We hold these truths to be self-evident that the informal sector is a major driver of employment and job creation in developing countries. While not as pithy as the American Declaration of Independence, this declaration of the state of employment reigns true: where the informal sector thrives, we see more employment and income-generating opportunities created within the system. Even though the sector gives millions of Nigerians opportunities to generate an income, the challenges of informality mean that these opportunities are precarious and the jobs within the sector lack security as a result. There is often much talk of the enormous potential of the informal sector but perhaps this optimism ignores a crucial element – the importance of resilience and safety nets in unlocking that potential. How can we ensure that micro businesses are able to sustain their businesses, safeguard themselves and their workforce in times of crisis?
The simplest answer to this question is to give them the enabling structures and support required to scale and/or optimise their operations. This answer would apply to most businesses regardless of size. The COVID-19 pandemic has presented the perfect proof point on the impact of a lack of resilience and scalability on businesses, especially micro-businesses. The ongoing economic effects of the pandemic have seen businesses both big and small greatly affected. Despite benefitting from economies of scale, large businesses were not immune to downsizing due to reduced demand, and for small and micro-businesses worldwide, the impact of this was magnified. According to estimated data from the Uganda Bureau of Statistics in 2020, up to 3.8 million employees in microbusinesses across sectors were set to lose their jobs temporarily while 625,957 risked losing their employment permanently if the threat of COVID-19 and associated containment measures persisted. These estimated layoffs constituted a 42 percent reduction in temporary employment and 7 percent in permanent employment. In Nigeria, where the informal sector was hit the hardest by the pandemic and the subsequent recession, unemployment rates increased from 27.1 percent to 33 percent since March 2020. This means that 1 in 3 Nigerians are not gainfully employed, a critically dire picture. With an official unemployment rate of 33 percent and 24 percent underemployed, Nigeria has a combined unemployment rate of 56 percent – in 2014, that figure was at 24 percent.
The informal sector is the lifeblood of the Nigerian economy accounting for approximately 65 percent of economic activity across different sectors, from the female rice farmers in Northern Nigeria to the roadside tailors and hairdressers under the bridge in Ikeja and small-scale building and construction workers across the country and beyond. Prior to the pandemic, the sector contributed extensively to new job creation – it was responsible for over 59 million jobs as at December 2017. Sectorally, the informal sector is the second-largest source of employment after small-scale agriculture. Despite this, the absence of inclusive regulation has given ground to a link between unemployment and a thriving informal sector. The high cost of formalization plays a role in impeding their ability to reap its benefits including access to capital and other financial services. In times of economic shocks and uncertainty, Informal businesses with no safety buffers, seeking to shield themselves from the weight of operational costs, will look at reducing the number of individuals they employ. Research from a Government Enterprise and Empowerment Programme (GEEP) COVID impact survey revealed that businesses without additional employees appear more resilient, experience more positive financial outcomes and are less likely to report worse economic situations.
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This appears to be common sense – the fewer people you employ, the fewer operational costs you have in times when inflows are limited. But if you consider that this also means that within one of our largest job-creating sectors, in worsening economic situations and with little resilience, employees will be the first to be sacrificed, we can begin to appreciate the seriousness of these implications both for the employees themselves and the businesses who employ them – and for the future of our economy at large. Loss of income for employees who are only marginally (if at all) above the poverty line can have truly devastating consequences.
For a sector that we have relied on to provide most of the nation’s jobs, and one that we continue to look to remedy our current unemployment predicament, survival and growth are only possible if businesses within the informal sector are given the tools they need to grow and scale their operations. One major way this can be achieved is through the formalization of the informal sector. The greatest challenge of informality is that it stays in the shadows. Because of this, business owners who operate in the space are overlooked and unable to grow in tandem with the economy around it or benefit from funding opportunities, skills training and access to finance capable of boosting productivity in the long run. A business that lacks the prospect of longevity and perpetually treads the line between staying open and closing down is fragile and is unsustainable. However, this is the state of many informal businesses in Nigeria; their inability to be formally recognized as functional contributors to the economy also means that their employees, where available, have little job security.
Vietnam saw rapid economic growth between 1999 and 2009, which led to a decline of young workers in the informal sector. Vietnam was able to achieve improved opportunities for its informal workers in the manufacturing sector through a 2001 bilateral deal which saw the US reduce trade tariffs on garment manufacturing leading to a 9.6 percent increase of formal workers in the sector. Understanding the links between informal and formal economies should inform more sophisticated policy interventions, concessions and structures that encourage businesses to transition from informal to formal. Because this transition is largely available to workers with improved educational opportunities and skillsets, policymakers in low-income countries like Nigeria need to explore additional opportunities to transition out of informality without leaving its most vulnerable members behind.
Beyond policies and government interventions, there are incentives that access to other relevant services can provide. For example, here on the continent, access to finance through mobile money has been effective in removing traditional barriers to entering the formal economy and boosting economic growth. For the millions of unbanked Nigerians, access to a mobile phone provides the basis for extending the reach of financial services such as payments, transfers, insurance, savings, and credit. Mobile phone and internet payments are higher in sub-Saharan African countries where there is strong mobile money penetration. For example, in Kenya, 78 percent of informal business owners utilise mobile money to transact. Mobile money also facilitates access to formal credit as these channels tend to offer greater flexibility and minimal guarantee requirements. GSMA research from Kenya, which has one of the most sophisticated digital credit markets in sub-Saharan Africa, has revealed that 37 percent of digital credit users report borrowing for short-term business needs. While it provides access to finance, it also creates jobs and supports business growth and this forms one of the models we adopt at E-Settlement. Through PayCenter, our agent banking solution, we have created jobs for more and 60,000 individuals and are supporting business growth.
The informal sector is seen as a driver for entrepreneurship and innovation and in many cases represents one of the rawest forms of capitalist enterprise. However, while this is true, it is evident that the informal sector also paradoxically supports dependency and enables cycles of poverty and unemployment. It is imperative that attention be given to ensuring that businesses in the informal sector continue to be productive, grow and build resilience and are able to access the resources, whether financial or logistical, to grow their business beyond a subsistent existence. This is where we need strengthened government action in incentivising businesses in the informal economy to formalise. For a sector that has contributed so much for so very little, thinking about a value proposition that seeks to deliver value in the form of structures, policies, systems and intervention and not just extract value in the form of levies and taxes will be key to articulating the “What’s In It For Me” to members of the sector. Being identified and financially included will underpin that support and simplify the process towards formalization.
Job creation is a marathon and not a sprint. For the benefits of the informal sector in a developing economy like Nigeria, true development and extracting real value from the informal sector can only come when we rethink the support delivered to this segment of the population and prioritize its growth and sustainability.
Awojoodu is co-founder & CEO, E-Settlement Group.
