi Kilimo, the average smallholder farmer in Kenya owns 1 -5 acres of land and mainly produces for subsistence or sales in informal markets to earn USD 2-4 per day. They are a micro finance institution that provides loans to rural small holder farmers and small-medium agribusinesses to enable them acquire high quality agricultural assets that enhance their productivity. The CEO, Nat Robinson has pointed out that one of the major obstacles rural small holder farmers face in their quest to become productive is that they lack the collateral assets required for financing. This is due to the fact that small businesses based in agriculture are perceived as too risky by commercial and micro finance institutions as well as being simply too far away or too expensive in invest in.

He reiterates that rural small-scale farmers cannot compete with larger producers because they lack the capital to transport and market their produce to more lucrative urban markets. This limits smallholder farmers to supplying informal markets where they are often forced to sell their produce to local brokers, or in open-air markets and kiosks. In this sense, they end up being paid at rates that are below market prices for their produce.

It is thus imperative to ensure that the agricultural sector and the small scale farmers in particular get the support that will enable them to become more productive. This will in turn positively contribute to poverty eradication by creating sustainable revenue streams through the creation of quality employment avenues.

 

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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(Source:http://d34elvfuwuckt2.cloudfront.net/wp-content/uploads/sites/21/2015/08/Africa-Unemployment-South-Africa-apprenticeship-05102012-620×350.jpg)

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