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Informal economy: Why the voice of MSMEs and Nano businesses should be heard

The expression, “informal economy”, encompasses a huge diversity of situations and phenomena in the country. However, working in the informal economy is often characterized by small or undefined workplaces, unsafe and unhealthy working conditions, unregulated, low levels of skills and productivity, low or irregular incomes, long working hours, and lack of access to information, markets, finance, training, and technology. The activities that occur outside the legal framework are considered informal. The informal economy can be seen either as the nature of the enterprise operation or the nature of employment relationship that exists in the business. That said, millions of Nigerians especially those that reside in the economic hub of the country, Lagos State –live, work, trade and produce in this informal economy and also engage the vulnerable citizens. From context observation, the informal sector in Nigeria is bigger than the formal sector in terms of employment and output year on year. In some cases, the informal economy is referred to as a shadow economy if associated with illegality and illicit activities such as internet scams, black markets, crime, production, and smuggling of illegal drugs, and money laundering, or as the case may be. For the informal economy, one thing is sure, informality provides critical economic opportunities for the poor and the vulnerable.

In Lagos State alone, the informal economy is said to employ about 5.5 million people – about three-quarters of the State’s 7.5 million labour force recently, and in the country as a whole with nearly 200 million people, over 80 percent of the population work in the informal sector according to the International Monetary Fund (IMF). There is no doubt that the majority of enterprises and entrepreneurs around are in this informal sector considering the labour intensity. However, unlike the formal economy, activities in the informal economy are not included in the Gross Domestic Product (GDP) of the country. Therefore, it can be said that the GDP number computation is a severe underestimation of the country’s GDP considering the exclusion of the large informal economy. Meanwhile, the informal economy in the country continues to expand in many contexts and may even be the largest in Africa by estimation considering the population and economy.

The GDP number computation is a severe underestimation of the country’s GDP considering the exclusion of the large informal economy

Agreeably, across the country, it is easy to notice street traders, artisans, vendors, nano and micro-businesses, commercial buses, tricycles, and motorbikes (Okada riders) domestic workers, market traders among others all operating informally. Broadly speaking, you can easily see informality all around the country. The informal economy has witnessed a massive expansion in the last two decades in Nigeria and the root causes of these include elements relating to the economic context in the country, decreasing levels of market regulation, weak policy frameworks, and socio-demographic drivers such as population growth, urbanization, rise in unemployment, widening inequality between the rich and poor, low-level education, including poverty. The key driver of the informal economy, however, is that such businesses in the sector do not need registration with any relevant government agencies.

When workers cannot find opportunities in traditional wage employment, the need for subsistence demands they find work somewhere else. Most times the alternative is usually in the informal sector of the economy where there is no minimum wage and workers are unlikely to pay taxes, have no holiday rights or labour rights, and often work in dangerous conditions. Most time it is usually a struggle for them to access microcredit, they lack income security and stable employer-employee relationships. In the midst of all these, it only offers the most vulnerable and often uneducated Nigerians a foothold for survival. This expanded and large informal economy is perceived by the majority of the elite to be at the bottom rung of the economic system when in truth, they are the major driver of the economic system because they are too large, important, and relevant to be ignored.

For instance, it is unclear if the country has reliable data on the National Union of Road Transport Workers (NURTW) activities in the country or the volume of transactions in Ladipo auto spare part market in Oshodi Lagos State and the popular computer village in Ikeja Lagos State, Balogun Market, and Alaba International Market to mention a few. These are visible informal business locations set-up within the country with multi-million daily business turnover, yet the operators are unrecognized or uncaptured by policy markers or relevant authorities. This part of the economy is particularly large in Nigeria, with the International Monetary Fund (IMF) estimating it to constitute about 60% of the entire Nigerian economy, yet not subject to full government regulations. Meanwhile, working in the sector is attractive due to the ease attached to operations as a result of the absence of a bureaucratic regulatory framework, and little or no formal educational requirements.

There are multiple perspectives on the informal economy, some associate it with lost revenue, unfair competition, low productivity, human rights abuses, and environmental degradation; while others associate it with entrepreneurship, flexibility, and resilience. Overall, the informal economy is enduring; but suitable regulations and policies are required to improve the sector and introduce formalization. The decision for these businesses to formalize depends on the benefits that are derived from formalization over the risks of remaining in the informal economy. If the former outweighs the latter, only then does formalization seem like a viable option to the operators.

Clearly, there is a need for government to embark on series of measures, interventions, and support to encourage the formalization of these businesses to sustain economic growth and development. As mentioned earlier, this informal sector is too large and important to be ignored, concerted effort to identify and protect them is crucial for sustainability and economic development.

In recent times, the Novel Coronavirus (COVID19) pandemic has negatively impacted these informal businesses greatly. Because they rely on daily income and most of them can rarely “work from home”, the harsh reality is that most of these businesses need government support. Therefore, this presents a good avenue for the government to have a mass registration and identification and equally reach out to them through social interventions.

Besides, the International Monetary Fund (IMF) is urging national statistical agencies to gather information on the informal economy to help in policy formulations and for gathering reliable data for economic planning. In this context, careful attention must be paid to the informal economy and policy solutions need to be in place to encourage and induce their formalization. These suggestions, if efficiently considered might, in turn, reduce the size of the informal economy in the country. Good luck!

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