Value Chain Development in the Informal Sector

A value chain is defined as the full range of activities that are required to bring a product or service from conception, through the intermediary phases of production and eventual delivery to final consumers. Value chains can be local, national or global, linking rural producers with traders and consumers worldwide. Their role in determining the quality and cost of a product and service cannot be overlooked for it is through them that effective competitiveness can be achieved.


It is hence important to understand the role value chains play in the route to market trajectory of any service or product. Thus, a value chain analysis at both firm and sector level is key to developing strategies aimed at improving the competitiveness of a product or service. At the firm level, this sort of analysis would be important for formal businesses to understand how much informality is in their value chain, as this will help them pin point areas through which they can fine tune the process in a bid to achieve quality standards in a cost-effective manner. At a sectoral level, it would provide information as to where informality sits in each sector and thus give a better understanding of which sectors have the densest or least levels of informality in their value chains, with the view to increasing their overall efficiency and competitiveness.

Considering that sustained poverty coupled with subpar economic growth has continued to inhibit the growth in the demand of locally manufactured goods, relatively cheaper internationally manufactured goods continue to gain the local market share. In this sense, locally manufactured goods are limited in their competitiveness. For example, value addition strategies that target micro and small businesses would greatly improve the quality of locally produced goods. In its strategy on decent work in the informal economy, the International Labor Organization (ILO) proposes that one way of improving the sustainability of informal enterprises may be to link them in cooperatives where jointly owned input supply, credit and marketing services can be organised without compromising the autonomy of individual entrepreneur.

In markets that are dominated by very powerful players, small producers tend to be highly disadvantaged by being arm twisted into accepting lower income for their produce. A good example is in the agricultural sector where small-scale farmers have little control of market dynamics, hence cannot reap the full financial benefits due to issues such as the lack of proper storage facilities, market information and access to inputs. This leads to post-harvest wastage and losses brought about by hurriedly selling their produce at lower prices than if they had stored it for sale when demand is higher. It is with such issues in mind that the ILO stresses the importance of the improvement of value chain competitiveness, as it is seen as a powerful approach for generating growth and reducing poverty in developing countries, where roughly 75 percent of the population live in rural areas.

In a quest to integrate micro and small-scale enterprises into formal value chains, understanding their level of involvement in these is key to formulating policies and implementing strategies that contribute to the overall efficiency and competitiveness of locally manufactured products. This sort of analysis will benefit all the players along the value chain.

Informal Economy Analyst


The link between counterfeiting and the Informal Economy

Trade in counterfeit products is a thriving business in areas with large informal economies for consumers are presented with products at substantially lower price points than the original products. The issue of aspirational satisfaction is another major reason why a good number of clients in informal economies opt to purchase counterfeit and pirated products. Also, most of the customers of these products in informal economies are usually faced with substantial budgetary constraints. Interestingly, the hazards that are associated with such products rarely feature on the minds of these customers. While looking at the issue of counterfeiting and piracy, clients that purchase these products either do so knowing that the products are counterfeit or are oblivious to the fact that the products are fake.


It is important to note that counterfeiting and piracy steals market share from legitimate businesses and undermine innovation, which usually negatively affects economic growth. Criminal networks and organised crime thrive via counterfeiting and piracy activities. It is not surprising that such groups target informal markets as a means to distribute their products, given that these offer them higher profit margins. Also, given the unregulated structure of such markets, they encounter a lower risk of detection. Another factor that makes these markets attractive is their large nature, which offers manufacturers of counterfeit products a huge market in which they can trade, given the intricate distribution networks that exist therein.

A report by the Organization for Economic Cooperation and Development (OECD) that delves into the economic impact of counterfeits and piracy raises some of the key concerns in terms of the effects that these products have and classifies these into different categories. I would like to concentrate on some of the socioeconomic effects, with a specific focus on criminal activities and employment.

In as far as criminal activities are concerned, the report makes the point that counterfeiting and piracy transfer economic rents to parties which are often engaged in a variety of illegal activities, including tax evasion and drug trafficking. It can be assumed that a portion of the rents is eventually used to sustain further criminal activity, in a corrupt and organised manner. While I tend to agree with this point of view, it is important to add that informal markets have for long been driven by a sense of micro entrepreneurship that has birthed innovative ideas and products due to the cut-throat environment under which they operate, with the view of trying to remain afloat. Seeing as most businesses in the sector operate in areas that are intricately intertwined with poverty, the quest to make a quick buck will push most of them to disregard intellectual property rights and opt to sell products that are in demand.

Counterfeiting and piracy affect employment by shifting jobs from rights holders to infringing parties, which is where a large part of the informal economy comes into play. The shift has implications for the welfare of employees as working conditions in the sectors where these activities occur are often far poorer than those prevailing in the recognised firms that usually offer their employees better terms of employment and adhere to health and safety standards. Although OECD raises a fair point in this sense, it is of vital to take into consideration the fact that unemployment is a scourge that is bedevilling developing nations. The shrinking availability of formal employment opportunities leaves even highly qualified graduates with little option but to venture into informal business that are a huge driver for pirated products due to their higher unit profitability.

While trying to unpack the issues that arise from counterfeiting and piracy, it is crucial to unpack these by looking at both sides of the equation. Understanding the drivers of counterfeiting from an informal sector perspective is key to finding viable solutions to this vice. For example, companies that manufacture cosmetic products can produce smaller package units that are targeted at informal markets. This would enable them to tap into the consumer demographic in such economies. This strategy has been successfully implemented by some multinational companies that manufacture household consumables. Seeing informal markets as part of the solution instead of the problem will immensely contribute to the strategy aimed at combating counterfeiting and piracy.

Informal Economy Analyst.

The Politics of the Informal Economy

The informal economy has gradually been growing in size over the past few decades. The sector is a significant part of economies in developing nations, especially those in Latin America and Sub-Saharan Africa. In some parts of these regions, it accounts for up to 90% of the employment demographic and contributes up to 40% of GDP in others. While these statistics may look appealing at face value, a deeper understanding of the dynamics within the sector present a different picture.


At face value, the statistics on employment can easily be misconstrued as a representation of positive social development. In reality, a majority of those that are engaged in informal businesses venture into it due to the lack of options to earn a living. A commonality in the regions where the sector is a prevalent feature of national socio-economic parameters, issues such as a shrinking availability of formal employment opportunities as well as the high levels of poverty and inequality are prevalent.

Some factors that keep those that are engaged in the sector trapped in informality include poor access to finance that would facilitate the scaling of their businesses, the application of low level skills without upgrading these over time which affects their productivity and the lack of properly structured business records. A big percentage of business owners in the sector remain caged in poverty cycles which inhibit their graduation into prosperity. In this ecosystem, the status quo upholds a scenario whereby cheap raw materials and human resource are available for established formal enterprise.

It is interesting to note that myths about the informal economy are based on issues such as governance and taxation. One such misconception is that informal businesses are plagued by a lack of regulation. Most informal businesses operate through institutions whose basis of operation revolves around interest groups around which they tend to organise. In a policy brief paper, the Netherlands Institute of International Relations clarifies this by pointing out that the informal economy can be understood as an alternative mode of economic governance outside the state. The term “hybrid governance” is used to provide a more accurate depiction of actual economic governance in the sector, whereby the state has no exclusive regulatory authority over economic activities and non-state institutional arrangements provide a form of economic order.

Also, the myth about taxation of informal enterprises is that they do not pay taxes. The institute further acknowledges that cases of informal taxation of small traders exist whereby they pay a ‘special fee’ in return for a lower tax or protection from harassment by state agents such as customs officials or police officers. In Kenya, this scenario presents itself in cases where small traders pay cess fees to county governments under which they operate.

All in all, the informal sector is one that is seldom understood and often misrepresented. This can be attributed to its neglect by the governments under which it operates, mainly due to the fact that a majority of those that are engaged in the sector mostly consist of the financially disempowered members of the society. It is imperative that the interventions aimed at supporting this crucial sector of the economy are streamlined into public policy. Implementation of such strategy will provide a solid foundation upon which sustainable economic empowerment and financial inclusion can be achieved.

Informal Economy Analyst

Jobless Growth in Africa

Despite the fact that East Africa remains the fastest-growing sub-region in Africa with an estimated growth of 5.6 percent in 2017, up from 4.9 percent in 2016, it still grapples with low job growth rates. The African Economic Outlook 2018 by the African Development Bank Group (AFDB) further notes that it is imperative for sustained economic growth to create jobs which positively impact poverty reduction and lead to more inclusive growth.


According to the report, the combination of high economic growth and low job creation has given rise to the claim that Africa is experiencing jobless growth. The findings of the document point to the fact that in the last decade, faster-growing countries in Africa actually generated fewer jobs than countries that grew more slowly. The slow job growth has mainly affected two demographic groups; women and youth aged between 15 to 24 years. Estimates of African population data indicate that it had 226 million youth in 2015, a figure projected to increase 42 percent, to 321 million by 2030. Its labour force is also projected to rise from 620 million in 2013 to nearly 2 billion in 2063.

In an effort to sustainably reduce poverty, economies must create more productive jobs, which are better remunerated and better-quality jobs. For this to happen, AFDB recommends that countries engage in structural transformation, which is a process whereby capital and labour is shifted away from low-productivity sectors toward higher-productivity sectors.

Structural transformation has encountered slow implementation due to a couple of reasons. First, the agricultural sector remains the dominant source of jobs in Africa, accounting for about 51 percent of employment in these countries, most of it in subsistence agriculture. The document highlights that almost 84 percent of Africa’s poverty is a result of employment in agriculture and services sectors. Second, the shift to manufacturing has been focused toward a comparatively small sector, which has the third-lowest relative productivity level after agriculture and services. Also, the labour resources that left agriculture have shifted toward wholesale and retail trade, much of which is characterized by low-productive informal activities.

As per findings of the report, the informal sector remains a key source of employment in most African countries, accounting for approximately 70 percent of jobs in Sub Saharan Africa and 62 percent in North Africa, with 93 percent of all job growth in Africa in the 1990s being accredited to the informal sector. The last factor that has slowed down the implementation of structural transformation is the fact that the public sector has generally been the main source of higher-paying formal sector jobs in many African countries. Fiscal constraints and demographic change have combined to limit the future scope of the public sector as a driver of formal sector employment growth.

One key policy recommendation that was proposed on the way forward as a priority for African governments is to encourage and embrace a shift toward labour-absorbing growth paths. In this sense, they should put in place programs and policies aimed at modernizing the agricultural sector, which employs most of the population and is typically the main step toward industrialization. A second priority is to invest in human capital, particularly in the entrepreneurial skills of youth, in an effort to facilitate the transition to higher-productivity modern sectors.

In as far as reversing the fortunes of the manufacturing sector, it is proposed that emphasis should be placed on light manufacturing, which is typically considered key to job creation in Africa. Doing so requires developing export capacity, given the continents small domestic markets. The interrelated nature of agriculture and manufacturing is crucial to achieving job creation as both are labour intensive. In the highly heterogeneous service sector, the way forward is to develop modern services while improving the productivity of informal activities.

Seeing as informality is a key component of African labour markets in that it accounts for an estimated 50–80 percent of GDP, 60–80 percent of employment, and up to 90 percent of new jobs on a continent where more than 60 percent of the population performs low-paid informal jobs, policy makers should avoid burying their heads in the sand and recognize the diversity and importance of the sector as a profitable activity that may contribute to economic development and growth.

Informal Economy Analyst.

Improving Informal Business

The past decade has been characterised by the gradual growth of informal businesses in the sub Saharan region. A global research-policy network, Women in Informal Employment: Globalizing and Organizing (WIEGO), states that regional estimates of the size of the informal sector provide a useful overview, but they hide the diversity that exists within a region.

In Sub-Saharan Africa for example, informal employment tends to account for a smaller share of non-agricultural employment in southern Africa (33 per cent in South Africa and 44 per cent in Namibia) relative to countries in other sub-regions (82 per cent in Mali and 76 per cent in Tanzania). Some of the factors that have accelerated this growth include the rapid rate of urbanisation, a decrease in the number of formal employment opportunities as well as increased rates of poverty.


While it may be argued that informal businesses provide a source of living for many families that would have otherwise been struggling to get by, the jobs that exist therein are poor quality ones. This is due to the fact that jobs in this sector of the economy do not offer any health or terminal benefits, as most operate on a wage-based model. Also, the conditions under which most operate are not conducive for the generation of business opportunities that may enable them to scale. For those that are involved in manual labour, a vast majority are exposed to highly risky environments as they do not have the requisite protective gear that would help them avoid work related injuries. Another common factor of businesses in the sector is their low level of productivity.

Policy makers have suggested various interventions for the sector that would see the improvement of informal businesses in a way that increases their incomes and offers some sort of decency to the lives of those engaged in businesses in the sector. One of the proposals that has been put forward is that of formalising informal businesses. It is often seen as a positive intervention from the perspective that it would not only make these enterprises more profitable, but also increase the tax base of a government, given the expansive nature of the sector.

One of the reasons that discourage informal businesses from formalising is the cost that comes with formalisation. Once they are formal, businesses are required to obtain certain licences as well as adhere to health and safety standards, all of which have a higher price tag than the cess fees that they are accustomed to paying. This aspect would naturally require such businesses to factor in these costs to their goods and services. An increase in pricing generally means that they would lose out on a certain percentage of their clientele who were accustomed to the lower prices.

Furthermore, given that the clientele of these enterprises mainly consists of low income households, the reality of a reduction in their base support system due to an increase in pricing makes the formalisation narrative a hard sell. A conundrum exists in the sense that on one hand, these businesses would like to grow to become more profitable entities while at the same time wanting to maintain their existing customer base. On the other hand, most of them would prefer to remain under the radar of the authorities in a way that minimises the taxes that they would have to pay and extra costs that accompany formalisation.

As it stands, most informal businesses are yet to be convinced that they will benefit from formalizing. When selling the formalisation narrative, policy makers and authorities need to better articulate the benefits that come with formalisation for informal businesses. This should be accompanied with interventions that enhance their business management capabilities, skills upgrading as well as increased access to finance as a precursor to formalization.

Informal Economy Analyst.

Economic Inclusion in Africa and Latin America

Global development is an aspect that is at the centre of programs that are aimed at improving the quality of life of people around the world. Africa and Latin America are home to most of the world’s developing and third world economies where poverty is rife. In this sense, they are constricted in their growth by socio-economic dynamics that revolve around health, education, income and occupation among other factors. A majority of the societies that comprise the populations of these nations earn a living through the informal economy.


Hernando de Soto is a Peruvian economist who has for a long time been a champion of the informal economy. He has authored books on how governments should best interact with this crucial sector of the economy with the aim of harnessing its power and formalising their operations, with special reference to Latin American economies. In a review of his book ‘The Other Path: The Invisible Revolution In The Third World’, published in the New York Times, de Soto argues that Latin Americans need to look as much at their own societies as to the outside world for the causes of their poverty and insists that they are caught up in policy regulations that deliberately inhibit innovation and initiative.

He proposes that the way out of the situation lies in the region’s informal sector. Backed by research that he conducted in urban areas of Peru, he concludes that despite decades of effort to stamp it out, the informal sector is the most dynamic part of the informal economy for it accounted for more than half of the country’s production. In other countries in the region such as Argentina, Mexico and Columbia, he said the figure is at least one third of production.

The situation in Africa is not far from that in Latin America in as far as the size and dynamics of the informal economy. Estimates from the International Labour Organization put the average size of this sector in Sub-Saharan Africa as a percentage of gross domestic product at 41%. In Kenya, this sector contributes 35% of GDP and accounts for 89.7% of employment outside agriculture. Over the past decade, there have been interventions by governments in the region to address issues that the sector is grappling with such as access to finance and upskilling.

The establishment of programs such as the Women Enterprise Fund and the Uwezo Fund in Kenya were set up to target women and youth, who form the bulk of informal business operators in the country. Such interventions need to be backed by policy amendments that facilitate the business environment in which the informal sector operates in a way that allows them to grow in the long term.

By releasing the creativity and energies of millions of would-be entrepreneurs, Mr. de Soto believes that national economies in Latin America can be strengthened and the region can enjoy a spurt of growth. The same can be said for Africa. Entrepreneurs, he concludes, would join the mainstream economy, thereby improving their material status and gaining new opportunities, were they not prevented from doing so by a legal system designed to thwart them.

Informal Economy Analyst



The Cost Of Informality

In a quest to formalise informal businesses, there are certain factors that stand in the way of this goal. It is clear that a good number of informal enterprises operate the way they do due to the underlying socio-economic background in which they find themselves working. For example, most of these are formed in areas where poverty is prevalent. In a bid to make these businesses formalise and hence become viable and profitable entities, some of these factors need to be taken into consideration as they can be used as catalysts or incentives to formalisation.


The International Labour Organization points out the fact that informality inhibits investment in bigger business ventures because they lack the necessary capacity and size to fully exploit economies of scale. One factor that drives this notion is their low levels of productivity due to poor access to skilled labour. However, this is not the case for larger formal enterprises for they are in a better financial position to access high-skilled labour and can hence fully exploit economies of scale which enhances their profitability.

The lack of secure property rights especially for micro and small enterprises deprives them access to credit and capital. This is a huge hindrance whenever they try to expand their business operations in the sense that their businesses do not possess the legal title deeds to the physical residences on which they conduct business. In this sense, their businesses cannot be used as collateral whenever they try to get loans from financial institutions. This mode of operation also makes it difficult for them to access legal and judicial systems to enforce contracts.  This aspect for example impedes them whenever they try to participate in the tendering processes of bigger companies or even government business.

Another obstacle for informal businesses is that most of them lack social protection. The fact that a vast majority of these are not registered units puts them in a situation where they are not recognised by governments under which they operate and hence fall outside of the official regulation network. This leaves them vulnerable to exploitation for they are not protected by social and labour legislation. Corrupt government officials often demand bribes to ensure that they remain in business, which is an unnecessary expense in the long run.

What comes out clearly is that some of the mitigation strategies that need to be embraced and implemented revolve around issues that deal with capacity development especially upskilling as this is a crucial requirement for boosting the productivity of informal businesses. Also, the development and harmonization of informal organisational structures should be done in a way that enables them to own the working spaces under which they operate, be it on a collective or individual basis.  More importantly, the improvement of conditions of employment in the sector in as far as occupational safety and health policies are concerned is another area that needs to be addressed. This includes looking into the promotion of labour rights, the extension of social protection to reach the most vulnerable and a favourable regulatory environment that discourages corruption.

In a bid to encourage formalisation, the above factors need to be strongly considered. The most viable way to tackle the problem and move forward would be to target top tier small and micro businesses in each of the sub sectors in the informal economy and engage these in a pilot programme. This  would then be used to precisely map out the challenges faced on the path to formalisation with the aim of developing and implementing tailormade strategies for the different business sizes in each sub sector.

Informal Economy Analyst.