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Ideas & Debate

Informal economy key segment, make it more productive

The informal economy is a key theme for me this year as a development economist. The informal economy can be broadly defined as economic activity that is not subject to government regulation, taxation or observation.

The reality is that although there is a general acknowledgement of the informal economy, there has yet to be a targeted and co-ordinated analysis of the informal economy in Kenya and I suspect much of Africa.

This is not due to the fact that different organisations and businesses in society do not intersect with the informal economy in the both professional and private lives; what seems to lack is a specific effort to delineate between the formal and informal economy in analytical work.

Therefore, for example, a company may assess an aspect of agriculture pertinent to their work but will not, while doing the analysis, delineate between formal and informal agricultural activity.

And this is no surprise as the informal economy is messy and complex. But lack of focused attention on the informal economy translates into a reality where numerous insights into the informal economy are embedded in general research and data generated for different sectors.

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This lack of clarity has therefore limited the extent to which policy interventions can be designed to meet the needs of players in the informal economy who are invariably the poorer.

In my view it is time for a greater attempt be gather data and information on the informal economy to better understand it.

This delineation is particularly crucial to unlock the potential of rural Kenya and Africa in general. In a paper published last year, the International Institute for Environment and Development (IIED) makes the point that in Africa, the informal economy generates up to 90 per cent of employment opportunities in some countries and contributes up to 38 per cent of the gross domestic product (GDP) in others.

Most farmers across Africa rely on informal networks to access their markets and communities diversify their income beyond farming (non-farm work) through informal sector activities which accounts for 40–45 per cent of the average rural household income.

But the informal economy is still viewed as a pariah because it is labelled as inefficient, unregulated, and as IIED aptly states, the informal economy is equated with illegality and thus faces strong pressure to formalise.

My view is that addressing the informal economy should not be based on the assumption that formalisation is the best way forward. Entry into the formal economy is expensive and goods and services tend to be pricier.

There is warranted concern with the lack of regulation of goods and services in the informal economy and the extent to which customers in this economy are exposed to danger, but the response of government and other stakeholders should not necessarily be a push for formalisation.

Since there is a pronounced lack of presence of formal organisations and businesses in rural Kenya and Africa in general, the informal economy is an even more important player in terms of determining the welfare of rural residents.

It would, therefore, be prudent for actors active in rural Kenya and Africa to map out the features and characteristics of this economy.

The first step should be the use of such data and information to design interventions that increase the productivity, efficiency and safety of activities in the rural informal economy.

This may increase the income-generating capacity in the rural areas and translate into more access to goods and services.

Were is a development economist. [email protected]

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