Frontier Markets

The Importance Of Africa’s Informal Economy

By Anzetse Were

AfricaIt is well known that in Africa there exist two types of economies: the formal and the informal. Often the general assumption is that the formal economy is the more important of the two, and often it is the formal sector which gains attention in terms of policy formulation, development strategies and funding inputs. However there exists a sizable informal economy on which millions of Africans depend and which employs millions of Africans. In fact informal employment comprises 66 percent of non-agricultural employment in Sub-Saharan Africa (82 per cent in Mali and 76 per cent in Tanzania). The Africa Development Bank (AfDB) which uses slightly different delineations estimates that nine out of ten rural and urban workers are informally employed.

The global research-policy-action network Women in Informal Employment: Globalizing and Organizing (WIEGO) delineates two types of informal employment. The first is informal employment inside the informal sector made up of all employment in informal enterprises including employers, employees, own account workers, contributing family workers and members of co-operatives.

The second as per WIEGO’s delineations is informal employment outside the informal sector which includes employees in formal enterprise not covered by social protection, employees in households (e.g. domestic workers) without social protection; and contributing family workers in formal enterprises. In Africa informal employment is a greater source of non-agricultural employment for women than for men: 74 per cent for women and 61 per cent for men in SSA. The percentages of women engaged in own account employment are higher than of men and trade is the most important branch of economic activity, accounting for 43 percent of SSA’s non-agricultural informal employment. The AfDB estimates that the informal sector contributes about 55 per cent of Sub-Saharan Africa’s GDP.

Analysts make the point that contrary to most assumptions, informal workers do not operate outside the state, informal workers interact with the state regularly. However the truth of the matter is that most informal workers are poor and most of the working poor are informally employed. Indeed AfDB makes the point that most informal workers are without secure income, employments benefits and social protection. Further, those informally employed tend to have lower education and rates of literacy and tend to work longer than those formally employed. Further, according to the ILO, wages are on average 44 percent lower in the informal sector. This explains why informality often overlaps with poverty. This factor is important to consider as the UNECA asserts that 93 percent of new jobs created in Africa during the 1990s were in the informal sector.

As it stands, most African governments have yet to design strategies to formalise the informal economy and design strategies to make the sector more productive in a poverty alleviating manner. Issues such as taxation and regulation currently act as disincentives for formalisation. Informal businesses are reluctant to be pulled into the tax net and complicated compliance requirements thereof. Further the long, complicated and often bureaucratic requirements for registration as well as licensing and inspection requirements are also barriers faced by the informal sector. Further, the informal sector struggles with raising capital to finance activities, are often unable to fully access or leverage technology and innovation and typically suffer poor infrastructure.

Finally, a conundrum exists for the informal sector because on one hand the sector is an important source of employment, income generation and is an important contributor to GDP growth. It is not clear if formalisation may negatively affect the positive elements of the informal sector. On the other hand poverty incidences are higher in households in the informal sector, employment is more socially insecure and the informality undermines development prospects through loss of revenue and unfair competition to formal firms. What is clear is that it is time for African governments to tackle the sizeable element of informality in their economies and develop creative strategies to magnify the positive while reducing the negatives.

This article first appeared in my weekly column with the Business Daily on February 28, 2016

Anzetse Were is a development economist based in Kenya and a weekly columnist for the Business Daily.  Twitter: @anzetse, email: anzetsew@gmail.com

About Anzetse Were

I'm an optimistic cynic. Born in Africa, raised all over the world, I have a passion to see Africa take its rightful place in the world. Long weary of the Africa bashing, continental character assassination and negative branding I am determined to ask: What can Africa do right particularly with regards to economic development? Most of my pieces will be on Africa's economies. Some pieces will be more formal than others but the guiding thrust is to become one of the growing voices that believe in Africa...We're here to stay. Follow me on twitter: @anzetse

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