Africa’s labour pool is uniquely made up of various sections, the most dominant one being the informal sector—encompassing the most human capital, catering for most young-population livelihoods and it is highly un-attended—in terms of proper management and regulations by governments across the region and there is substantial evidence to back this claim.
According to a 2018 publication by the World Bank Understanding the informal economy in African cities: Recent evidence from Greater Kampala, the informal sector accounts for huge employment in African cities, marking 86 per cent of total employment in sub-Saharan Africa according to the International Labor Organization estimates (ILO).
“With a pervasive informal sector, city governments have been struggling with how best to respond. On the one hand, a large informal sector often adds to city congestion, through informal vending and transport services, and does not contribute to city revenue,” the publication argued.
Despite this grim-reality—still, there are plenty of hawkers, traders and vendors populating cities in East Africa—for instance. These hard-working individuals pin their efforts to low productivity, low wages and non-exportable goods and services.
Regardless of these issues, there are hordes of young sellers plying their wares on streets and street corners around Dar es Salaam and Nairobi and most active commercial cities in East Africa. This means they serve a certain purpose and cater to the needs of a particular segment in the community.
“The informal sector provides crucial livelihoods to the most vulnerable of the urban poor,” the report argued.
As World Bank argues, policy reactions tend to vary between two situations: some of them strictly target evicting vendors and hawkers to outside of city limits and allocate to them a particular zone within which to operate. The other strategy eyes on giving them a chance to develop their businesses and unleash their true entrepreneurial potential—of which Tanzania could be the perfect example.
Tanzania’s President John Magufuli has been quoted on different occasions giving street-traders a chance to explore various economic opportunities, to say the least. In 2016, he ordered local authorities not to evict hawkers from city centres and urged them to find commercially suitable areas for the traders, according to The East African.
“They should never be evicted if commercially viable premises for their businesses within city centres have not been prepared,” he said.
He took another step in December 2018, when he introduced 670,000 customized identity cards for petty-traders in Tanzania (those with less than $1,720 capital), to be sold for $8 to petty–traders nationwide.
“From today onwards no petty-trader should be bothered as they will bear identification cards,” he said.
The essence behind the ID cards was to ease these traders’ operations particularly their interactions with city and tax officials—which was their long-cried lament against the government.
This statement coming from a President aspiring for middle-income status (already half-way there with achievement of low-middle income status in 2020) and ambitions for industrialization, “I have told the TRA (Tanzania Revenue Authority) several times not to disturb food vendors and hawkers as their capital is too small to be taxed,” who knows what the future holds for the sector.
As Tanzania becomes our exemplary focus it is important to recognize various scenarios around the informal sector in Africa.
The informal economy reality
First things first, it is important to understand that a substantial portion of people entering the sector join by the need to survive and not by choice.
Most transactions are conducted with cash. World Economic Forum (WEF) 2019 publication 3 ways to get Africa’s informal economy on the books pegs it at 95 per cent, despite advancement in mode-of-payments—particularly digital payments—which are currently rampant across West and East Africa (Tanzania and Kenya predominantly).
WEF argues that—not only is this situation cumbersome for the industry to expand to new ground where things are organized, but it becomes difficult to harmonize the sector with other development in auxiliary sections such as financial inclusion.
“Why is this bad? For people and micro-entrepreneurs who are trapped in cash-only systems, it’s much harder to grow a business, much less safe to save and much more difficult to forge a path into the middle class,” WEF argued.
In that same context, WEF highlighted that “cash is fuelling what’s called the invisible economy, limiting productivity and growth of vibrant sectors such as micro- and small enterprises, and making it infinitely more difficult to include these economic activities in any form of official statistics, oversight, taxation and regulation.”
The sector is dynamic; it features different sets of labour—ranging from micro-, small and medium enterprises—with workers who are employed to attend business activities and some who are self-employed as workers in homesteads, street vendors or small-scale farmers.
There is yet light percolating from the end of the tunnel, and it emanates from modern technology. Yes—modern tech offers a wide range of leeway to domesticate the informal economy, by giving it access to decent financial services—aiding those involved in saving, planning and management of their business resources.
With network operators, current fintech solutions M-Shwari (Kenya), and M-Pawa (Tanzania) these sub-sectors of the economy are now within reach. In this context the WEF has come up with three vital issues to look upon.
Developing informed, human-centred product development focused on consumer needs, continuous engagement of untapped users to enrich knowledge and empowerment and building robust ecosystems to drive up scale.
The informal economy does matter and it should be laid down properly, especially during this time and period where technology can harmonize situations and create a win-win situation. Here is why according to analysis from WEF.
Targeting customer needs
If we can convert cash payments to digital transactions, much more benefits could be reaped—particularly in designing and developing policies, laws and regulations to better the sub-sector.
It is true developments will vary from one vicinity to another and with individual preferences taking precedence, but it is an important milestone to achieve as it is will rest on the bedrock of inclusive-economy, especially now when African economies are battling unemployment and inequality.
Knowledge is a factor
“Knowledge and trust are major hurdles in any financial transaction and are well-recognized as key barriers that need to be overcome before consumers and businesses embrace digital payments. The public and private sectors need to rethink financial literacy, using innovative models such as gamification and mobile messaging services, to encourage behaviour change at scale,” WEF highlighted.
This pathway is essential as it tackles an important hurdle to the sector—for example in Egypt despite mobile accounts being almost universal, still, mobile financial services use is rare—due to lack of trust.
WEF insists that tackling this hump would propel an increase in monthly transactions as it did with Egypt, with 5-8 per cent increase.
Sustainable digital ecosystem
“New business models for deploying technology, along with new payment flows and channels, are key to expansion. Mobile and digital technologies can also be used to better bring ecosystem players together and to connect service providers to the underserved in new and innovative ways. This reduces the cost of delivering solutions and improves the effectiveness of providing essential services to people and micro–entrepreneurs trapped in a cash economy.” This is an important argument by WEF, especially now when a large slew of unemployed throng the informal sector.
Kenya is a fitting figure, where according to WEF, Jaza Duka, a first–of-its-kind digital lending initiative, aids small kiosk business owners to overcome cash flow constraints; hitherto, with an absence of formal credit history, this had limited their ability to buy and sell more products and ultimately grow their businesses.
“The platform tracks how much product a store–owner has purchased over time and combines that data with analytics. Results are used to provide a micro-credit eligibility recommendation to a bank, which can provide interest-free credit. Bringing together the tools and data from different industries has changed the model of small business financing,” WEF said.
To all intents and purposes, the informal economy is here to stay, but it holds the potential to be harnessed and offer crucial support to communities’ economies—when governments, NGOs and the private sector collaborate to drive the sector’s growth and modernization