• Thursday, May 30, 2024
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A Large informal sector is nothing to celebrate

informal sector

The SME sector has been celebrated, probably a bit too much, as the hope of development in many economies, especially the less developed ones. Nigeria is one of those countries with a burgeoning informal sect. This is understandable. With a stagnant economy and a population growing much faster than the economy, unemployment is a natural signpost while the informal sector is the soothing balm. The sector has been credited with unmatched capacity to create jobs and reduce poverty. This way, the informal sector is made to appear like the missing link in the development chain of these countries. Yours sincerely has been a strong advocate of the sector, having studies, researched it, and published a lot of materials on it. I still believe the MSME sector holds great promise, for as long as we remain on this static development journey in our country.


The reality is that a large informal sector is not a thing of which to be proud. It is a mark of underdevelopment. It is not something you go about saying how great it is to have in one’s country. While the MSMEs will help you bridge the employment gap, it is not good news to be bragging of their being the group that will create the most jobs in a country in the 2020s. They may do so and it becomes a thing to celebrate, if you live in sub-Saharan Africa, but certainly not in the developed world. The smaller the size of the informal sector the richer the economy.


However, it does appear that the SME sector in Nigeria has not come into that glorious position where we can say, unequivocally, that it has become the engine of growth of our economy. This has led me thinking that there must be something or some challenge in need of resolution. And I think there is a problem with our SME strategy. The truth is that SMEs are nothing without big companies patronising them. They will not do much until we forge an enduring linkage between them and the big corporations, I have said this over and over again: that there needs to be a tight link between them and the big companies that should provide them with markets.


The SME sector in Nigeria has been operating like an orphan without that support. So it has been overrated and under provisioned. While we must acknowledge the extensive sums of money made available in the system for on-lending to the sector, we seem to have abandoned the task of job creation and economic growth to the MSME sector, on the wrong notion that finance is their biggest problem. From the reports available regarding the extent of utilisation of available on-lending facilities, there are more serious problems in the sector than finance. There is the problem of low technical capacity and lack of organisation in terms of proper registration and packaging of companies in the sector. These are some of the reasons why the MSME sector in our part of the world is different from those in Europe and America. Besides the fact that what they call an SME over there may be our own large corporation, making them more amenable to policy support and capable of benefiting from such, our SME sector is full of briefcase companies and orphan entities that hustle their way to daily bread. We need a deliberate policy to expand the formal sector by letting the big companies know the duty of care they owe small entities.


Promotion of the SME sector has no doubt gained global support, especially in the developed world, from which much financial and technical support flows to the developing countries. In other words, policy action targeting to advance the cause of SMEs is no longer limited to developing countries. Even the more advanced countries have continually taken steps in this direction, probably doing more than the developing ones. The advanced countries have long since recognised that for a large informal economy, premium should be put on the dominant informal sector. However, the job creation capacity being ascribed to the sector is probably exaggerated for so long as these entities live under uncertain conditions with regard to patronage.


During the past three or four decades, developed countries have made significant efforts to implement programmes and policies to assist operators in the SME sectors of their countries. This is evidenced by the findings of several research works in that area. This effort has also been justified by the increasing contribution of the sector to the growth in output and employment in those countries. In the OECD countries where SMEs account for about 99 percent of all firms, for instance, research shows that they are the leading source of employment, and account for much of the job placements in diverse economic fields. About 60 percent of all the jobs in the manufacturing sector come from the SMEs. They also provide about 75 percent of the employment in the services sector.


In terms of value addition, the SMEs are generating, on the average, between 50 percent and 60 percent of value added. In Europe, specifically, small and medium enterprises have continued to demonstrate dynamism and innovativeness, creating new technologies and products. They are responsible for about 20 percent of all patents in biotechnology-related fields. In fact, over two thirds of the National Productivity Champions in Europe ─ defined as the most productive firms in their various European countries and industries – are SMEs. In the knowledge-intensive services, this contribution is in excess of 80 per cent.

The contribution of SMEs to the output and growth of economies of the emerging markets is equally impressive. Here, they contribute as much as 45 percent of all employment and about 35 percent of GDP. According to the National Bureau of Statistics (NBS) in Nigeria, during the past five years, SMEs have contributed 48 per cent of the nation’s GDP, which has helped to establish the country as the biggest economy in Africa. They also constitute 96 per cent of all business entities in the country while providing 84 percent of all employment. These are by no means small issues but evidence of the need to take more pointed steps to improve the operating environment for small business in Nigeria.

Much is actually being done in that regard, especially by entities like the development banks, but there is a need for coordinated and synchronised efforts, and the measurement of results. Compared to Nigeria, SMEs in South Africa make up 91 percent of all business entities; they contribute 60 per cent of employment and 52 percent of that country’s GDP. There is indeed no more doubt that these small firms are usually dynamic and innovative. It is therefore a wise policy action to do things that make them improve their operations. They are also a critical element in any effort to achieve inclusive growth. A large informal sector is not a good thing but while it is there, we must connect them with the big companies for patronage.

Emeka Osuji