The level of informality of an economy has long been seen as a measure of its arrested development. Going by that viewpoint Africa would seem to have a very serious case of it. However, it has in recent times become fashionable by some people to suggest that perhaps we have been looking at the matter from the wrong frame of reference.
Those taken up with this new school of thought are typically at pains to point out that the size of Africa’s informal economy is rather substantial. A figure I recently came across in one of our daily newspapers put its size at $5 trillion. To be sure, that is certainly not a figure to be sneezed at. Given its gargantuan size, I guess it is no surprise that purveyors see it as yet another example of Africa starving in the midst of plenty.
The title of my article will leave no one reading in doubt of the fact that I am somewhat skeptical. I have my suspicions that there is some measure of oversimplification as regards this rosy view of Africa’s informal economy despite the impressive sounding $5 trillion figure.
Perhaps I should start the justification for my views by noting the fact that adherents of this new school of thought are often quick to point out that over-taxation and burdensome regulation drive many to operate in the informal economy (this is no doubt true), however, close observation of their fellow citizens would have shown that many more are driven to the informal economy because of unemployment. In fact, a 2021 study conducted by the International Monetary Fund (IMF) showed that globally, roughly 85% of the existence of the informal economy can be attributed to unemployment. Returning the focus to Africa, this would seem to imply that the vast majority of people operating in Africa’s informal economy do not want to be there.
Why would anyone not want to be part of a $5 trillion economy? Well, perhaps it is because much informal work is subsistence-level (street vending, small-scale farming, casual labor). A precarious, from hand to mouth, “living for the day for we know not what tomorrow brings” kind of existence. It is here I think that we can find the problem with the impressive looking $5 trillion figure. Aggregate size does not equal aggregate potential. Aggregating the informal economy into “trillions” doesn’t mean it has the same economic potential as formal, high-productivity sectors. Most informal work is low-margin, low-productivity survival work that doesn’t automatically translate into investable, scalable opportunities.
Most informal businesses are micro-enterprises that generate just enough to cover food, rent, and transport. They rarely generate a surplus that can be invested in growth. Also, many informal businesses rely on unpaid family members, which keeps costs low but also limits scalability. With informal work typically having no formal contracts, workers are paid daily or weekly, often in cash, with no long-term security. This discourages skill development and long-term planning.
The irony is that what is typically recommended to tap this opportunity require the very formalization that Africa is struggling to achieve. They talk about documenting, financing and empowering the informal economy. They tend to harp on the power of digital technology to speedily achieve these things.
There is no doubt that digital technology can achieve meaningful time compressions, but you cannot digitize away the hard, slow work of building institutions, infrastructure, and social protections that will enable documenting, financing and empowering to have their full impact. Formalization is not just about registering businesses — it’s about building an ecosystem where informal actors can thrive and scale.
To take some specific examples:
- Digital registries can store titles, but the political and legal process of adjudicating land disputes and granting secure ownership is slow, contested, and requires courts and governance capacity.
- Irrigation canals, rural roads, and storage facilities cannot be digitized — they require heavy capital investment and construction.
- Transport apps can optimize routes, but they cannot redesign cities, build rail lines, or expand road networks.
- Digital contracts are useful, but if courts are slow or corrupt, enforcement will remain weak.
- Apps can track workers, but extending pensions, health insurance, and collective bargaining requires fiscal resources and political will.
- E-learning helps, but literacy, vocational training, and teacher quality still demand human investment, and take a long time to yield fruit.
- Digital platforms can deliver benefits, but governments must fund and design the social programs — technology doesn’t create social protection systems on its own.
- Trust and new cultural norms take time to develop. Digital platforms can’t easily replace these social contracts.
Putting these in place are the essence of development, and these are by nature, long term efforts. One more thing. Recall the IMF statistic quoted above that said 85% of the people in the global informal sector are there because of unemployment. They can’t get jobs in the relatively high wage, high productivity formal sector. It would therefore seem therefore that the best way to help those plying their trade in the informal sector is by expanding the opportunities in the formal sector and helping members of the informal sector transition. That of course is also the essence of economic development. What I am implying is that there is no short-circuiting the hard work of building the formal economic systems that can absorb the large swathes of the African population currently locked out of it. The informal economy is not a goldmine waiting to be tapped overnight — it’s a slow-burning transformation project.
Bibliography
- IMF Country Focus July 28 2021 ‘Five things to know about the Informal Economy’ https://www.imf.org/en/News/Articles/2021/07/28/na-072821-five-things-to-know-about-the-informal-economy
