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.

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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.

litualex@gmail.com

Informal Economy Analyst.

 

 

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Lessons from Hernando De Soto on the Informal Economy

Hernando De Soto’s Theory on the informal economy looks at the reason as to why capitalism is a system that cannot work in developing countries. The theory explains why capitalism has succeeded in particular western countries and failed in other parts of the world. As he aptly puts it, the major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital.

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He further adds that in these areas where poverty is prevalent, most of the poor possess the necessary assets to produce capital. The problem in place is that these resources are held in defective forms in terms of a lack of proper documentation, a lack of property rights and basically no form of formal representation hence the reason why they cannot be turned into capital. In this sense, these assets can only be traded in informal circles.

Further, seeing as the broader definition of the informal economy encompasses unregulated economic activities in an environment in which similar ones are regulated, businesses in the informal economy often feel comfortable operating outside the official government regulatory framework. This makes them susceptible to a myriad of risks from which they cannot gain legal protection.

According to De Soto, a country with any proportion of informal economy will never have reliable macroeconomic figures. This is due to the fact that informal economy systems lead to a strong preference of using cash while carrying out transactions. It gives birth to a situation whereby the influence of informal activities on an economy can only be measured by indirect means with a long information delay. This is true in as far as getting data on the informal economy goes. A good example is that of the Micro Small and Medium Sized Enterprises 2016 Survey by the Kenya National Bureau of Statistics which is an estimated projection of the informal economic space in the country. It was compiled using official data that was available on the sector, leaving out a lot of small and micro businesses in their analysis.

Strategic efforts aimed at strengthening informal businesses in a way that they gradually grow from micro, small and medium enterprises into formidable formal enterprises should focus on fixing the systemic legal and policy issues that force these businesses to operate outside the legal frameworks. By doing this, we will be building a society where wealth creation is an aspect that is achieved and felt across the different levels of the socio-economic demographic.

In an interview with McKinsey & Company, a management consulting firm, De Soto demonstrates the relationship between the informal economy and poverty in the following words, “It is very simple if you are poor in a Third World country. If you don’t make an income in the first month, you are dead in the second month. So, it is very hard to be unemployed in a Third World country, because life takes place on another level. The sign of progress that I would like to see is that the body politic basically recognizes that the poor are an enterprising poor. They are not the problem, but the solution”

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.

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

 

 

 

 

 

 

 

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