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Informal sector data, policy gaps hinder economic plans

Kenya, like many other African countries, has a dualistic economy which informs patterns of economic development in the country.

Although there are several forms of economic dualism, this article will focus on the formal versus the informal.

The formal sector of the economy comprises of activities that are largely captured in GDP statistics, tend to comply with legal and regulatory requirements (i.e tax compliance and implementation of labour laws, among others), offer jobs that are financially secure and tends to be the wealthier section of the economy.

However, the informal sector’s activities are not always captured in official GDP figures, are often not officially registered, are not formally regulated, and do not necessarily meet legal operational requirements like tax compliance.

According to the Institute of Economic Affairs (IEA), Kenya’s informal sector is estimated at 34.3 per cent and accounts for 77 per cent of employment.

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Over 60 per cent of informal sector employees are youths aged between 18 and 35 years, 50 per cent of whom  are women. In the East Africa region the sector is the source of 85 per cent to 90 per cent of all non-farming employment opportunities. According to other sources, the informal sector is no longer confined  to low-skill artisan work.

It now includes other areas such as ICT and related service enterprises. There are multiple implications of this formal versus informal dualism.

First, lack of clarity on the precise size of the informal sector translates to the absence of certainty on the size of the economy. Although the informal sector is said to contribute about 18 per cent of GDP, is this credible? Is it understated or overstated?

The ambiguity means that Kenya does not really know how big the economy is; this then informs the accuracy of statistics such as the debt-to-GDP ratio, which provides useful information on the extent to which the country is leveraged.

This formal versus informal dualism also informs factors such as the ability of the country to move  in one direction as policy focuses on the formal economy. Other issues include social protection; workers in the informal economy are generally not covered leaving them exposed. Quality assurance is an additional issue. The formal economy tends to comply with established standards and quality norms, but not the informal sector.

Some may meet industry standards while others do not. This has implications for consumer protection rights. Another issue is productivity. Most informal sector players cannot afford analysis which informs them of the enterprise’s productivity, dragging down sector efficiency. 

Then there is skills transfer. While the government may change curricula in universities, this does not truly affect the informal economy as 60-73 per cent of informal sector employees acquire their skills through apprenticeships.

So only the formal sector is likely to benefit from updates in curriculum. There are already implications to this dualism. For example, the number of apprentices in the informal auto mechanics sub-sector has dropped sharply because many of the “older”  mechanics do not have skills to handle “newer” versions of injector engines.

 While efforts are being made to formalise the sector, the reality is that there is limited incentive for the informal sector to do so. Formalisation is often an expensive process with registration fees, lawyer’s fees, social insurance payments for employees, and taxes. 

So what’s the way forward? The informal sector should develop associations to update them on skills and allow for easier tracking of emerging training needs. Such associations should also allow for self-regulation, make it easier for interventions and facilitate easier monitoring and analysis.

Ms Were is a development economist.  email: [email protected]; twitter: @anzetse

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