The Kenyan Government’s Priorities for the Informal Sector

It is a welcome development to see that the prolonged electioneering period has come to an end, for it was characterised by the slow down and even stagnation of certain businesses that has had a negative effect to the economy. As the new administration comes into office, it is interesting to note that it has prioritised aspects of the informal sector in its agenda. These are articulated in their campaign manifesto, some of which were prioritised by the president during his inauguration speech.

(Source: https://i0.wp.com/www.dhahabu.co.ke)

In their manifesto, the current administration aimed to create and fully implement a robust Small and Medium sized Enterprises (SME) development and support programme which would formalise the large number of informal businesses and support their growth from micro to small to medium sized enterprises, and eventually into large firms. By doing so, they aim at catalysing the creation of at least one million jobs and consequently contributing to tax revenues.

The two main demographic groups that characterise the informal sector are women and youth. Between 2013 and 2016, 12,000 Micro, Small and Medium sized Enterprises (MSMEs) have received training in entrepreneurship and management. The manifesto states that a total of Ksh25bn has been transferred to MSMEs through Youth, Uwezo and Women enterprise funds providing support to close to 15 million people who have been enabled to set up businesses. The plan to establish the Biashara Bank by merging the Micro and Small Enterprises Authority, the Youth Enterprises Development Fund, the Women Enterprises Fund and the Uwezo Fund as a means to coordinating the delivery of affordable financing and support for business development is a move that will enhance the focus on the lack of capital as an impediment to the establishment, growth and development of informal businesses. Notably, through the Women Enterprise Fund, women have demonstrated that they are a highly bankable and reliable borrower with a repayment rate of 92%.

Further, providing low interests loans to youth owned enterprises to enable them to grow their businesses has seen an increase from Ksh4.9bn accessed by 407,793 young people in 2006, to Ksh11.8bn disbursed to 893,438 young people in 2013 under the Youth Enterprise Development Fund. As alluded to above, coordinated efforts towards targeting the relevant demographic groups will fine tune the government’s focus. This should include policies and systems that track the growth and performance of businesses that receive funding with a view of informing the direction to be taken during capacity building initiatives.

The manifesto points out the fact that about 80% of the Kenyan population relies on agriculture for employment and livelihood, and that the sector contributes approximately 27% to GDP, about 40% of government revenue and more than 60% of the total export revenue for the country. The plan to establish the Food Acquisition Programme (FAP) that is aimed at creating market demand and stabilising prices for products from small-scale farmers. Under this programme, the government will buy 50% of it’s food requirements from small holder farmers. The fact that Kenya is a major agricultural exporter and that only 16% of all exported agricultural output is processed, the move by the President to target the creation of 1,000 Small and Medium sized Enterprises in agro-processing is a welcome move.

Efforts to construct the Kenya Leather Park in Machakos for over 7,000 SMEs, the setting up of the Leather Cluster Common Manufacturing Facility in Kariokor as well as increasing the number of Export Processing Zones (EPZs) during their previous term is a step in the right direction. However, to ensure sustained growth of these industries will require that Kenya fine tunes its approach towards agriculture as a base requirement for the setting up of light manufacturing. Key to this is setting up collection points for hides at abattoirs, making beef farmers and pastoralists aware of the right cows to breed for higher quality hides, increasing the productivity per acre for agricultural produce as well as setting up sufficient storage facilities that minimise post-harvest wastage.

litualex@gmail.com

Informal Economy Analyst.

 

 

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Comparative Analysis of Informal Economy in Nigeria and Kenya

The Informal Sector in Nigeria and its Impact on Development is a book by Stephanie Itimi which is based on research on the informal sector in Nigeria. It focuses on three key areas namely employment, gender equality and tax evasion. Employment is looked at from the angle of the effect that the informal sector has on job creation. Gender equality merges with employment and is looked into by examining the role that the latter plays in empowering women financially. The author also provides an analysis of the complex relationship between the informal sector and the principle of tax evasion. This article aims at providing a comparative analysis of the informal sector in Nigeria and Kenya, based on the findings of the book, as well as those from research conducted on the Kenyan informal sector.

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In Nigeria, the informal sector accounts an estimate of 70% of the total industrial employment. The country has the largest informal sector on the continent, which is enhanced by its population size as well as high levels of poverty. The Federal Office of Statistics (FOS) states that the informal sector creates 25,000 to 35,000 jobs each year. However, although this is highlights the job creation role of the informal sector, the author argues that with a country of 153.9 million people, the impact of the informal sector on unemployment is quite insignificant.

The Kenya Economic Survey 2017 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% growth from 83% recorded the previous year to 89.7%, or 13.3 million people. Nigeria outweighs Kenya’s working population by 66.33 million, however the significant gap is not reflected in the differences in the number of people in the informal sector between Nigeria and Kenya. This is due to Kenya having 89.7% of its working population in the informal sector, while Nigeria has only 34.6% of its working population in the informal sector.

In her book, Stephanie points out that the percentage of women in the informal sector of any economy is high, especially in developing and transition economies by referencing an ILO report which found that 46% of the informal sector in urban Nigeria was dominated by women. She states that the informal sector is seen as a major source of employment for women due to its suitability to their needs. The Micro Small and Medium Sized Enterprises Report 2016, released by the Kenya national Bureau of Statistics (KNBS), indicates that 32.2% of licenced establishments were owned by women, while 60.7% of unlicenced establishments were also owned by women. According to Bitange Ndemo, an associate professor at the University of Nairobi, these statistics mirror a global trend whereby women are over represented in the informal economy; a factor that is largely driven by survival, rather than the exploitation of an entrepreneurial opportunity. In terms of financing informal business, he argues that the problem faced is more of the cost of finance rather than it’s access.

On tax evasion as regards informality in Nigeria, the author notes that research has shown that there is a positive correlation between a rise in taxation and a rise in tax evasion, concluding it as a motivational factor for people migrating from the formal to the informal sector. However, factors such as an increase in tax evasion punishments such as heavy fines and prison sentences reduced the likelihood of people participating in the informal sector. Informal Sector and Taxation in Kenya is a publication by the Institute of Economic Affairs (IEA) that stresses the significance role that the informal sector can play in the quest to expand the tax base, noting that the intention of bringing the informal sector into the tax net is to facilitate the transition of these businesses to the formal sector and reduce barriers for all businesses. The paper shows that by extending the tax net to the informal sector, for example in the year 2008, the Kenyan government could have increased the tax base by approximately 7.66 percentage points, translating to revenue worth Kshs.79.3 billion.

In conclusion, as is the case in as far as data on the informal sector is concerned, the author indicates that one of the biggest impediments encountered during her research is its limitation which involved the omission of data in some years and unavailability of up to date research. To this end, she proposes that primary research should be conducted in to have a more up to date and realistic perspective on the topic. The part the informal sector plays in enhancing gender equality is restricted on just income, as female participants are able to easily obtain employment in the informal sector and adapt their job rule to their social and culture gender obligations. Also, government agencies should move from harsh approaches such as destroying informal market areas and increasing tax evasion punishments to more liberal approaches that empowers the activities of the informal sector through the provision of a conducive environment and inclusive policies which enhances productivity within the sector and enables taxation.

litualex@gmail.com

Informal Economy Analyst

 

 

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.

(Source:http://www.ibtauris.com)

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

 

 

Labour Exploitation

In a research article published in the Arts and Social Sciences Journal entitled Economic Informal Sector and the Perspective of Informal Workers in India, the authors explore various dynamics that characterise the informal economy. Some of these include aspects covering job security, social security, rural urban migration, child labour, and exploitation of working women. They further point out a common phenomenon that is common with the informal economy whereby the lack of reliable statistics on the size, distribution and economic contribution of the informal sector has for long been a major constraint in providing a realistic understanding of its significance as well as working conditions in the sector. This has often led to its neglect in development planning.

(Source: http://www.worldpolicy.org/sites/default/files)

Most of those engaged in informal activities are mainly the underprivileged in society and opt into the sector as of an alternative source of employment and income, in a quest to better their livelihoods. The authors go on to say that some of the reasons as to why people choose to run businesses in the informal sector vary from the lack of a basic level of education and skill sets that enable them to get jobs in the formal sector, to the prevalence of poverty in the communities in which they exist. These factors, coupled with those such as rural urban migration that is driven by the quest for better living conditions and job opportunities, are drivers for the rapid growth of informal sector businesses in third world countries. The precarious situation that most of these individuals end up being caught up in involve working conditions that leave them vulnerable to various forms of abuse and exploitation.

According to a briefing paper by the Overseas Development Institute, the informal sector has its own obstacles, particularly for those working illegally or without registration. Some of these include inadequate access to credit, bureaucratic licensing requirements and regulatory restrictions, as well as overzealous policing which entails the removal of informal vendors, demolishing kiosks, confiscating stock and denying licences. In their view, informal work is a mixed blessing depending on context. On one hand it can be seen to offer an escape route from poverty in areas where informality is the norm due to the high demand for goods and services within such a community. On the other hand, instances where informal workers are more isolated exposes them to various systematic legal obstacles. This ideology is supported by the fact that urban areas differ in their economic diversity and their ability to respond to higher concentrations of consumers.

They argue that costs are likely to be higher in cities that are experiencing economic growth, because growth entails higher monetisation of basic services and other non-food items such as housing, transport, and informal payments to maintain livelihoods. While costs of living are higher in rapidly-growing cities, there may also be more income-earning opportunities. However, it is not necessarily clear that more opportunities translate into better working conditions or remuneration for the poor. Further, the flow of people into cities can be destabilising and push urban wages down. As a result, a growing number of migrants live in the informal sector, confined to unskilled, low-paid and low-security work.

It is clear that the informal sector is grappling with the issue of the wellbeing of workers that are engaged in it. Most importantly, giving a voice to the plight of those that are engaged in the sector with a view to actively engage governments and organizations in conversations on how to best address this challenge, is a positive step forward in seeking a credible solution to the problem.

litualex@gmail.com

Informal Economy Analyst

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

 

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 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