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
Earlier this month I was interviewed by The African Investor on Kenya’s Informal Economy.
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
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.
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.
Informal Economy Analyst
(Source: http://www.africa.com/wp-content/uploads/2016/05/Female-Vendor.jpg )
Informal businesses have often been perceived in a negative light. They are seen to be high risk ventures, a nuisance to formal enterprises and government as well as being of little assistance to the growth and development agenda of most nations. This is due to the fact that most of them have haphazard modes of operation and a majority are not registered and hence do not pay taxes. This sector has however registered rapid growth over recent years. In Kenya for example about 82% of those employed are engaged in informal businesses. The high levels of poverty has exacerbated this growth as a majority of people seek to make a living where jobs are hard to come by.
There are a wide range of issues that, if addressed, will see most of these businesses develop to a level where they will be even more positive contributors to the economy. A place to start would be offering financial literacy programs for those that operate these businesses. Due to the fact that a majority of them do not keep records of their day to day operations, it becomes difficult for financial institutions to offer any assistance because there is no clear basis from which performance can be tracked. The importance of basic skills like book keeping needs to be emphasized when developing capacity building programs for the sector.
Access to health facilities for informal workers is another area that can improved. In my experience while visiting various informal businesses around the country, most business operators have had to leave their work unattended as they try to seek medical attention whenever they fall sick. Most work under deplorable conditions without the required protective gear. The Kenyan government through the National Hospital Insurance Fund (NHIF) has launched a program that seeks to increase the number of informal workers who can access quality healthcare. The program aims to recruit 12 million Kenyans under a cover that sees them pay a monthly contribution of between Kshs 150 to Kshs 500 depending on their income status. This is a step in the right direction that needs to be replicated.
While interacting with businesses in the sector, a major hurdle that has consistently come up is the difficulty they face when trying to market their goods and services. Most do not have the skills required to widen their scope of customers. This is an area that should be considered by those developing capacity building programs for the sector. Another barrier has been the allocation of spaces they are given to operate their businesses. Most of these are in areas that potential customers cannot easily access and are often unattended to by those that collect revenue from them in terms of garbage collection. This considerably compromises the ability of the informal sector to attract clients and customers to their business.
Although information on those engaged in the informal economy is hard to come by, my experience indicates that the sector is ready for engagement; it is critical we tap into this goodwill. However, note that the Kenya National Bureau of Statistics (KNBS) released the Micro Small and Medium Enterprise survey in 2016. In as much as this is a move to be applauded, most of the players in the informal sector that I interviewed over the past few months feel that the report was inconclusive as it excluded a huge percentage of micro businesses. A proper census will need to be carried out to provide a clearer picture of where the sector stands. This will go a long way in better informing policy makers and those that would like to engage with the sector.
In conclusion, these interventions can be best leveraged through bodies such as the Micro and Small Enterprises Authority (MSEA), who have established a credible network around the country as well as various organizations and associations that work with the informal sector at the county level.
Informal Economy Analyst
The introduction of devolution into the governance structure of Kenya has helped in the decentralisation of power from the national government to county governments. Counties are now responsible for the direction in which they choose to go for they can now legislate their own laws through their county assemblies. Counties have come together to form economic regional blocs whose main aim is to bolster trade within the member counties by pooling their resources. However, most of the regional blocs are still at the inception stage. Just as is the case with many new institutions, there are a few challenges that come up during their formation and growth.
As a means to collect revenue to keep the counties operational, they have had to pass legislation that enables them to collect revenue. This has made each county to come up with its own rates. Businesses that operate between two or more counties, such as those that are in agribusiness, find it very expensive when it comes to paying cess fees. Most of these businesses have to transport their goods to markets that are not in their counties of origin. They are thus required to pay multiple cess fees for those goods across different counties. This replicative system of taxation is expensive for business.
Tribalism has become pronounced in the devolved governments. People who are not from communities that are indigenous to certain counties are finding it difficult to operate even small businesses. This comes out strongly when informal businesses apply for loans at various county offices and get turned away on the basis of their tribal affiliation. Those that come from the region are favoured to the ‘outsiders’. This factor has become so deeply rooted that it is going deeper into clannism. This is whereby people from the same tribe choose to align with members of their clan (sub tribe).
Further, there is favouritism when it comes to the allocation of spaces within which they can work. The Eldoret Market Association is one such organisation whose members have had to struggle with the Uasin Gishu County Government. There have been instances where the county government has issued market spaces to people that are not traders who in turn sell the spaces to the genuine market operators. The County government also tried moving them to an area that is outside the central business district which they declined due to access to customers. Another scenario is the raising of market rates without consultation. The County government intended to raise the market rates to a level that most traders would not have been able to afford. This made the Market Association to sue the County government. The issue is still pending in court.
Some of these issues can be dealt with in a way that is beneficial to both the informal businesses and the respective county governments. One way is by harmonising the rates that are charged by the individual counties. The regional blocs should ensure this so that traders will be required to pay once for transportation of goods across the counties in the region. Also, county governments should consult the traders whenever they plan to allocate working stations. They should also introduce strong accountability structures that ensure fairness in the allocation of funds that are meant for traders. This will minimise instances where loans are disbursed on the basis of favouritism. Stronger efforts should be made to shun tribalism as this is a cancer that is negatively impacting the growth of business in the regions as it tends to drive away potential investment.
Informal Economy Analyst
Employment statistics from the Kenya National Bureau of Statistics indicate that the informal economy is by far and largest contributor, which stands at 82 percent of the total number of people that are employed. The quality of these jobs still remains low as most of them are operated in a manner that makes it hard for them to grow. Most of these businesses do not keep records of their transactions, which makes it hard for them to track the levels to which they have grown. It also makes it difficult for them to access support from financial institutions as there is no basis on which they can measure their financial track record.
Due to this mode of operation, informal businesses have for the longest time been viewed as being incapable of contributing to national development through payment of taxes. An angle that has not been looked into is that of those informal businesses that choose to remain informal as a means of escaping the cost that comes with being formal. This can be seen in instances whereby businesses have remained informal for long periods of time. They present a scenario where they compete unfairly because they can afford to offer lower prices for goods and services that they provide.
A good example of this is that of informal businesses that opt to open numerous micro firms instead of upscaling and growing one business. Such businesses would rather operate under the guise of informality due to the fact that most informal operations escape the radar of government scrutiny as tracking the evolution of such enterprises is difficult. It is an easier option for them to remain dishonest by not acknowledging when they are financially growing. By going down that road, such businesses rob opportunities to new entrants by taking up spaces that could be used by those trying to get in.
Although this is not a widespread practice in the informal economy, it is such businesses that make government authorities approach legitimate informal businesses with a lot of scepticism. Entrepreneurs that choose to go down that road are often stable and make enough money from operating informally as they do not pay taxes. In this sense, the amount of lost revenue to the taxman is quite substantial. By opting to open up multiple micro firms, such businesses escape the dragnet of revenue collection and withhold money that could be used in growing the economy.
There needs to be a census of businesses in the informal sector that includes micro businesses, so that it will be easier for government to come up with policies such as those that indicate how long businesses can operate as informal. A good approach is that of setting a limit on the number of years that a business can be allowed to operate informally, with a graduation scheme that offers incentives for moving up the ladder. This will help curb instances where some businesses hide under the guise of informality. It will also go a long way in bridging the shortfall in government revenue collection due to the ability to know the number of businesses that will have graduated to a level which they can pay taxes. This move will also curtail the unfair competition presented by such businesses in a way that encourages new entrants into the informal sector to be able to do business.
Informal Economy Researcher