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posted on 13 August 2017

The Potential For Growth And Africa's Informal Economy

from the International Monetary Fund

By 2035, sub-Saharan Africa will have more working-age people than the rest of the world’s regions combined. And this growing workforce will have to be met with jobs. In the region, up to 90 percent of jobs outside agriculture are in the informal sector. This includes household enterprises that are not formally registered, like street vendors or domestic workers. It also includes off-the-books activities by registered firms - for example, the taxi driver who offers a discount if the meter is not turned on.

As our Chart of the Week shows, the informal economy in sub-Saharan Africa is the second-largest in the world, after Latin America and the Caribbean. From 2010 to 2014, sub-Saharan Africa’s informal economy accounted for 38 percent of GDP to the region.

Within the region, however, there is significant variation in the size of informal economies. They range from a low of 20 to 25 percent of GDP in Mauritius, South Africa, and Namibia, to a high of 50 to 65 percent in Tanzania and Nigeria. As the chart shows, informality persists even in advanced economies, which means that the shift from informal to formal will take many years.

What drives informality in the region? Survey data show that the primary motivation for starting an informal business is to fulfil an aspiration for the future. A third of new entrepreneurs in sub-Saharan Africa, however, report choosing this path out of necessity - most would prefer a job in the formal sector, but don’t have that option.

The informal sector presents both opportunities and challenges:

  • It acts as a social safety net. The informal sector provides employment and income to many people who might otherwise be unemployed in the absence of sufficient opportunities in the formal sector. Household survey data suggest that people working in the informal sector consume more goods and services than those in the agricultural sector in many countries.

  • But productivity levels are low. Firms in the informal sector tend to suffer from low productivity. In sub-Saharan Africa, on average, the productivity of informal firms is only one-fifth to one-quarter that of formal firms. These differences likely reflect a combination of lower skill levels among workers, and a lower level of physical capital. In a country where the informal sector is large, the rate of economic growth is reduced.

The informal economy provides much-needed jobs to a growing working-age population, but also constrains growth.

Countries need to adopt a balanced approach in the design of policies to grow to formal sector. This means focusing on ways to increase the productivity of the informal sector, while working to support the expansion of formal businesses.

Policies that improve access to finance, make it easier for small firms to enter the market, and increase access to electricity could go a long way in formalizing the informal sector. This will be key to creating the types of jobs that are most desirable among sub-Saharan Africa’s expanding workforce.

To learn more, read the latest Regional Economic Outlook for sub-Saharan Africa and listen to a podcast featuring Ali Mansoor, one of the authors of the report.


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