How the State can rev up Kenya’s informal sector

The creation of high quality employment for Kenyans is a development priority. Unfortunately, an increasing number of jobseekers are finding employment in the informal economy and there is growing informality in job creation.

In 2015, 83 per cent of employed Kenyans sat in the informal economy, in 2016 that jumped to about 90 per cent. 

According to the World Bank, labour productivity in Kenya is significantly higher in the formal than in the informal sector.

The productivity, as measured by sales per worker, is higher in formal firms and thus unsurprisingly, more productive firms pay higher wages. This means the informal sector does not truly generate wealth for the 90 per cent of Kenyans employed there. 

Additionally, in the formal manufacturing sector, job security is relatively high, with more than half of employees holding a permanent job. Contrast this with the informal sector where jobs tend to be seasonal with no benefits, poor working conditions, little social protection and low wages. 

However, it is important to note that within the informal sector, the manufacturing sector is the most productive.

According to the World Bank, informal manufacturers register more sales per worker than both informal agriculture and services; the furniture industry performs particularly well.

In terms of firm growth, again, informal manufacturing leads where 31 per cent of manufacturing firms experienced expansion in the past three years, compared with 24 per cent of services firms. 

Thus given that informal manufacturing is both the most productive and the sector expanding the fastest, why aren’t these features correlated with income and firm growth, and the creation of more jobs?

This conundrum can be understood by unpacking three structural factors that work against the sector: capital, skills and business environment. 

In terms of capital, internal funds serve as a source of financing for working capital for 86.8 per cent of informal firms. Mainstream financiers, microfinance institutions (MFIs) included, are reluctant to lend to the informal sector.

Secondly, informal manufacturers tend to be inadequately skilled in terms of technical skills (i.e. carpentry, welding, use of technology etc), as well as financial and business management skills. Thirdly, informal firms work in a very difficult business environment.

They have limited access to land and are targets of bribery and corruption; 60 per cent of informal firms report harassment by government officials.

The business environment is particularly onerous for informal manufacturers who work in very congested and dilapidated shacks with no protective gear, no water and sanitation systems, unreliable electricity and lighting, and no security provisions. 

All these factors explain why many firms remain informal and never scale up and formalise and thus are stuck in a rut of low productivity and profitability.

That said, informal manufacturing is a bright spot in the informal economy and thus can be the starting point for interventions aimed at increasing profitability and productivity.

By addressing the three factors, informal manufacturers, which are already star performers in that economy, can be an avenue for creating better managed business that generate wealth and employment for the country.