Gift Kasika
What defines the informal sector is a matter to be debated, and it appears to have no comprehensive and universally accepted definition. Attempts to come up with a generally accepted concept resulted even in more diversity than harmony. Attempts to measure the contribution of the informal sector faces a challenge of first defining what it entails.
Hart (1973) defines the informal sector as unregulated economic enterprises or activities; Feige (1989) relates to it as all economic activities that contribute to the official calculated gross national product, but currently unregistered; while Smith (1994) defines the informal sector as the “market-based production of goods and services, whether legal or illegal, that escapes detection in the official estimates of the gross domestic product. The informal sector is the segment of the business that falls outside the modern industrial dimension. The black market, as it’s sometimes referred to, has a number of characteristics which distinguishes it from the formal sector. In developing countries, the informal sector provides a significant number of economic opportunities where masses of people are faced with unemployment, and they therefore remain an integral part of the economy, and an important focus point for policy formulation. The activities of the informal sector are diverse in any country, and may differ from one country to another. In most cases, they are of small-scale operations with common objectives of the sustainability of their owners and their families. The informal sector creates an estimated 72% employment of the non-agricultural sector within sub-Saharan Africa. When agricultural employment is included, the percentages rise to above 90%. Traders within the informal sector are vital for the economic development of any country. Although legally they are not liable for income tax, a substantial number of them tend to be lucky enough with the help of government policies, and gradually get into the formal sector of the economy, and by then contribute to a country’s GDP through income tax as well as employment-creation. The rate at which they join the formal sector depends much on the policies adopted by government in facilitating their growth and development. The contribution of the informal sector in terms of income and employment-creation is larger and of greater interest to policymakers. Although there is free entry into the marketplace, there are little chances that a newcomer will succeed or maintain their position without the help of an insider. The working conditions in the informal sector are unpleasant, largely attributed to the fact that they are unregulated by law-enforcement agencies. Entrepreneurs in the informal sector do not enjoy protection from the state against fraud as their operations are hidden and difficult to identify for fear of being taxed.
Studies suggest that there is an income inequality within the urban area between the formal and informal sector of the economy. When migrants move from rural to urban areas in search of better economic opportunities, some end up working in the formal sector, with others in the informal sector. The destiny of their economic opportunity is attributed to the differences in their capabilities and their level of educational attainment. Individuals in rural areas are indifferent between earnings in the rural agricultural sector with certainty, and taking their chances in the urban sector, where they either earn a high income if they are to secure work in the formal sector, and low income if they are unlucky or get stuck in the informal sector. Those in the informal sector generally earn lower wages than comparable skilled workers in the formal sector. While there is mobility over time from the informal to the formal sector, those in the informal sector view their situation as permanent. Income of those in the formal sector is better than for those in the informal sector, therefore resulting in high income in equality. As time passes, the inequality declines because the migrants get better adapted to the economic life in the urban area, and because as their number increases, their political power starts escalating. As a result, policymakers are forced to enact legislation favouring their interests. A high proportion of low and middle-income class is hypothesised to cause political instability, and political instability is not consistent with sustainable economic development. Challenges The informal sector faces a number of challenges, which appear to be difficult to address. Informal sector operators tend to escape the regulations of government, and as a consequence suffer negligence by policymakers. The informal sector is characterised by under-employment, bad working conditions, uncertain work relationships and low wages.
The inability of the formal, private sector to generate enough employment opportunities in the required quantities leaves the informal sector as the ideal economic opportunity for the remaining masses. In the absence of appropriate social benefits such as unemployment benefits, informal activities are the most thought of survival strategies for many people. The informal sector mainly comprises micro and small-scale enterprises, which are largely self-employed. The high prevalence of poverty among traders in the informal sector is attributed largely to the lack of access to productive resources such as capital. Estimates suggest that between 80% and 90% of the population in developing countries have limited or no access to credit facilities, except what is provided by families, friends or informal money lenders. Among others, lack of skills and inappropriate technology negatively affects the level of production potential among informal sector workers, who rely mainly on traditional methods and manual technologies of production, and therefore end up working long hours with little production outputs.
Therefore, the economic growth of any country will depend on the graduation rate of their informal operators into the formal sector. Facilitating their growth and development is a daunting task, which requires efforts and initiatives from government and the private sector within the formal economic system. The following are some of the recommendations advocated in facilitating SME’s advancement into the formal sector. The government should take the responsibility of building the capacity of traders through training, and to promote coordination initiatives among them. The government should sensitise and encourage traders to organise themselves and form trade unions that would represent their interests, and to sensitise them on existing credit and other financial schemes available at their disposal in order to enlarge their capital base.
The responsible authorities need to help them develop group collateral in order to facilitate the ease with which they can access credit from the financial sector. Another area where the informal sector requires assistance is in marketing. The authorities can assist by undertaking marketing promotions such as trade fairs in order to expose them to other potential economic opportunities, and to link them to their potential business networks and affiliates. The government agencies have the capability to further facilitate their development by promoting cooperation as a means of improving their access to inputs, and by linking the informal organisations to national development programmes.