The informal economy has gradually been growing in size over the past few decades. The sector is a significant part of economies in developing nations, especially those in Latin America and Sub-Saharan Africa. In some parts of these regions, it accounts for up to 90% of the employment demographics and contributes up to 40% of GDP in others. While these statistics may look appealing at face value, a deeper understanding of the dynamics within the sector presents a different picture.
At face value, the statistics on employment can easily be misconstrued as a representation of positive social development. In reality, a majority of those that are engaged in informal businesses venture into it due to the lack of options to earn a living. A commonality in the regions where the sector is a prevalent feature of national socio-economic parameters, issues such as a shrinking availability of formal employment opportunities as well as the high levels of poverty and inequality are prevalent.
Some factors that keep those that are engaged in the sector trapped in informality include poor access to finance that would facilitate the scaling of their businesses, the application of low-level skills without upgrading these over time which affects their productivity and the lack of properly structured business records. A big percentage of business owners in the sector remain caged in poverty cycles which inhibit their graduation into prosperity. In this ecosystem, the status quo upholds a scenario whereby cheap raw materials and human resource are available for established formal enterprise.
It is interesting to note that myths about the informal economy are based on issues such as governance and taxation. One such misconception is that informal businesses are plagued by a lack of regulation. Most informal businesses operate through institutions whose basis of operation revolves around interest groups around which they tend to organise. In a policy brief paper, the Netherlands Institute of International Relations clarifies this by pointing out that the informal economy can be understood as an alternative mode of economic governance outside the state. The term “hybrid governance” is used to provide a more accurate depiction of actual economic governance in the sector, whereby the state has no exclusive regulatory authority over economic activities and non-state institutional arrangements provide a form of economic order.
Also, the myth about taxation of informal enterprises is that they do not pay taxes. The institute further acknowledges that cases of informal taxation of small traders exist whereby they pay a ‘special fee’ in return for a lower tax or protection from harassment by state agents such as customs officials or police officers. In Kenya, this scenario presents itself in cases where small traders pay excess fees to county governments under which they operate.
All in all, the informal sector is one that is seldom understood and often misrepresented. This can be attributed to its neglect by the governments under which it operates, mainly due to the fact that a majority of those that are engaged in the sector mostly consist of the financially disempowered members of the society. It is imperative that the interventions aimed at supporting this crucial sector of the economy are streamlined into public policy. Implementation of such strategy will provide a solid foundation upon which sustainable economic empowerment and financial inclusion can be achieved.