Africa’s economy is a puzzle but it can be pieced together

You would have heard it often: Africa’s economy faces serious challenges, but also presents marked opportunities. No fact exemplifies this polarisation of possible futures better than the following: more than 80% of employment in Africa is informal. This doesn’t mean illegal, as some may think, but rather sums up those people who ply their trade outside the rules and regulations that govern formal work registered with the state. They’re the street vendors selling fresh produce, those washing cars for cash, and the labourers on subsistence farms. The backbone of economic activity in Africa, in fact.

Without them, Africa stops. But they enjoy no social and legal protection, often living hand-to-mouth and lacking access to the capital that is essential to help expand their businesses. In effect, they make Africa’s economy tick, but aren’t formally recognised or rewarded for doing so.

To formalise or not to formalise?

The obvious step given this lack of protection is to drive formalisation so government can provide better support. This would bring in substantially more taxes for the state too; formalised businesses pay tax, and registered taxpayers — businesses and individuals — can be held accountable if they don’t pay. Formalisation could also facilitate the scaling up from small enterprises to steady-state employers. But that reality would also mean informal businesses have to pay more, both in terms of money and time, to comply with regulatory requirements that may not support them in return, nor offer the kind of protection they’re paying for. It’s quid pro quo between them and the state, though currently it isn’t a fair trade.

In a recent Henley Business School webinar, Copenhagen Business School assistant professor Rebecca Namatovu pointed to how the informal economy is seen in Uganda. The perception is that it’s legal, community focused and a necessity, as the government does not ably assist. It becomes about filling in the gaps missed by government and the private sector, which can be substantially larger than that which is provided for. By one estimate, the value of informal work in Uganda adds up to $58bn a year, about 35% of its GDP. And this is not an outlier; it’s a story seen across Africa, where about 25 countries on the continent have even more unbalanced formal/informal distribution than Uganda.

Talking alongside Namatovu, Copenhagen Business School professor Marcus Larsen said one of the difficulties in managing the informal sector lies in its vast heterogeneity. It’s impossible to transition towards formality through a one-size-fits-all approach. Formal regulations group businesses and organisations into sectors. There may be certain rules that apply to all telecom companies, or to all retail merchants. But if governments can’t manage the informal economy through similar industry-wide categorisations and applicable laws, then the challenge becomes catering for each individual case of commerce and trade, where the contexts may be different. Together with the numerous barriers to starting a business in the formal sector, this means being informal (and remaining informal) becomes the default position.

Managing the transition

In the bid to shift businesses into the formal sector, some governments have sought to incentivise registration in exchange for services such as free schooling. In today’s data-driven world, anonymity is hard to maintain after your details have been captured. Nasir El-Rufai, the governor of Nigeria’s Kaduna state, pointed out that despite various infrastructure challenges the capabilities and efficiencies of technology and cheap data is likely to enable more widespread and accurate monitoring of information, which will help transition informal workers into the formal economy.

But this exchange depends on trust. And it turns out many citizens in the informal sector don’t trust government much. It is more rational to stay undercover and operate accordingly. As Nasir El-Rufai highlighted, a formalised economy needs to be a mutually beneficial relationship: “Government should not only be focused on getting taxes”, he said, “but should want a social contract between government and citizens.”

But to build this might take time. And even if the requisite trust can be built, the reality is that there will always be a natural level of informality in every economy, even the most developed ones. The UK’s informal sector is estimated at about 10%, for example. Working from home, flexible hours, regulation-skirting “gig” opportunities and exchange platforms all blur the line of formal versus informal work to some degree, and therefore the dichotomy becomes less clear. However, as Africa evolves and grows unlocking the power of the informal sector will be key to translating potential promise into meaningful development and change.

Namatovu summed up the challenge well: “We need to open up the space for all of us to fit our piece into the puzzle”. This is more easily done when you can see all the pieces.

• Narula is director of the Dunning Africa Centre and Foster Pedley dean and director of Henley Business School in SA. They recently hosted a webinar conversation on African marginalisation as part of a Dunning webinar series.