• Thursday, June 20, 2024
businessday logo

BusinessDay

The informal sector: Recognising and including the missing middle

The informal sector: Recognising and including the missing middle

Olayinka David-West is a senior fellow, Information Systems, associate dean of the Lagos Business School (LBS), and a member of the LBS management board. She is an IT and financial services expert with almost 30 years of experience.

In this interview with TVC, which was monitored by BusinessDay, David-West speaks on how the government and the private sector can provide better support and structure for the informal sector — a group of businesses and individuals who have often been referred to as ‘The missing middle.’ Excerpts:

How important is the informal sector to the economy of any nation?

The informal economy consists of all economic activity that happens outside the government regulation, which is neither taxed nor represented in a country’s gross domestic product (GDP).

When talking about the informal sector, we need to start by understanding the size of the sector. By all accounts, Nigeria’s informal sector is huge – it constitutes about 65 percent of the economic activity in Nigeria and also employs about 80 percent of the workforce.

The sector’s seeming limited contribution to national development is due to working under the radar of financial services, as they transact mostly in cash. Hence it is difficult to track citizens operating in that sector for the purpose of taxation or even credit history that enhances lending.

What are some of the characteristics and peculiarities of the informal sector and its players and why, in your view, is a one-size-fits-all solution not the best approach?

An informal sector is common among many countries and it’s typically known as a shadow economy. This is almost like a parallel economy to the formal economy.

For decades, the informal sector has served as a ‘safety belt’ in providing employment and income to low-income citizens.

Basically, it is where a majority of the country’s low-income citizens make a living. And with Nigeria recently being infamously tagged the poverty capital of the world; it is understandable why the sector is more important than ever before. The sector is largely characterized by low entry requirements, small-scale operations, skills acquired outside of formal education, and labour-intensive methods of production.

One-size-fits-all approaches are rarely successful even in the formal sector, how much more the informal sector! For example, we could try to create a one-size-fits-all financial product for MSMEs in the informal sector, but it wouldn’t be successful.

According to EFInA’s A2F 2020 Survey, 14.4 million adults use only informal financial services to meet their financial needs while 38.1 million are financially excluded. It is impossible to create one single solution that would cater to over 52 million human beings with diverse needs and realities.

And this feeds into the reason why interventions keep failing – is due to minimal understanding of the players in the sector.

Transitioning informal workers and businesses into the formal sector, we need to examine the different structures in the informal sector and think of how to remove bottlenecks for those who want to make the transition.

Take our taxation process as an example, can we have taxation agencies or collectors who can value an asset of an informal worker so payment can be made instantly, rather than having to go to a bank or go to a government office? When accessing these services are less onerous, it will lead to more informal workers and businesses being onboarded into the formal system.

Solutions and interventions have been designed for the informal sector but many of the players are not able to access them because they do not meet the requirements for access.

Read also: Nigeria to start 2021 National Survey on MSMEs on Monday

How would you say that the peculiarities of the sector can be applied to ensure that groups can access the much-needed support?

First of all, when we talk about informality, there’s urban informality and rural informality. The solutions will differ based on the perspective we consider. When we examine TraderMoni and other programmes, for example, the first challenge that comes up is KYC/establishing identity; because the government cannot give interventions to citizens they don’t know. So, the issue of having an identity is critical.

We don’t know everybody. It’s the people who provide us with the data that we know. When people are asked to register for such programmes, there is distrust. They become hesitant to provide their information on any type of register. This leaves them permanently off the grid.

So how do we bring them on-grid?

Programmes like TraderMoni, MarketMoni, etc have provided citizens with access to money. The money is to be used responsibly – to grow businesses, and grow the economy. But because the funds come from the government, people are not as responsible with these funds as they would most likely have been if they were provided by the private sector.

It is also important to note that Nigeria is a large country and these things must be at scale. We have 774 local governments; what infrastructure is in place to collect information, store it, and validate all the information when people don’t have the necessary identity? We need to provide communications systems so that information can be transmitted and ensure that people are on the grid and captured immediately without delay.

The informal sector already accounts for more than 80 percent of jobs in the nation – that is according to ILO. In what ways would you say that the government can better support this job-creating segment in order to bridge the unemployment deficit in the country?

I think that I would be a bit controversial in this answer because it’s not just about job creation, but we also need to think about job retention. As we can see in the industry today, technological unemployment keeps increasing. So how do we use this predicament to drive change? By technological unemployment, I am referring to job loss as a result of not having the right skills or roles that have been automated.

We’re also going to need to fill more jobs in the workplace. So, I think that we need to be more strategic and intentional. We need to think of ways to build the vocational sector and its practices, and how to scale it up across the nation. We also need to use technological opportunities to build capacity. Technology gives us the ability to reach more people.

The question becomes, how do we create better content to skill our people, upskill them, reskill them and change their way of thinking? How do we use new technologies like augmented reality or virtual reality to help people in engineering and sciences? How do we get people to think critically and use tools better?

My point is that while we want to create employment, we need to consider the fourth industrial revolution and the new world order we are living in. We need to create knowledge workers, digital beings that can use technology and use devices. We need to help micro enterprises automate some parts of their businesses.

We need to think about how to build micro-enterprises that can thrive. We need to ask how we can identify some of the high-impact enterprises, put them into the system, and provide them with support services. This includes helping them understand business practices that enable them to do better and thrive.

Finally, we need to look at things holistically. Some of the schemes we have should cover areas beyond access to finance. For example, I can give farmer funds or access to productivity tools but if I don’t give him access to markets, I haven’t solved his problem.

We need to have a global view of the value chains of the problems we are trying to solve. What are the nuances in those sectors? And how do we ease information flows, financial flows, and some of the physical flows we can’t get rid of because they still need to move physically? We can work better using digital solutions as well.

Does the nation need to transition into a fully formal system or do we need to redefine and change how businesses are supported?

Well, we can do both. We can reduce and shrink the size of the informal economy and modernise aspects of it but we might not be able to get rid of it in its entirety.

However, it’s really about finding use cases that work. For example, if you examine the financial services ecosystem, everybody uses financial services or finds payment instruments one way or the other. Whether it’s a cash-based instrument, digital instruments or electronic instruments, we all use payment instruments.

I would suggest that rather than try to replace and eliminate, we should interrogate behaviours, asking questions like What are they doing right now? When you think about the woman in the market who is doing her daily contributions, does it mean it’s a bad thing because she’s doing it in cash? Or does it mean that she needs to do it the formal way? How do we formalize some of these processes that they are already used to? Because that’s going to be the entry point into formalization.

People’s behaviours and attitudes also are built over time. We need to think about how we would begin to change behaviours so they can shift gradually. This is where behavioural science comes in.

How do we use behavioural science techniques to nudge people towards change to ensure that they go from informal to formal? But it doesn’t happen like a light switch.

It needs to be deliberate – we need to understand what they’re doing and how they are doing things and build that into the system by design.