The hidden role of informality in formal business

The synergy between formal and informal businesses is a factor that should be leveraged upon by those looking to improve and strengthen the business environment on the African continent. The multiple definitions of the informal sector have often not been precise, especially whenever it is looked at in relation to the formal economy, and not as a distinct entity. It is with this in mind that the authors of the research paper “Informal Sector Dynamics and its Role in the Capital Accumulation Process interestingly point out that the central meaning and relevance of this phenomenon of informality as a sector or workforce become clear only when considered in the light of the global capital accumulation process.

(Image Source: https://gemkonnect.files.wordpress.com)

It is common knowledge that in today’s world, the informal sector is an integral and essential part of global commodity and value chains. What is at the core of the interaction and dynamics between the two sectors is a range of flexibilities that can be ascribed to informal sector processes.

Factors that are common in informal circles such as the lack of a regulatory environment, the flexibility or absence of labour contracts and the ability to stretch hours of operation at ease are adopted by formal firms when they subcontract informal firms to perform some of their production and distribution jobs. It is this flexibility and managing to keep transaction and labour costs to the minimum, which is at the core of the dynamics of small enterprises that allows them to survive and provides them the competitive edge. This advantage is made use of by large multinationals in their pursuit of global profits.

Also, formal firms further accentuate informality through their restructuring processes. This is done in cases whereby the formal firm downsizes its labour force and thus forcing people into the informal sector as a means of survival and source of livelihood.

What comes out clearly is that there are two distinct processes in which informalisation of employment takes place in formal sector firms. The first is to employ labour without any permanent wage or employment contract or provide any employment benefit. The other is to subcontract operations that were earlier performed by employees of the firm to smaller or ‘specialised’ enterprises. A particular form of this is to subcontract operations to labour contractors or suppliers, where even if particular employees are regularly working in the principal firm, they are not considered the employees of the principal firm and are therefore denied any rights, which they would have otherwise got.

The thrust of the idea is to highlight the point that solutions on how to better engage and improve the informal sector can only be effectively implemented by working through formal firms that constitute a crucial part of their value chain. It is vital for policy makers and parties that are involved in drafting strategy to have a clear understanding of the definition of the informality as a means to getting to its root causes in a way that will enhance their engagement processes with the sector.

litualex@gmail.com

Informal Economy Analyst.

Advertisements

Housing Poverty in Kenya

The challenge of offering affordable housing has for long been an uphill task for many developing countries. As at 2016, Kenya had 22,000 mortgages in the country of 45 million people. A report by investment and real estate firm Cytonn further notes that the low uptake in mortgages can be attributed to the high mortgage interest rates offered by financial institutions, which puts the dream of owning a home out of the grasp of many citizens. According to the World Bank, Kenya has a housing deficit of over two million units which increases annually by 200,000 units. Alongside this is the fact that nearly 61 percent of urban households live in slums.

(Image Credit: http://www.daaonline.org)

With one the pillars in the President’s Big Four Agenda focusing on the issue of affordable housing, efforts that look into how low-income earners can own decent housing have come to the forefront of government policy. Considering that about 90% of Kenyans are employed in the informal economy, it is timely that these strategies are being geared towards this segment of the population. In this sense, providing decent housing will be a step in the direction towards curtailing the growth of informal housing settlements, while at the same time reducing social inequalities.

One way of reaping the benefits of inclusive growth is by Incooperating this aspect to the Big Four industrialization pillar. In a quest to develop our manufacturing industries, it is crucial to integrate the building of housing for low-income earners around the different Special Economic Zones (SEZs) into the infrastructure plans of such projects. In this way, workers in these SEZs will be provided with an opportunity to own homes which they can pay for as they work. Further, integrating micro and small enterprises (MSEs) into the supply value chains will provide a means through which they can strategically bolster their incomes in a way that enables them to afford the houses. Linking infrastructure to industrialisation in this way will provide a means through which the affordable housing agenda can be met.

Another way of accelerating home ownership, particularly amongst low-income earners would be by channelling such efforts through cooperatives and more so, Savings and Credit Cooperative Organizations (Saccos). Seeing as these are bodies through which most informal sector participants operate, it would be a positive move for government to get them on board this strategy by incentivising them in a way that would enable these to offer housing loans at cheaper rates. This would strengthen the sources of affordable credit to low income groups. This is an avenue if pursued, would widen the reach of this program to those that desperately need this intervention.

Given the difficulty in accessing affordable housing in the country, the deliberate move by government to make this pipe dream a reality is one that will have a positive impact and contribute to the country’s economy by not only having multiplier effect on job creation in the construction sector, but also developing an ecosystem of services that will provide employment for those that serve the residents of these housing communities.

litualex@gmail.com

Informal Economy Analyst

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.

(Source: https://images.theconversation.com)

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 the 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.

litualex@gmail.com

Informal Economy Analyst

Analysis of the SME Competitiveness Report 2017

The SME Competitiveness Report is an annual document that is published by the International Trade Centre (ITC) whose goal is to provide guidance to policy makers, business managers and trade and investment support institutions. This year’s report SME guide to regional value chains gives a way forward to stakeholders on how to become more attractive partners for lead firms, as well as how to strengthen their bargaining power within these value chains. It looks at how SMEs can best leverage value chains with a specific focus on regional value chains and how they can use these as a platform for internalization.

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

It is interesting to note that over the past last two decades, significant strides have been made in as far as creating a conducive environment for inclusivity in regional trade agreements. Provisions that have been made for gender equality and SMEs has seen the share of preferential trade agreements entering into force with this inclusivity angle more than triple since the late 1990s.

What comes out clearly is that regional value chains are more prevalent and easier to access than global ones. Generally, value chains are clustered around regional activities. However African firms tend to operate in a different manner as it was found out that they are more likely to join production networks outside of the continent. This is especially the case for East African Firms that typically export intermediate inputs to firms in East Asia, Europe or North America.

Also, the lack of regional integration in Africa means that it is more difficult for SMEs on the continent to lower their transaction costs and tap into regional value chains. To this end, the report shows that on the global scene, regional value chain activity was lowest in Africa. In their ranking of SME regional competitiveness, South Africa leads the score on the continent, but lies significantly behind top performers in other regions of the world. The low ranking of Sub Saharan African SMEs is attributed to the lack of a clear headquarter economy in the region.

Further, SME firms generally engage in business functions of low complexity, suggesting that they only capture a small share of value added in the chains. In order to gain traction in the right direction, SMEs can increase their bargaining power by improving the complexity of their goods and services and by also increasing the pool of their buyers. This can also be achieved by focusing on how to improve services as higher value is associated with segments of a value chain that trade services, and not goods. In both developed and developing countries, services are seen to be the glue that holds value chains together.

The report is timely and relevant for stakeholders for it clearly states the importance of having a well-coordinated process around the drafting and implementation of government policies aimed at regional integration processes in a way that enables them to spur the growth and success of SMEs by enabling them to tap into wider markets.

litualex@gmail.com

Informal Economy Analysis