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Ideas & Debate

Why most Kenyans still wallow in the informal economy

A leading economic think-tank that’s active in Africa recently asked me two questions about Kenya’s economy.

I thought it would be useful to share the questions in order to give others a sense of the puzzles the Kenyan (and African) economy present to global research institutions.

The two questions were: why is manufacturing productivity so low in Kenya and why is the informal economy not decreasing with economic growth?

These are great questions and reflect some of the issues I grapple with as a Kenyan development economist.

My response to the issue of manufacturing productivity was as follows: first, there is no single story about productivity in manufacturing in Kenya.

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The recently launched World Bank Country Economic Memorandum (CEM) makes the point that levels of productivity vary greatly between and within sectors, so there is no single story that has emerged yet.

However, I do agree that there are productivity issues in manufacturing in Kenya and these are driven by three core factors.

The first is the fact that wages in Kenya are high. The CEM made the point that Kenya has the highest wages among peers such as Bangladesh, Cambodia, Ghana, Burkina Faso, Tanzania, Pakistan and even India. Thus, if one were to do a wage to productivity analysis in Kenya, how well would we do compared to peers?

Secondly is the issue of poor management. Some are of the view that management is fairly good in Kenya but I beg to differ. In the past I have been part of a team coordinating surveys on management issues in companies in Kenya.

What we found was that while Kenyans are technically competent, we lack soft skills such as efficient communication or managing staff in a manner that makes them productive, motivated and committed to the organisation.

In short, there are thousands of Kenya who show up to work but have zero motivation to give the organisation their very best. And management does not know how to change this.

Finally, many Kenyans in manufacturing are employed in the informal sector which is characterised by low productivity due to poor management skills, low education levels and the lack of access to finance, technology and innovations. All these factors negatively inform productivity in manufacturing.

Expense of entry

Second question: Why is informality not decreasing with economic growth? There are three core factors informing this feature. There are barriers to entry into formality.

First is the expense of entry. Realities such as business registration and licensing are expensive and laborious processes. Secondly, formality is also linked to expensive compliance requirements such as paying (high) wages, complying to inspections, and of course, taxation.

Running a formal business is expensive and on the tax issue, informal businesses are yet to be convinced that they will benefit from formalising and entering the tax net. What benefits do they accrue in return for paying taxes? A clear case has yet to be made to them.

Finally, for many Kenyans starting a small informal business is often the last resort. We all know the story of the graduate who has tried to get a job for years and has failed.

As a result he opens a small business in order to make ends meet as he looks for a job. Such a person may not have the desire (or resources) to start a formal business as entrepreneurship is not his true passion or career focus area. Why would such a person formalise their business?

Were is a development economist; [email protected]

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