The Role of Informality in Urbanization and Industrialization

The Economic Report on Africa 2017 was released by The United Nations Economic Commission for Africa(UNECA). This year’s report looked into ways in which the continent can harness industrialization to better structure the fast pace at which urbanization is taking place. Given that Africa is the fastest urbanization region after Asia, the report puts emphasis on the fact that only under the right policy frameworks can this momentum be leveraged so as to accelerate industrialization.

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(Source: http://www.uneca.org)

Some of the proposed measures point to ways in which informal businesses can be made a part of this process. One such measure was to bank on the links between informal and formal sectors, for these are mutually beneficial and dependent. Those involved in industrial land use planning should consider the needs of informal enterprises, given their importance for job absorption and the challenges they often face in finding adequate premises for work.

One option is to try to meet industrial firms’ location-specific needs through Special Economic Zones (SEZs) and industrial zones. These will bring the most benefits if they are well connected to the urban economy, including the informal sector firms that can provide low cost inputs and use linkages as a path to growth and formalization. SEZs present opportunities for co-investment by formal firms and the public sector in infrastructure and technical and vocational education and training, which can broaden participation in economic growth and provide avenues for inclusion of critical workforce groups such as women and youth. These links to markets and skilled labour are critical.

The report further states that studies suggest that informal operators benefit from clustering through the various sectors in which they operate, and that they generally have a positive impact on their formal sector counterparts. It is with this in mind that agglomeration economies should be considered in the context of locational policies related to the informal sector and a path to formalization. Agglomeration economies can benefit the informal sector particularly through proximity to suppliers and purchasers.

Also, low-tech, labour-intensive infrastructure projects accessible to SMEs are a major opportunity for urban job creation. Lower-skilled labour-intensive technologies have high potential in some public investment sectors, including roads. A good example is that of Ethiopia whereby between 2005 and 2008 through a cobblestone roads and pavement programme, more than 90,000 jobs for young people were created. This led to the establishment of 2,000 small and medium enterprises. The project included backward linkages to domestic inputs—cobblestones—and labour-intensive skills in quarrying, chiselling, transporting and paving. The programme, implemented in 140 towns and villages, built around 350 km of road.

In terms of access to finance, Sudan has taken steps to improve this for industrial firms, including SMEs. Policy efforts in 2013 simplified the regulatory framework for financial access and new bank branches, and the central bank made preparations for mobile banking. These reforms targeted small enterprises, which make up 93 per cent of manufacturing firms, by requiring that commercial banks set aside 12 per cent of resources for microfinance. It is with this spirit that African countries must leverage the force of urbanization to drive and enable industrial development for a prosperous and equitable future.

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

 

Developing value chains for micro enterprises

During this past week, the Ministry of Industrialisation and Enterprise Development organised an exhibition in Nairobi which was aimed at bolstering the sales of apparels that are manufactured at the Export Processing Zones (EPZ). Cabinet Secretary, Adan Mohamed announced that government had decided to avail up to 20% of goods and apparels manufactured by companies at the EPZ to the local market at affordable prices but for the same export quality. He added that some outlets will be opened around the country by small and medium sized enterprises where Kenyans can access the items after the exhibition.

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(Source:www.pension-watch.net/silo/images/blogs/11805_1323355569)

This is an interesting development considering that EPZs were set up with the initial intention of producing goods for export only. The government also intends to set up Special Economic Zones (SEZs) in key urban centres in the country whose main goal is to diversify manufacturing activities and create employment. Pilot programs for this project are currently ongoing in Mombasa, Lamu and Kisumu. As a means to fast track the establishment and growth of SEZs, the government exempted all supplies of goods and services to companies and developers in the zones from VAT and reduced the corporate tax rate for enterprises, developers and operators to 10 per cent for the first 10 years and 15 per cent for the next 10 years.

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.

This is a move that if properly executed, will be an avenue for sustainable business growth and development for micro enterprises that operate in the agriculture, manufacturing and tourism sectors. This is the right time to look at value addition strategies that target the micro and small businesses that will be suppliers of products and services to the SEZs. In its strategy on decent work in the informal economy, the International Labour organization (ILO) suggests that one way to improve the sustainability of these informal enterprises may be to link them in cooperative structures where jointly owned input supply, credit and marketing services can be organized without compromising the autonomy of the individual entrepreneur.

It will be interesting to see the extent to which informal enterprises will benefit from SEZs. Deliberate thinking on how to link informal manufacturers with the SEZ initiatives is important. Strategies need to be developed to enhance the capacity of informal manufacturers to better service the formal enterprises that will be operating from the industrial parks. Such measures should include, but not limited to training, business mentoring and organizational development projects to better position the informal sector and their ability to meet orders by the established formal organisations. Doing so would improve their capacity to deliver quality products and thus better integrate them into the value chain.

litualex@gmail.com

Informal Economy Analyst

 

 

 

Lessons from informal business

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

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

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

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

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

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

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

litualex@gmail.com

Informal Economy Analyst 

 

Hawking In Nairobi

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

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

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

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

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

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

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

litualex@gmail.com

Informal Economy Analyst 

 

Working Poverty

During the past decade, there has been a rise in the number of people pursuing alternate means to employment as a means of raising their living standards. This can be largely be attributed to the high levels of unemployment as well as the rising number of people that are engaged in poor quality jobs. The informal sector creates poor quality jobs and is an avenue for a large percentage of the population to find an extra source of income.

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

In the light of this factor, the International Labour Organisation (ILO) has released the World Employment Social Outlook 2017 report. It focuses on trends in job quality, paying particular attention to working poverty and vulnerable employment. What come out clearly is the contrast in the growth of the regional economies over the past decade vis-à-vis the employment and poverty trends. The report states that Sub-Saharan Africa continues to report the highest rate of youth working poverty globally, at almost 70 per cent in 2016, while facing rapid growth in the number of youth in the labour force.

It further states that Sub-Saharan Africa’s unemployment rate is forecast to be 7.2 per cent in 2017, unchanged from 2016. While the unemployment rate remains stable, the number of unemployed is expected to increase from 28 million in 2016 to 29 million in 2017 due to the region’s strong labour force growth. Poor quality employment, rather than unemployment, remains the main labour market challenge in the region. With this in mind, the lack of productive opportunities for youth and adults alike meant that 247 million people were in vulnerable employment in 2016, equivalent to around 68 per cent of all those with jobs.

Statistics from the report show that an additional 12.6 million youth in the region will enter the labour force over the next four years. Due to growth in the working-age population, the number of people in vulnerable forms of employment is expected to increase by 14.6 million. Further, the outlook is particularly challenging for women, who are more likely to be in vulnerable employment, largely as contributing family workers. The share of female workers categorized as contributing family workers, at 30.6 per cent, is more than twice the rate for their male counterparts, at 14.0 per cent, with women additionally over-represented in informal non-agricultural employment.

The issue of vulnerable employment is linked to that of working poverty. The report adds that Sub-Saharan Africa continues to be characterized by elevated rates of working poverty, with 33.6 per cent of all employed people living in extreme poverty in 2016 – i.e. on less than US$1.90 per day – and an additional 30.1 per cent in moderate poverty – i.e. between US$1.90 and US$3.10 per day. This corresponds to over 230 million people in sub-Saharan Africa living in either extreme or moderate poverty.

These numbers are a strong indicator as to why the informal economy continues to consistently grow in the region. The downside to having a large informal economy is that those that are involved in the micro businesses cannot afford to access proper medical attention as well as other social welfare benefits. It would be prudent for policy and decision makers to look into and implement strategies that grow the capacity of informal businesses to enable them to become profitable entities. This will reduce the high levels of poverty by providing sustainable incomes to a vast majority of households.

litualex@gmail.com 

Informal Economy Analyst 

Informal Garages Rule Kenya

There has been a steady rise in the number of informal motor vehicle garages and repair shops over the last few years. It is no wonder that the sector currently accounts for the highest number of persons engaged in the licenced MSMEs by economic activity and establishment size. According to the Micro, Small and Medium Enterprises 2016 Survey released by the Kenya National Bureau of Statistics, those engaged in the repair of motor vehicles and motorcycles formed the majority of persons engaged in MSMEs. This demographic group represented 36.3% of the total number of small businesses in the country.

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(source:http://www.openair.org.za/wp-content/uploads/2017/01/Truck-repairers-at-Suame-Magazine.jpg)

There are two main categories in the motor vehicle repair industry. The first one constitutes of new vehicle dealers. These offer after sales services inclusive of repairs. They are however limited to a warranty that is based on a set mileage. The second category is that of independent garages and workshops. These mainly handle a majority of the second hand imported vehicles as well as some new vehicles whose warranty with the new vehicle dealers has expired. It is in the latter category where these MSMEs are located.

It is with this in mind that the importance of ensuring professional standards in this sector are adhered to. A large number of these mechanics learn their trade through apprenticeship. This was what I found out during an interview I conducted with Barak Okoth, the Secretary of the Kisumu County MSE Association. He informed me that a majority of the artisans involved in the motor vehicle repairs industry were primary school dropouts who require to up skill their technical knowledge. Most of them can visually identify spare parts but do not know the technical terms which identify them. This poses a risk to the quality of repair work and service they offer. Any minor mismatch to this end will affect the performance of motor vehicles that undergo repairs in such garages. He also noted that the equipment that they use is outdated.

The Ministry of Industrialisation tasked the Kenya Motor Repairers Association (KEMRA) and the Kenya Bureau of Standards (KEBS) to develop a code of practice for motor vehicle garages for repairs and services. In consultation with other stakeholders in the industry, the KNWA: 2460 was drafted and formulated. It is a standardisation code of practice for this industry that dictates that motor vehicle garages adhere to the delivery of quality service during repairs of motor vehicles. One of the aims of developing this code of practice was to reduce accidents caused by faulty repairs. During the launch of the code of practice, Benard Ngoe who is the chairman of KEMRA pointed out that only 20% of informal garages follow professional standards.

In order to minimise the carnage on Kenyan roads, it is of key importance that focus be put on developing training programs that target informal motor vehicle mechanics. Key areas of implementation should include upskilling to enable the use of modern tools and equipment that are more efficient in diagnosing and servicing motor vehicles. This will ensure that informal garages will improve the quality of services that they offer. It will also give informal garage operators an avenue to upscale their operations thus improving the livelihoods of those engaged in this critical sector of our economy.

litualex@gmail.com 

Informal Economy Analyst