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.

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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.

litualex@gmail.com

Informal Economy Analyst

 

 

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The African Retail Market

According to the United Nations Economic Commission for Africa (UNECA), the African retail market is characterised by approximately 90% of transactions occurring through informal channels. This points to the existence of an opportunity for the increased establishment of formal retail presence to capture larger portions of this market share. Tapping into markets that are dominated by the informal economy presents formal retailers with a key to unlocking the potential of the African market in as far as leveraging the customer base presented by the population therein. However, hurdles such as the diverse consumer mix, low levels of established distribution networks, infrastructure constraints and political and economic uncertainties are some of the challenges that big formal retail chains have to contend with when setting up in-country operations.

(Source: https://thisisafrica.me)

The “African Powers Of Retailing Report 2015” published by Deloitte tracks the progress of the top African retail performers on the continent. While the top 25 retailers have a limited operational presence in Africa, operating in 21 out of 54 countries on the continent, other countries, such as Algeria, Sudan and Ethiopia, are among the top 10 countries by retail market size but have no listed African Retailer present. Nigeria is the largest retail market in Africa with a retail size of US$122.9 billion as of 2013. However, East Africa – particularly Kenya – is still being identified as the next market for major South African players. Apart from Kenya’s attractive GDP of US$56.1 billion at the time this report was published, it has 25-30% formal retail compared to 60% in South Africa.

It is worthy to note that Nigeria’s retail market is largely fragmented, with the top 6 retailers accounting for barely 2% of sales and 98% of Nigerians shopping in small, local and informal outlets. The importance of the informal economy in Africa cannot be overlooked considering the fact that small, local and informal retail transactions account for 96% in Ghana and 98% in Nigeria and Cameroon. Even in Kenya, the vast consumer base in rural areas still shops at informal outlets, which accounts for approximately 70% of retail shopping. Zimbabwe also has a fragmented retail market and is seeing a recent upsurge in small “tuck shops”.

It further states that as the African economy continues to improve and expand, it is likely that groceries will be a key driver of industry growth across the continent’s retailing industry. The approach that retail multinationals in search of developing their presence in Africa have used in a quest to set up operations in the African retail market is that of acquisitions of local companies or directly establishing their retail stores in-country. How increased access to the informal sector will play out as retailers compete for share of wallet beyond the main urban centres remains to be seen.

Given the above statistics, an avenue which would be worth considering for formal retail multinationals is that of incorporating an informal market operational strategy into their business models. Developing deliberate linkages with this sector of the economy will be a huge game changer and bolster business for both sides of the equation.

litualex@gmail.com

Informal Economy Analyst

 

Leveraging Informal Business

Considering the fact that sustained poverty coupled with subpar economic growth has continued to inhibit growth in the demand of locally manufactured goods, effective demand continues to shift more in favour of relatively cheaper imported manufactured items. In addition, the high cost of inputs informed by poor infrastructure which leads to high transport costs has led to high prices of locally manufactured products thereby limiting their competitiveness in the local and regional markets. With the view of looking towards ways in which this trend can be turned around to benefit locally manufactured products, certain aspects need to be taken into consideration.

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Working through the informal sector is one of the avenues that presents a huge opportunity when it comes to penetrating the local and regional markets. The sector has market networks that are vastly untapped. Formal firms need to venture further into fostering links with informal firms in a way that is mutually beneficial. In this sense, there are different ways in which this can be achieved.

The first and foremost aspect that formal firms should look into in order to get the right partners to work with in the informal sector 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 informal firms.  Informal businesses have an access to clients that would not be readily available to formal businesses. Customers to their businesses often purchase goods and services that are at a lower price point. Tapping into the economies of scale from this angle will be a huge plus for any formal business that can avail their products and services that meet the needs of these customers. Unpacking this dynamic will assist in coming up with tailor made marketing structures around which they can upscale the production of their products and services.

Another thing to consider 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.

An 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, be they in the form of Sacco’s or cooperatives.  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 sorts of associations provide a unity of purpose and act as a pillar of stability for informal businesses for it is through them that they can better interact with other bodies such as government bodies in cases of conflict resolution or even financial institutions whenever they require to access loans. Associations in this sense, offer security to the individual entrepreneurs, for it is through these that they can access loans to grow their businesses as well as better market their products.

Businesses in the manufacturing sector should look into value addition strategies that target the micro and small businesses that they intend to be suppliers of raw materials for their finished products. This is especially important for those that rely on agricultural raw materials. Partnering with small scale farmers for example, with a view of improving the quality of their yields, is a worthwhile investment. Promoting a culture of interacting with these farmers on best practices in crop and animal husbandry is a long-term investment that will ensure a long term consistent availability of good quality raw materials, as well as improve the incomes on both sides of the coin.

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 as well as build the capacity of informal businesses.

litualex@gmail.com

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.

(Source: http://www.smallbusinesscomputing.com/imagesvr_ce/6102/Collaboration_595)

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.

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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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 

 

Informal Business Dynamics

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(Source: https://www.google.com/)

One of the key areas of focus when setting up a business is knowing who your customers are. Targeting the right type of clientele is one of the pillars upon which the success of a business is based. With this in mind, it is important for a start-up business to know beforehand what their niche market is so as to channel its resources in the right manner. Aspects like getting the right location as well as having the right information on the profiles of customers within ones area of operation are key factors that dictate whether a business will succeed or fail. This is no different for informal businesses.

This aspect came out clearly during a recent visit to Nanyuki, a town in Laikipia County – Kenya, while interviewing different businesses in the informal sector. Victor Gaita, the chairman of the Nanyuki Municipality Jua Kali Association which has a membership of 150 businesses, pointed out some factors that determined the levels to which businesses within the association generated income. The first was that despite the fact that some of the craftsmen had the requisite skills to make high quality furniture like beds that would cost Kshs 35,000, they seldom did because these sold much slower than those that cost Kshs 4,000. The latter cost appealed to the low income clientele who frequent their premises.

Another factor that determined the level to which members generated income was their location. Those that operated from residential areas had higher returns than those that are located in the market places. This is due to two factors. The first is that those in the residential areas were not frequently visited by the county officials, which reduced the amount of bribes that they had to pay. This angle has a downside to it, in that due to the fact that the county officials do not frequent the residential areas, these businesses get away with not having to pay most taxes that are required of them, which gives them an unfair competitive advantage.

The other factor is that the cleanliness of the environment under which they operate determines the type of clientele that will visit their business premises. Those that are located in the market places often have to deal with the inefficient service provision by the county government when it comes to garbage collection. They are also congested in their working spaces, something that doesn’t encourage clients to visit their premises. Those in the residential areas operate in clean and spacious environments hence end up attracting higher end clients.

Phyllis Micheni is the chair of Jambo Kenya Women Group which is an association that is comprised of 15 members. Their core business is the manufacturing and selling of curios that include wood crafts, jewellery, hand woven carpets and African themed clothing. She noted that most of their clients were mainly tourists and locals that have a higher income dispensation due to the quality of their products and costs of production. Their prices were too high for the local clientele. Their main challenge was marketing their products and are thus looking into ways in which they can upscale their vending points in areas frequented by tourists.

 

litualex@gmail.com

Informal Economy Analyst