Why evidence should guide the formalisation of African informal economies

By Charles Dhewa | 11h ago | 5 Min read

African informal economies

WHEN African policymakers, development organisations and financial institutions talk about the need to formalise Africa’s informal economy, those discussions and decisions are often based on a superficial understanding of how African informal economies function.

That most African economies are driven by the informal sector is no longer debatable. At the centre of the informal sector are territorial mass food markets dominated by smallholder farmers, food vendors, transporters, traders and push-carts. The informal economy also embraces non-food actors like taxi drivers, furniture makers, hairdressers, hawkers and waste collectors that populate big African cities like Johannesburg, Maputo, Harare, Lusaka, Nairobi, Kampala, Dakar, Accra, Lagos and many others.

Informal economies as safety nets for the majority

Although there is increasing recognition that African informal economies play a key role in strengthening rural and urban communities through providing meaningful work and creating sustainable livelihoods, efforts to formalise these economies for purposes of collecting tax miss the fact that these economies function as critical safety nets that prevent vulnerable populations from falling into destitution.

African policymakers like ministers of finance who have absorbed Western education continue to misconstrue informal economies as being chaotic and immoral spaces that are impediments to economic development and progress.

Due to lack of investment in generating evidence on the informal economy, the increasing call by African governments to formalise the informal sector overlooks the social order and indigenous commerce that hold informal economies together in ways that anchor resilience. Overwhelming evidence gathered by eMKambo (www.emkambo.co.zw) over the past decade show how African informal economies use trust and relationships to fulfil crucial socio-economic welfare functions, especially given the absence of reliable support from the state and local authorities. Unfortunately, this socio-economic fabric is under threat from current development policy paradigms that seek to replace informality with formal, Western-style economic arrangements. While the conventional economic development’s focus on entrepreneurship, innovation and employment creation makes sense, it assumes that actors in the informal economy are empty vessels just waiting for support from formally-educated experts. That attitude undermines existing socio-economic welfare systems.

Importance of understanding how informal economies function

To prevent harm and to strengthen what is already working, policymakers, development agencies and investors must invest in understanding the dynamics of African informal economies. Rather than looking at territorial markets and the broad MSMEs sector as being full of victims and problems requiring fixing, they should start by asking what the ecosystem has been doing and is doing make things better. That way, the basis for intervention by external actors focuses on first identifying and leveraging on existing strengths, resources and capabilities within the informal economy. This means valuing and enhancing the collective problem-solving abilities including informal insurance mechanisms, and community-based support structures that already exist.

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Thorough understanding will lead to appreciation that in African informal economies, you do not succeed as a sole trader. Success is a collective rather than individual achievement. Armed with grassroots evidence, formal financial interventions can start by recognising existing local financial solutions such as rotating saving and credit associations, which are common in several African countries. In Zimbabwe they are called VSLAs or rounds and in South Africa, stokvels. Rather than building new lending facilities, a well-received intervention should start by strengthening existing financial arrangements and finding productive ways to interact with them.

New market infrastructure should be informed by users and uses

Abandoned expensive market infrastructure is found across many African countries because it was built without consulting users and understanding the socio-economic fabric within informal economies. To an outsider, Mbare market’s cluster of businesses might seem to be disorganised and stagnating because of a lack of specialisation and differentiation. However, on the contrary, the businesses are surviving and thriving because of their co-location and their similarities, which allow them to create an informal social-welfare system. Because they collaborate with, rather than competed against, each other, traders support each other in intriguing ways like the social order of interdependent relationships between businesses — a mutualistic bond that ties businesses together, despite existing in an environment of negligence by government and local authorities.

This creates local solutions for preventing traders and their families from slipping into destitution.

Efforts to rebuild or revamp market infrastructure in Mbare should critically examine and learn from these dynamics. That will prevent what has happened in Ghana where the development of modern market infrastructure has displaced the traditional institution of Ghanaian market queens, women who regulate industries ranging from tomatoes to textiles. The creation of formalised market stalls has induced scarcity, limiting the number of market participants that can operate within the new market, dispersing traders across multiple locations and, in doing so, undermining the queens’ ability to govern their traders.

The value of respecting local solutions

A crucial problem is the arrogance of external development interventions to overlook and undermine locally developed collective solutions that allow informal-economy businesses and traders to function effectively. Top-down policy interventions designed mostly to collect tax risk fracturing the social order between businesses as they introduce previously unseen socioeconomic asymmetries. Large-scale efforts to formalise businesses and introduce norms such as property rights may be detrimental. For instance, squatters randomly given land titles (property rights) are more likely to develop individualist and materialist market beliefs (for example, that one can be successful without the support of a community) than squatters who do receive such titles. In other words, the collectivist ethos in this setting is eroded by the introduction of individual-oriented market norms and institutions such as property rights.

What is also not appreciated by African policymakers is that traders in informal economies save money together and invest together. They provide apprenticeships for school dropouts from rural areas and go further to create business opportunities when the apprentices graduate. And, they provide an informal insurance system that covers not only traders and the entire market but also their families. The businesses and the people that operate them have invested substantial resources into the collective instead of just themselves. Members make regular and often substantive, contributions to collective associations as a way to enhance their resources, access lines of credit from each other and invest in business activities other than selling agricultural commodities, such as buying real estate to grow collective wealth. Traders have also created an informal insurance scheme to prevent members and their families from falling into destitution.

The African informal economy social order is self-generated to ensure that the businesses survive and thrive, despite the harsh conditions characterising the informal economy. It is not governed by a central authority, such as the municipality or elected councillor or Member of Parliament. It is decentralised and enacted through group-level mutualistic norms and solidarity practices between traders of diverse commodities that are related in a fluid manner. What kind of tax can be introduced without destroying this robust social-welfare system that gives African economies a uniquely indigenous face? Instead of burdening informal economies with taxes, African policymakers should introduce diverse ways of strengthening these economies in order to increase the resilience of existing safety nets and welfare systems that lift many people out of poverty.