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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Informality – Africa and Latin America

In the last article, I gave an overview of the informal sector in both Latin America and Africa while looking at the general features that characterise them. In this piece, I will delve into the similarities and differences in their operation while putting into perspective the opportunities and challenges that they face in line with the environment in which they operate. It is interesting to note that data on this sector of the economy is scanty and shallow in most cases. This signals to the side-lining of this area of the economy despite the magnitude of its existence. The fact is that there needs to be more investment into ventures that will provide a strong foundation for urgently needed interventions in the sector.

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In as far as opportunities are concerned, the informal sector provides employment for the millions who miss out on formal employment opportunities. In Kenya, it contributes 90% of the employment demographic outside agriculture. In this sense, it acts as a social safety net by providing a source of income to a majority of households. The sector also presents a crucial access to market for large formal firms due to its proximity to a wider population network in both rural and urban markets.

One of the biggest challenges that arise from informality is the low levels of productivity in firms that operate in the sector. An analysis conducted by the International Monetary Fund (IMF) shows that on average, the productivity of informal firms is only one fifth to one quarter that of formal firms in Sub-Saharan Africa. Some common factors that conceive this phenomenon include difficulty in accessing finance, as well as the use of manual techniques in their operations. The latter presents a challenge in the form of producing non-standardised goods and reducing the amount of output while the former makes it difficult for them to scale their operations. Other challenges range from poor access to markets, insufficient entrepreneurial to regulatory barriers.

It is interesting to note that the IMF analysis puts the average size of the informal economy in Sub Saharan Africa between 2010 and 2014 at 38 % of Gross Domestic Product (GDP), only surpassed by Latin America’s, which stands at 40% of GDP. Between 1991 and 1999, the average size of the same was 45% for Sub Saharan Africa and 43% for Latin America. The fact that there has been a reduction in the size of informal economies in the two regions may indicate that there have been some efforts by policy makers to pay attention to the some of the challenges that informal businesses have to contend with. This can be seen by the increasing number of initiatives that target this sector of the economy by successive governments.

One of the demographic groups that form a large part of informal sector dynamics is the youth. It is with this in mind that the Latin American Economic Outlook 2017 focuses on youth, skills and entrepreneurship. The report stresses the importance of skills and entrepreneurship from the perspective of these being used as tools to empower the youth in the region to develop and engage in knowledge based economic activities in a way that boosts the region’s productivity. SMEs in the region account for 80% of employment and more than 90% of firms. However, formal firms contribute 70% of GDP in the region, which highlights the issue of productivity in the informal sector, a phenomenon that is not exclusive to the region.

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

One of the key recommendations that the report proposes to policy makers is that it asks them to go a step further by providing the necessary support tools to implement theoretic policies that revolve around financing, services and capacity building, market creation, regulatory framework and the diffusion of an entrepreneurial culture. It notably articulates the importance of the private sector in supporting start-ups by stressing the importance of strengthening the link of young entrepreneurs with business networks by supporting mentoring programs.

What comes out clearly is that the challenges that businesses in the informal sector are similar in these two regions of the world, given the environment in which they operate. Considering the magnitude of the sector in these two regions, interventions that are aimed at harnessing its potential should be embraced and seen through the lenses of it being a viable driver of economic growth.

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.

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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

 

 

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

 

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 

 

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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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 

Elections 2017

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(Source: https://fb.onthe.io/0fgjhs40c2bj0eh1c.2e0c22f6.jpg )

 

Kenya will be holding its elections this year. As we approach the period, the political atmosphere in the country usually gets highly charged with the various candidates holding meetings and rallies. The business environment has often taken a beating during this period due to the uncertainty that looms. Despite this challenge, there are businesses in the informal sector that can take advantage of this scenario and use it to grow their operations.

Opportunities await those that are involved in the printing and catering businesses. During the campaign period, candidates like to be visible. Posters, flyers, pamphlets, t- shirts and caps are some of the items that they use to push their messages across to a wider audience. Those businesses that are involved in these ventures stand to make attractive profits given the political interest in the various levels of county representation. Also, there will be a number of rallies and meetings that will require the services of caterers who provide tents and chairs as well as food and beverages.

Candidates that are vying for various seats need to have a strategy that addresses the informal economy agenda as these constitute a majority of the voting population. Those that are engaged in the informal economy mainly run micro and small businesses that are considered as a means of trying to escape from the vicious cycle of poverty. It would be a positive move to have this as a strategy in their campaign manifestos for it would appeal to a broader range of the electorate.

The youth are a demographic group that are usually targeted by politicians to gain popularity and help in the running of campaigns. In some cases they are misused to cause chaos and even enlisted to join militia groups. Given the high levels of unemployment among this group, they should demand a better deal from political candidates by way of the latter providing viable solutions that will see them positively engaged in a manner that benefits them.

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(Source: http://gdb.voanews.com/EF458178-C136-4E97-90C0-AB2C939A189B_mw1024_s_n.jpg)

 

The down side to elections in the country is the disruption of businesses as we get closer to the election date for it is during this period that most business operations temporarily stall or even shut down. The charged political atmosphere usually comes with tribal connotations that see the displacement of people who are not indigenous to a particular region. The National Cohesion and Integration Commission should come down hard on aspirants that use this sort of political speak as a means of gaining popularity as it is a hindrance to the growth and sustenance of businesses.

The time is way overdue for the electorate to lean towards candidates that advocate for issue-based policies as this is the only way that will ensure the leadership that is voted in works to improve the social and economic environment in the country. Choosing tribal affiliations and outfits is an outdated principle that only serves to divide our nation further. As we vote in the next cycle of leadership, let us choose wisely.

litualex@gmail.com

Informal Economy Analyst