The “Informal Sector” in AfricaJune 1 and 3, 2010 ECON 3510
.
This section is not in the text book. Please take notes to flesh out this
summary.
Outline1. Some Description2. Past Theorizing3. Definition of the Informal Sector4. Origins and Roots of Informal Economy5. Comparison of “Formal” and “Informal
Sectors”6. Impacts of the Informal Sector on the
National Economy and Society7. Public Policy and the Informal Sector?
Artisanal Mining, Tanzania
Kenya: Rural Market
1. Some Description– Presence everywhere– Variation among Countries– Diversity or “Heterogeneity” of Informal
Enterprise within countries• High-end to low-end• Sophisticated to “last resort” enterprise
– Rural and Urban IS– Men, Women and Children in the Informal
Sector
The Informal Sector in KenyaNon-Farm Economic Activities in Rural Households.
Kenya, circa 1979
Number of Non-Farm Activities per Sample
Household
Western Province
National
012345
6 or more
44.332.811.84.03.11.52.5
49.626.413.04.72.51.32.4
Total 100.0 100.0
Informal Employment in Non-Agricultural Employment for Africa
Country Informal Labour Force as % of Total
Non-Ag. L.F. Women Men
Self -Employment as % of Total
Informal Employment
Benin 93% 97% 87% 95%Chad 74 95 60 93Guinea 74 87 66 95Kenya 72 83 59 42South Africa
51 58 44 25
Sub-Saharan Africa,
72 84 63 70
Source: ILO, Men and W\omen in the Informal Economy, Geneva, 2002 pp 19-20
Past Theorizing regarding the Potential Role of the informal SectorOlder Views:
Adam Smith: Normal activity; purely competitive
Karl Marx: Replace with large scale industry and organization; “lumpen proletariat”
Socialist Theorizing:Replace it; Central Planning; Economies of Scale; Collectivization
Mainstream “Development Economics” 1945-1972Small Enterprise Usually Ignored
– Rostow, Lewis, – Prebisch, Capital-Centred Theorizing, – Dependency Theorizing …
Some Voices in the Wilderness:– Indian Cottage industry,– Community Development Theorizing
The Informal Sector gets Discovered!• Keith Hart, 1972, focussing on Ghana; • ILO, 1970s, Study in Kenya; • Parallel interest in Underground Economies of
Western countries [“Shadow Economies”]• Hernan DeSoto, 1989 re Peru;• Underground Economies in Centrally Planned
Economies get ‘discovered’ , 1980s [“Second Economies,” ]
• Informal Economy and Underground Economy in Transitional Countries (E.Europe and former Soviet Union)
Definition of the Informal Sector based on Institutionalization and Legality
Area of the Economy Process of Production or Distribution
Final Product
Formal Economy +++ Legal +++ Legal Household Economy (for
home use)Informal Economy
(sometimes home-based)
++ Legal
+/- “Extra-Legal”
+++Legal & Vital
+++ Legal
Underground or Shadow Economy
+ (Process); -ve (Tax
Avoidance)
+ Usually Legal
Criminal Economy --- Illegal Totally Illegal
The Range of Economic Activities and their Place in GDP Measures
Product Legality of Product
Legality of Production Process
Inclusion in “GDP” Reasons for Exclusion
“Formal Sector” or Economy
Legal products of all varieies
Yes
Yes Underground provision for
some activities
Yes No for some
activities
n.a.
Tax Evasion
“Informal Sector” or Economy
Many types of services, usually small scale
Yes Yes
Often No Yes in LDCs for
Main IS Activities
Excessive costs of gathering information Some tax evasion
Home-Based Economic Activities
Child-care; Home maintenance and repair, Food preparation, Personal Services
Yes
Yes
No
Value impossible to determine accurately Tax collection unrealistic
Criminal Activities
Drugs, Prostitution, Gambling of some sorts; Extortion rackets
No
Yes; Maybe yes Maybe no;
No
No
Activities are illegal; Relevant Information
impossible to determine
Origins and Roots of Informal Economy
Why does it exist?
Origins and Roots of Informal Economy
1. Traditional and often Pre-Colonial Economy and Society,
e.g. African traditional economic activities ….
2. Slow Growth of Employment in the Formal Economy
(due to excessive capital intensity, economic stagnation ……….)
3. State Controls and Bureaucratic Regulations
– Note differences among various types of societies and economic systems.
• - Hernando De Soto: “The Other Path”
– Registration Blockages
Registration Blockages: Starting a BusinessCountry Number of
ProceduresTime Required,
DaysCost as % of Per Capita Income
Burundi 11 43 215.Kenya 12 30 40.0South Africa 6 22 6.0Tanzania 12 29 41.5Zambia 6 18 28.6Zimbabwe 10 96 432.7Sub-Saharan Africa
10 46 111.4
Canada 1 5 0.5
World Bank, WDI 2009, pp. 276-278
– Taxation Levels– Regulations
• Labour Laws , • Health & Safety Regulations, • Minimum Wage Legislation, • Environmental controls and rules• Zoning Regulations
– i.e. some IS entrepreneurs may prefer to remain “informal” to evade regulations and taxation
4. Informal Sector as a Social Safety Net
Comparison of “Formal” and “Informal Sectors”
Characteristics “Informal Sector” “Formal” Sector
Ease of EntryEase of EntryResource UseOwnershipScale of OperationTechnologyOrganizationIncome
Low Barriers Low Barriers to Entryto EntryLocal ResourcesFamily OwnershipMicro to SmallLabour IntensiveSimplerVariable; from sales
High Barriers High Barriers to Entryto EntryForeign Resources Often Foreign Medium to LargeCapital IntensiveBureaucraticFormal Wages
Skill Acquisition Outside the School System (Informal Apprenticeship)
Formal Educational System
Labour Market Competitive and Unregulated
Uncompetitive and Regulated
Comparison of “Formal” and “Informal Sectors”, continued
Informal Economy
Formal Economy
Taxation
Regulation
Untaxed except for Licensing
Mainly Unregulated
Taxed
Highly Regulated (Labour legislation, minimum wage, health and safety, environmental)
Public Policies
Unprotected and unassisted
Protection and Assistance (credits, trade protection, infrastructure investment, R&D support….)
The Positives: What are they
The Negatives: What are they
On Balance,
Impacts of the Informal Sector on the National Economy and Society
The Positives:1. Production of low-cost goods and services
mainly for low income people2. Job Creation3. Income Generation4. Social Safety net function5. Development of Entrepreneurship6. Training: informal apprenticeship systems7. Domestic Value Added (using domestic
inputs rather than imported inputs)8. Appropriate Technology?9. Foreign Exchange generation10. Generation of Savings and Investment
Impacts of the Informal Sector on the National Economy and Society
Impacts of the Informal Sector on the National Economy and Society (Continued)
The Negatives:1. Tax avoidance and evasion2. Health & safety standards ignored3. Environmental laws & regulations ignored4. “Self-exploitation” ? ?5. Child labour6. Links with criminal economic activities
sometimes7. Irreverence and non-compliance with some
concerns of the state.
Public Policy and the Informal Sector?
Should governments do anything in support of micro and small enterprises? Why or why not?
What types of public policy would be relevant?
Public Policy and the Informal Sector?Possible Supportive Policies:
– Low cost licensing– Security of tenure– Physical security– MICROCREDIT – Basic training e.g. in book-keeping– Technical extension services– Public provision of infrastructure (market stalls, water,
electricity)
Encouragement to “graduate” to “formality”? – But note aversion to paying taxes and government
regulation
Potential Contribution of the Informal Economy for Future Development??
1. Development of Entrepreneurship: transferrable to other sectors and up-graded enterprises
2. Training: gradual up-grading of skills?3. Steadily increasing productivity leading to
higher incomes, one hopes 4. “Graduation” of enterprises, into the formal
economy, with tax-oaying and acceptance of regulations
5. Improved environmental standards
Potential Contribution of the Informal Economy for Future Development??
7. Better jobs and higher incomes8. Increased generation of Savings and
Investment9. Foreign Exchange generation and savings
(continued domestic Value Added using domestic inputs rather than imported input)
10. “Last resort” activities will diminish and disappear with the expansion of the formal economy – one hopes
12. Low productivity activities will evolve into higher productivity activities or else disappear.
Potential Contribution of the Informal Economy for Future Development??
Potential Contribution of the Informal Sector for Future Development
– Last resort activities that will diminish and disappear with the expansion of the formal economy?
– A foundation for future enterprise development and economic improvement?
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