The Informal Economy in Eastern Africa - Definitions, Impact and Challenges

Thèmes abordés

Informal economy, East African Community, Rwanda, Burundi, Uganda, Tanzania, Kenya, unemployment, decent work, doing business, microfinance, gender equality, poverty line, poverty reduction, globalization, formal business

Résumé du document

The first studies concerning the informal sector were conducted back in the 1970s. It was first considered as a marginal phenomenon, comprising activities not totally distinct from the formal sector. Since then, more institutions showed interest in this very specific part of the economy and different visions were developed to describe the features of the informal sector. We can crystallize these visions into three dominant schools:

- The dualist school, popularized by an ILO (International Labor Organization) study in Kenya in 1972. It subscribes to the notion that the informal sector is totally independent from the formal one. It is useful in the sense that it provides the poor with an income, a safety net. Its persistence is explained by the absence of modern job massive creation, and its decline should come through the implementation of a capitalist economy leading to economic growth. This vision is based upon Lewis' dualist model, stating that the informal sector constitutes a labor reserve for the formal economy.

- The structuralists, represented by authors was not limited to Castells and Portes in the late 1980s. According to them, the informal sector was linked and even subordinated to the formal sector, the latter using the former in order to optimize its profits, thanks to the informal sector low costs. The causes of its subsistence lie in the very nature of capitalism rather than in the lack of capitalist structures as stated by the dualist school.

- The legalists, through Hernando de Soto's work in the late 1990s. He assumes that informality is a rational response from micro-entrepreneurs to avoid taxes and costs of setting a business due to over-regulations and bureaucracy. In 1993, the participants of the 15th International Conference of Labor Statisticians agreed on the need to elaborate an international definition of the informal sector to assess its size and facilitate international comparisons.

Contrary to some predictions, the informal sector was expanding and it had become obvious that it would be an issue of main concern in the coming years. To understand its impact upon employment and its contribution to GNPs, what we call "informal sector" had to be clearly defined. Doing so could enable analyzing its features and evolutions through space and time. During this conference, the informal sector was defined in terms of characteristics of the production units, i.e. following an enterprise-based approach rather than a labor-based approach that would consider the characteristics of people working in this sector.

The participants agreed on two principles to characterize the concept of informal sector:

- The informal sector consists of units producing goods and/or services that are meant to generate employment and incomes to the persons involved. They operate at low-level of organization, with little or no division between labor and capital as factors of production. Labor relationships are not regulated through contractual agreements, but are based on casual employment, kinship, personal or social relations.

- The production units have the features of household enterprises. These features are the following: production units are not constituted as separate legal entities independently of the households or household members who hold them; no complete set of account is held so there is no clear distinction between the flow of income/capital of the enterprise and the ones of the owner; the units as such cannot enter into contracts nor engage in transactions with other units; the owners are personally liable, without limit, for any debt or obligation contracted in the production process.

Tags: Informal Economy, marginal phenomenon, International Labor Organization, informal sector, capitalist structures.

Extraits

[...] If concentrated in labor-intensive sectors, these investments have a positive impact on employment. However, the majority of FDI flows in Africa has been in the extractive sector which is capital-intensive and do not really impact on the level of employment (UNECA, 2004). Therefore, and contrary to what was thought by many authors, the implementation of a modern economy through FDIs in developing countries would not lead to a decreasing informal economy. The globalization has had an impact upon informality through migrations. [...]

[...] The creation of the East African Community saw an increase of the trade among the member states. This initiative must be strengthened and policy makers should go further to enhance the creation of jobs in this sector. To be attractive to FDIs, governments need to focus on education and trainings. The lack of skills from which African labor suffers deters firms from investing in the continent (Bennett 2009). Therefore, governments should facilitate the access to education for the youth, and to trainings for individuals engaged in economic activities. [...]

[...] It is therefore necessary to precise what is included when we talk about informality in order to sharply assess its size and impact upon a country. - The nature of the activities: activities conduced informally avoid any type of registration. The informal economy is part of the non-observed economy, and informal businesses do not figure on any census or list of existing firms used by National Institutes of Statistics to design their surveys. - Despite these difficulties, some methods have been elaborated in order to measure the size of the informal economy. [...]

[...] Causes of informality also lie in the business environment provided by the State. In many Sub-Saharan countries, were the informal economy is particularly developed, State corruption, government's weak enforcement capacities and the absence of efficient institutions in charge of preventing abuses reduce the benefits of operating formally (Informality, productivity and enforcement in Sub-Saharan Africa, Mbaye 2010). Besides, these States suffered from the implementation of the Structural Adjustments Plans. As a result, state-owned companies were downsized, the labor market was deregulated and competition increased between firms. [...]

[...] FDIs in Africa were mainly directed to capital- intensive activities (UNECA 2004) and did not benefit to the continent as much as they could have. Some argue that Africa is a continent where urbanization happens without industrialization (Fiess, Fugaza, Maloney 2008), bringing labor from rural to urban areas that lack job opportunities. Attracting industries on the African soil would help creating jobs and absorb the labor surplus that usually engages in informal activities. Many African economies rely on exportations, which is also the case in Eastern Africa. By being labour-intensive, investments in the export sector must be favoured. [...]