Informal sector in African economies plays crucial roles

Anzetse Were, Development Economist

It is well known that in Africa there exists 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 sizeable informal economy on which millions of Africans depend. In fact, informal jobs comprise 66% per cent of non-agricultural employment in sub-Saharan Africa (82 per cent in Mali and 76 per cent in Tanzania).

The African Development Bank (AfDB), which uses slightly different delineations, estimates that nine out of 10 rural and urban workers are informally employed. The global research, policy and action network, Women in Informal Employment: Globalising and Organising (WIEGO), delineates two types of informal employment. The first is informal employment inside the informal sector made up of informal enterprises including employers, employees, own account workers, contributing family workers and members of co-operatives. The second is informal employment outside the informal sector, which includes employees in formal enterprises not covered by social protection, domestic workers without social protection, and contributing family workers in formal businesses.

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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 sub-Saharan Africa. 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 per cent of sub-Saharan Africa’s non-agricultural informal employment. The AfDB estimates that the informal sector contributes about 55 per cent of the region’s gross domestic product. 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. Indeed AfDB makes the point that most informal workers lack secure income, employment benefits and social protection. Further, they tend to have lower education and rate of literacy, and tend to work longer than those formally employed. According to the ILO, wages are on average 44 per cent lower in the informal sector. This explains why informality often overlaps with poverty. This factor is important to consider as the United Nations Economic Commission for Africa asserts that 93 per cent 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 make it productive in a manner that alleviates poverty. Issues such as taxation and regulation currently act as disincentives for formalisation. Informal businesses are reluctant to be pulled into the tax net.

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Further, the long, complicated and often bureaucratic requirements for registration as well as licensing and inspection are also barriers the informal sector faces. Those in the sector also struggle with raising capital, 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 the one hand the sector is an important source of employment, income and spurs economic 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 informal sector households, employment is socially insecure and the informality undermines development prospects through loss of revenue and unfair competition.

What is clear is that it is time for African countries to tackle the sizeable element of informality in their economies and develop creative strategies to magnify the positive while reducing the negatives.

© CDM Africa Bulletin – Issue 52, 2016

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