The “Informal Sector” in Africa May 27 and 29, 2014 ECON 3510, Arch Ritter Source: Class Notes
Outline • Some Description • Past Theorizing • Definition of the Informal Sector • Origins and Roots of Informal Economy • Comparison of “Formal” and “Informal Sectors” • Impacts of the Informal Sector on the National Economy and Society • Public Policy and the Informal Sector
1. Some Description • Presence everywhere • Variation among Countries • Diversity of Informal Enterprise within countries • High-end to low-end • Sophisticated to “last resort” enterprise • Rural and Urban IS • Men, Women and Children in the Informal Sector
Informal Employment in Non-Agricultural Employment for Africa, circa 2000 Source: ILO, Men and W\omen in the Informal Economy, Geneva, 2002 pp 19-20
Quantitative Significance of the Informal Economy: The Case of Liberia World Bank, Liberia: Employment and Pro-Poor Growth, November 19, 2010
Liberia: Employment Status,Percentage of total World Bank, Liberia: Employment and Pro-Poor Growth, November 29, 2010
The Significance of the Informal Sector: The Kenyan Case Non-Farm Economic Activities in Rural Households. Kenya, circa 1979
Past Theorizing regarding the Potential Role of the Informal Sector Older Views: Adam Smith: Normal activity; purely competitive; preferable to monopoly Karl Marx: Replace the activities with large scale industry and organization; - A backward “lumpen proletariat” Socialist Theorizing: Replace it; Central Planning; Economies of Scale; Collectivization
Past Theorizing regarding the Potential Role of the informal Sector Mainstream “Development Economics” 1945-72 Small Enterprise Usually Ignored • W. W. Rostow, • W.A. Lewis, • Raul Prebisch, • Capital-Centred Theorizing, • Dependency Theorizing … Some Voices in the Wilderness: • Indian Cottage industry, • Community Development Theorizing
The Informal Sector Gets Discovered! • Keith Hart, 1972, focusing on Ghana; • ILO, 1970s, Study in Kenya; • Parallel interest in Underground Economies of Western countries [“Shadow Economies”] • Hernan DeSoto, 1989 re Peru;
The Informal Sector gets Discovered! • Underground Economies in Centrally Planned Economies get ‘discovered’ , 1980s [“Second Economies,” ] • Informal Economy and Underground Economy in Transitional Countries (E.Europe and former Soviet Union)
Definition of the Informal Sector based on Institutionalization and Legality
Origins and Roots of Informal Economy Why does it exist?
Origins and Roots of Informal Economy Normal Out-growth and accompaniment tp Home-based economic activities Traditional and often Pre-Colonial Economy and Society, e.g. African traditional economic activities …. Mixing with modern types of activities as well 3. Slow Growth of Employment in the Formal Economy (due to excessive capital intensity, economic stagnation ……….)
4. State Controls and Bureaucratic Regulations • Note differences among various types of societies and economic systems. • - Hernando De Soto: “The Other Path” • Registration Blockages
Registration Blockages: Starting a Formal Business World Bank, WDI 2009, pp. 276-278
4. State Controls and Bureaucratic Regulations, continued: • Regulations • Labour Laws , • Health & Safety Regulations, • Minimum Wage Legislation, • Environmental controls and rules • Zoning Regulations • i.e. some IS entrepreneurs may prefer to remain “informal” to evade regulations and taxation • Greater relevance for middle-income countries
5. Informal Sector as a Social Safety Net • “Last resort” activity for those with no better alternative, and no other safety net • Low “Barriers to Entry” permit almost anyone to find some income earning activity • Examples in Liberia: street vending of basic foods; scratch card venders, soap venders and other street retailers; Result: Low productivity, near subsistence income
Comparison of “Formal” and “Informal Sectors”continued
Impacts of the Informal Sector on the National Economy and Society The Positives: What are they The Negatives: What are they On Balance,
Impacts of the Informal Sector on the National Economy and Society The Positives: 1. Production of low-cost goods and services mainly for low income people 2. Job Creation 3. Income Generation 4. Social Safety net function 5. Development of Entrepreneurship
Impacts of the Informal Sector on the National Economy and Society The Positives, continued: 6. Training: informal apprenticeship systems 7. Domestic Value Added (using domestic inputs rather than imported inputs) 8. Appropriate Technology? 9. Foreign Exchange generation 10. Generation of Savings and Investment
Impacts of the Informal Sector on the National Economy and Society(Continued) The Negatives: • Tax avoidance and evasion • Low productivity and low incomes in “Last Resort” activities • Minimal prospects for improvement in some low level “Last Resort” activities • Health & safety standards ignored • Environmental laws & regulations ignored
Impacts of the Informal Sector on the National Economy and Society(Continued) The Negatives, continued: 6. “Self-exploitation” ? ? 7. Perhaps Child labour; reduced access to learning 8. Links with criminal economic activities sometimes 9. Irreverence and non-compliance with some concerns of the state.
Public Policy and the Informal Sector? Should governments do anything in support of micro and small enterprises? Why or why not? What types of public policy would be relevant?
Public Policy and the Informal Sector? Possible Supportive Policies: • Low cost licensing • Security of tenure • Physical security • Micro-credit • Basic training e.g. in book-keeping • Technical extension services
Public Policy and the Informal Sector? Possible Supportive Policies, continued: 7. Public provision of infrastructure (market stalls, water, electricity) 8. Encouragement to “graduate” to “formality”? • But note aversion to paying taxes and government regulation
Potential Contribution of the Informal Economy for Future Development?? Replace it? OR Can it be a Foundation for Future Development?
Potential Contribution of the Informal Economy for Future Development?? • Development of Entrepreneurship: transferrable to other sectors and up-graded enterprises • Training: gradual up-grading of skills? • Steadily increasing productivity leading to higher incomes, one hopes • “Graduation” of enterprises, into the formal economy, with tax-paying and acceptance of regulations • Improved environmental standards
Potential Contribution of the Informal Economy for Future Development, continued ?? 7. Better jobs and higher incomes in future 8. Increased generation of Savings and Investment 9. Foreign Exchange generation and savings (continued domestic Value Added using domestic inputs rather than imported input)
Potential Contribution of the Informal Economy for Future Development, continued?? • “Last resort” activities will diminish and disappear with the expansion of the formal economy – one hopes……. 12. Many low productivity activities will evolve into higher productivity activities or else disappear.
The Informal Sector and Future Development: Two concurrent future scenarios: • Some “Last resort” and “dead end” activities will diminish and disappear with the expansion of the formal economy and general increases in incomes, hopefully. B. Other activities will evolve, improve and “graduate”. Thence, they should help to provide a foundation for future enterprise development and economic improvement