There is perhaps nothing more typically African than the market—women sitting by their wares, selling neat bundles of fruit or vegetable; or the man at the corner roasting skewers of spiced meat, or even second hand clothing roughly spread out on cardboard stands, ready to be quickly bundled up in case the municipal police are sighted.
Despite low wages, unpredictable terms and almost no benefits, the informal sector employs more than three out of four workers in many African countries, including Cameroon (73%) Ethiopia (85%), and Sierra Leone (88%), and accounts for up to 80% the of new jobs created in economies such as Kenya, Nigeria, and Uganda.
It’s apparent that the informal nature of trade and commerce is a big problem for Africa, and governments all over the continent are working to formalise small businesses to improve productivity, reach more customers, hire more workers and become more profitable, such as by building permanent stalls for traders, or offering loans whose main requirement is that the business should be registered and paying tax.
The common story is that youth unemployment is a ticking time bomb for the continent, and young, educated Africans are desperately seeking “good jobs”, meaning white collar, formal jobs with salaries, pensions and medical insurance.
A 2012 report by McKinsey Global Institute, titled Africa at work: Job creation and inclusive growth, shows although poverty is falling, and around 31 million more African households have joined the world’s consuming classes in just over a decade, the continent must create wage-paying jobs more quickly to sustain these successes and ensure that growth benefits the majority of its people.
Although Africa’s official unemployment rate is 9%, just 28% of the workforce is engaged in stable, wage-earning jobs. With few social safety nets, the majority of Africans simply cannot afford not to work, and thus are in vulnerable jobs such as subsistence agriculture or informal self-employment.
But perhaps there is more to this story—perhaps young people are drawn to the informal sector not by circumstance but by choice.
Being off the radar has its benefits. Informality means freedom; freedom to choose where to set up your business, to move quickly when your customers move, and importantly, to avoid the heavy hand of government in your affairs.
Studies from other developing regions, including Sri Lanka and Bolivia, suggest that only mid-sized firms (2-5 employees) become more profitable after registration, but for both the smaller and larger firms, formalisation actually reduced profit margins and did not necessarily make access to finance any easier.
For the very small firms, the cost of registration was prohibitively high, and more importantly, made the business less agile, and for big informal firms, drawing attention from the taxman brought more problems than benefits—in any case, owners of large informal firms are able to quickly raise financing for expansion from friends, relatives and their already large customer base, and so have no real need to register the business and begin issuing tax receipts.
One media house in Kenya, it is rumoured, paid its workers in cash until just a couple of years ago, with the only physical trail being the signing of a “petty cash” voucher!
Lack of structures provides flexibility and makes it easy to divert resources as needed, without having to fill in forms or deal with banks or accountants.
The idea that the informal economy could be the sector of first choice provides a totally counter-intuitive approach to the problem of jobs and unemployment in African economies—perhaps it is time for African governments to stop looking at the market women on the street as a problem to get rid of, but as a rational business model in rapidly growing economies where businesses need to move faster than the stuffy banks allow them to, and people do not trust the states that tax and control the formal economy.