Edge 17th Edition Microbusiness in the Informal Economy
Formalising the informal sector
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TOWARDS WEST-AFRICA REGIONAL ECONOMIC INTEGRATION:
FORMALISING THE INFORMAL SECTOR
1
Oluwole Ibikunle OGUNYEMI & 2
Adebayo Sunday ADEDOKUN
1. Agricultural Extension and Management Department, Lagos State Polytechnic, Ikorodu,
Lagos, Nigeria
Corresponding: Email: woleoguns@yahoo.com Tel.: +2348023124607
2. Economics Department, University of Lagos, Akoka, Lagos, Nigeria
Email: brobayunilag@gmail.com Tel.:+2348027507021
PAPER DELIVERED AT THE
17TH
ANNUAL CONFERENCE ON GLOBAL ECONOMIC ANALYSIS
United Nations Economic Commission for Africa (UNECA)
organised session on ‘‘Boosting Intra-African Trade’’
KING FAHD PALACE HOTEL, DAKAR, SENEGAL
JUNE 18 – 20, 2014.
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TABLE OF CONTENTS
Page
Title page and authors‘ details 1
Table of contents 2
Abstract 3
1.0 Introduction 3
2.0 Literature Review 6
3.0 Methodology 10
3.1 Scope of study, data and analytical framework 10
3.2. Analytical procedure 11
3.2.1 Currency ratio/demand method 11
3.2.2 Descriptive statistics 12
3.2.3 Definition of terms 12
3.3. Formalising the informal sector framework 12
4.0 Discussion of results 13
4.1. Currency in circulation and Money supply in Nigeria 13
4.2 Ratio of currency in circulation to M2: 1960-2010 16
4.3 Ratio of currency outside bank to M2: 2000 - 2013 16
4.4 Informal-Formal Sector Transmission (INFOSTRA)
Model for Economic Integration in West African Sub-region 17
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4.5 Linking formalisation of informal sector to inter-regional trade
in West-Africa 22
5.0 Conclusion and Recommendations 23
5.1 Conclusion 23
5.2 Policy recommendations 24
References 25
Abstract
The existence of large informal economy is one reason for the developing countries not to be
benefiting fully from the world economy through integration. The countries have remained
behind those of the north in global financial, monetary and market development. The paper
employed secondary data for Nigeria, the largest economy in the West- African sub-region,
computes the indication of the informal sector in the country with monetary variables and
develops an Informal-Formal Sector Transmission Model for Economic Integration. The data
were analysed using currency-money supply approach, graph and tables. The ratio of currency
in circulation to M2 indicates that the incidence of the informal sector shrunk between 1960 and
2013. The currency outside bank to M2 ratio reduced from 9.39 to 8.81 per cent while currency
in circulation to M2 ratio reduced from 11.96 to 10.66 per cent in 2010 and 2013 respectively.
The Model explains the means of transforming informal sector to formal sector that leads to
market access in which all artificial barriers to trade are removed to facilitate free trade flows
within West-Africa. The paper reflects that with market access for the formal sector, countries
would benefit in terms of growth, employment, poverty reduction, intra regional trade and
labour mobility. This will promote the drive for financial and monetary union as well as
economic integration of the sub-region. The paper recommends the registration of informal
activities, the establishment of Informal Sector Institute and provision of inputs support for the
sector.
Keywords: Informal sector, Market Access, Economic Integration, West Africa, Employment.
1.0 Introduction
The informal sector remains a veritable source of economic growth and emancipation in
Africa and in West Africa in particular. It is equally seen as a means to step up the process of
economic integration in the sub-region as it accounts for the highest proportion of non-
agricultural employments. Never-the-less, the informal sector has not been given the kind of
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attention it requires both at the advocacy and policy levels in many developing countries
including those in the sub-region. This is one of the motivations for the current study. In addition
to this, the role of the informal sector in generating employment, reducing social set-backs and
serving as a catalyst for economic growth cannot be over-emphasized. Similarly, the paper
intends to investigate the link between informal sector, market access and economic integration
in the case of West African countries.
Conceptually, many authors have defined informal sector in one way or the other. The
definition in the current study aligns with convergence view describing the informal sector as the
legal economic or income generating activities that operate outside the regulatory framework of
the state (Castells and Portes 1989; Harding and Jenkins 1989; Feige 1990; Ogunyemi, 2009).
Though the paper recognise the illegal economic activities like drug trafficking and money
laundery at significant levels as part of the hidden economy. This illegal aspect is being
continuously fought by the governments of all countries and does not qualify for formalising the
informal sector concept underlying this study.
The informal sector is second largest employer of labour in West Africa. It follows
agricultural sector employment even in countries that are rich in natural capital like Nigeria,
Ghana and Cote d‘Ivoire. The sector has been a panacea for women and youth unemployment
and youth restiveness as it provides these vulnerable groups the opportunity to earn meagre
income in order to bullet proof themselves from food and income poverty. It is equally a sponge
that absorbs the population that is willing and able to work but does not have the requisite
qualifications necessary for gaining employment in the formal sector.
The study of the informal sector, market access and economic integration in the case of
West Africa Sub-Region is very important in the current time because the global economic
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slowdown has been discovered to have a prolong ripple effects on job destructions in the formal
sector. The informal sector thus provides social safety nets for the industrial reserve armies
(I.R.A) that are rendered jobless as a consequent of the waves of shocks affecting the global
economy. The informal sector provides the sizeable number of the working population with the
opportunity to be productively engaged even at the face of devastating effects of climate change
in several countries.
Flash floods and other natural disasters have succeeded in destroying farm lands in
several countries in West Africa. This has reduced agricultural employment, particularly those
involved in direct farming. The affected farmers can only find solace in informal sector
activities. The effects of adverse weather have not only affected agricultural productivity but also
employment in the agricultural sector. It has equally contributed massively to environmental
degradation and negative growth in many countries. The ecological fund notwithstanding,
poverty and depravity are widespread in developing countries, including those in the West
African Sub-region.
It is expected that the study will provide us with some salient information that are
asymmetry in nature on the nexus between informal sector, market access and economic
integration in West Africa. The lessons from the study can be used in other regional
arrangements among developing countries with some homogenous characteristics with West
Africa. Further, the paper contributes to the ongoing debate about the important roles of the
informal sector in regional alignment and economic integration. It shows the potential roles the
informal sector can play in promoting regional agenda within the study area.
The choice of West Africa for this study is informed by the fact that there have been
incessant conflicts, insurgencies and separationist movements within the West African sub-
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region. The remote cause of this upward rise in conflicts in the sub-region is primarily economic.
It is our conviction that an investigation into the roles of informal sector through market access
will promote integration within the sub-region. It will also encourage policy that will free
resources to the vulnerable groups in the society, thereby reducing armed conflicts and
insurgencies that have their root in poverty and depravity.
The paper develops an Informal-Formal Sector Transmission Model (INFORSTRAM)
for economic integration to establish the link between the informal sector, market access and
regional economic integration among any given countries. The remaining part of the paper is
divided into four. Section 2 is the Review of literature, where body of knowledge in the thematic
area is extensively discussed to establish gaps for the current study. Section 3 is for
Methodology, while section 4 is for Discussions. The paper ends with Section 5 which is for
Conclusion and recommendations.
2.0 Literature review
Different terms have been used to describe the informal sector and some of which are
underground, hidden, unobserved, unofficial, shadow or unrecorded economy. According to
Killam (1992), underground economy entails all off-the books and unregulated activity. It
encompasses a wide range of economic activities and services as well as legal activities that are
concealed from or misrepresented to government authorities such as involving tax evasion or
benefit fraud. Underground economy may then be illegal or legal economic activities. But Feige
(1999) identify four different components of underground economy as illegal, unreported,
unrecorded and informal economies. The illegal economy entails any income generating activity
done contrary to the legal definition of commerce. Unreported economy involves the activities
that dodge fiscal rules such as tax codes like under-reporting of income and under-invoicing.
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Unrecorded economy consists of those economic activities such as smuggling that circumvent
reporting requirements of government statistical agencies.
The informal economy refers to those activities that escape the costs and are excluded
from the benefits and rights of property relationships, commercial licensing, labour contracts,
torts, financial credit and social security system. This study focuses on the informal sector as
described and it entails the legal monetary and non-monetary economic activities that are not
against the law of any country but escape official recording and do not take advantages of labour
laws and property bonds as obtained in the formal sector (Schneider and Enste, 2002; Ogunyemi,
2009; ILO, 2009).
There is plethora of literature on informal sector of the economy in all the regions of the
world but it is an under-investigated topic in developing countries. All publications on the sector
highlighted its meaning and importance; some emphasise on transforming the informal to formal
sector but hardly is there any literature linking the informal sector to regional market access and
economic integration. The studies include Fluitman (1989), Rauch (1991), Armah (2001), Chen
(2001), ILO (2002), Carr and Chen (2002),. ILO (2002), Goldberg and Pavcnik (2003), Klarita
(2004), Adeyinka (2006), Alan et. al. (2009), Ogunyemi (2009), Sparks and Barnett (2010),
Chen (2012), Duru (2012) and Olunloyo (2012). The informal sector is defined as all economic
activities by workers and economic units that are either in law or practice not covered or
completely covered by formal arrangements (ILO, 2002). Fluitman (1989) reports that the
informal sector is heterogeneous, comprising a wide variety of economic activities that often
failed to be noticed in statistics.
In Sparks and Barnett (2010), the informal sector boosts job creation, reduces poverty
and is a veritable tool of unemployment reduction and governments need to take away barriers
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from the formal sector to encourage more participants. Similarly, Chen (2012) mentions that the
sector provides a larger share of the world working population and economic activity. Among all
the literature mentioned, Chen (2012) examines the formalisation of the formal sector which
includes formalising both the employers and employees, both self-employed and wage workers
and the concept goes beyond official recognition of the informal sector businesses. Specifically,
formalisation of the informal sector is of two sides; formalisation of the informal businesses and
jobs in the countries concerned.
However, market access is a phenomenon among countries of the world in the face of
globalisation and drive towards regional and sub-regional economic integrations. It refers to the
conditions especially on tariffs and non-tariffs measures agreed upon by countries for the entry
of particular commodities into their markets (Hoekman and Martin, 1999; IMF/World Bank,
2002). Market access can be said to be one of the necessary ingredients of economic integration.
According to Investopedia (2013) economic integration is an economic arrangement between
different countries characterised by partial or full elimination of trade barriers and the
coordination of monetary and fiscal policies. The aim of economic integration is to reduce costs
for both consumers and producers, as well as to increase trade between the countries taking part
in the agreement. Some features of a regional economic integration are preferential trade
agreements (PTA), free trade areas (FTA), customs unions, common markets and economic and
monetary unions. The more integrated the economies become, the fewer trade barriers exist and
the more economic and political coordination among member states (Carbaugh, 2004).
These foregoing definitions point to the fact that market access is directly related to
economic integration as the former enhances the later. Market consideration is one of the five
processes of economic integration which are free trade area, customs union, common market,
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economic union and complete regional integration respectively. An advantage of economic
integration is regional economic growth and larger market for diverse commodities. Several
authors including Goldberg and Pavcnik (2003), Klarita (2004), Adeyinka (2006), Alan et. al.
(2009), Sparks and Barnett (2010), Chen (2012), Duru (2012) and Olunloyo (2012) have pointed
out the contributions of the informal sector to the growth of the economy through employment
generation and production of goods and services. During period of economic growth in countries
that have integrated economically, the benefits will be enormous for all in terms of wealth
creation especially in Africa with large proportion of the informal sector. This paper is thus
adding to existing literature in the area of informal sector formalisation that promotes market
access for businesses for the achievement of regional economic integration with its
accompanying benefits.
Due to the relevance of the informal sector, efforts have been made to estimate its size in
many economies. In this endeavour, there are few quantitative studies in both developed and
developing countries which include Tanzi (1980 and 1983), Simon and Witte (1982) and
Scheneider (2002). More of the literatures have been for developed countries than developing
countries. The interest in informal sector estimation started immediately after the World War II
in the United States and since then about five to six methods have been demonstrated.
The methods either involved the use of aggregate (macro) data or individual (micro) data
and were grouped by Georgiou (2007) into direct survey, monetary measures, income and
expenditure measures, indirect non-monetary measures, labour market indicators and multiple
indicators-multiple causes model. Georgiou reports that all the methods have short-comings.
Those applying micro data are faced with the challenge of non-representative sample and
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respondents biasness among others. The macro data based approaches are weakened by some
factors which include unrealistic assumptions and measurement error problems.
Table 1 shows the size of the informal sector in five West-African countries as computed
by Scheneider (2002). Though the estimates are for over a decade ago, they are pointers to the
significance of the sector in the region‘s productivity. As at 2000, the informal sector was about
60 per cent of Nigeria‘s gross national product (GNP) and about 40 per cent for Burkina Faso,
Table 1: The size of the informal economy of 5 West African Countries
S/N Country GNP at
Market Prices
(Current USD
Billion) 2000
Informal
Economy (%
of GNP
1999/2000)
Informal
Economy
(Current USD
in Billion) 2000
1 Burkina Faso 21.7 38.4 17.6
2 Cote d‘Ivoire 86.1 39.9 34.4
3 Ghana 48.3 38.4 18.5
4 Niger 18.1 41.9 7.6
5 Nigeria 367.3 57.9 212.6
Source: Scheneider (2002)
Cote d‘Ivoire, Ghana and Niger. These estimates could have either increased or decreased by
significant per cents in 2013 after a period of ten years with rising population, higher
unemployment rate in the formal sector and poverty levels in countries like Nigeria, Niger and
Cote d‘Ivoire.
3.0 Methodology
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3.1 Scope of study, data and analytical framework
The study used the data for Nigeria. The country is the largest economy in West Africa
and represents more than 40 per cent of the population in the sub-region. Therefore the paper
used secondary aggregate data obtained from the site of the Central Bank of Nigeria and its 2010
Statistical Bulletin. We used the monetary measure procedure to indicate the occurrence of the
informal sector in Nigeria instead of its actual estimation in terms of GDP for which all known
methods Georgiou (2007) have drawbacks. The monetary approach is of three types: banknote
denomination indicator, currency ratio/demand method and the transactions method. The
banknote denomination indicator and transaction methods are not used for the following reasons.
The former wrongly assumes that the informal economic activities, both legal and illegal, are
done only by cash ignoring electronic money and cheque payment systems as well as
commodity-for-commodity means of exchange. The method shows the incidence of both legal
and illegal informal economic activities. The transaction method is weakened mainly by lack of
empirical validity.
3.2. Analytical procedure
3.2.1 The currency ratio/demand method:
We examined the long-period changes in the ratio of currency to money supply (M2) in
Nigeria between 1960 and 2013. This enabled us to determine the proportion of the broad money
that is outside the bank all over the period as an indication of the informal economy in the
country. This approach involving broad definition of money indicates the proportion of money
out of the banking system which is in the informal sector. The method is based on the following
assumptions: (i) there is one to one relationship between transactions and cash payment, no
barter and cheque payments (ii) velocity of currency in the informal sector is the same as in the
formal economy.
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The advantages of the method are (i) it provides rough indication of the informal sector in
any economy (ii) where aggregate data are not available in detail for all financial, income,
expenditure and labour market indicators, it can be relied upon as it uses the readily available
central bank monetary data (iii) It can also be relied upon where survey cannot be done due to
cost and time constraints. However, the method has inherent weakness. There are other factors
which affect the relationship between currency and monetary indicators like demand deposits,
opportunity cost of holding cash, level of income tax rate, level and rate of urbanisation,
expected real per capita income and volume of retail trade. This affects the basic assumption of
currency-money supply ratio adopted as indicator of the informal sector. Estimates to be arrived
at will depend on many quantitative and qualitative factors.
3.2.2 Descriptive statistics
Graph and table were used to analyse the data to present an indication of the informal
sector in Nigeria. This informal sector indication procedure can easily be adopted based on
available data within the West African sub-region as alternative to more sophisticated estimation
options.
3.2.3 Definition of terms
Money supply: The amount of money which is available in an economy in sufficiently liquid
and spendable form (Afolabi, 1998).
Broad money supply (M2): This is the wider definition of money supply recognised in Nigeria
and other countries of West-Africa. It is expressed as:
M2 = M1 + TD + SD
where, M1 = Narrow definition of money supply = C + DD
C = Currency in circulation
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DD = Private sector demand deposits with commercial banks plus adjusted private sector
demand deposits with the Central Bank
TD = Time deposits, and SD = Savings deposits
3.3. Formalising the informal sector framework
We developed a model for changing the informal sector to formal sector for the West
African sub-region. This framework emanated from the nature and scope of informal economic
activities in the sub-region which are almost alike in all its countries.
4.0 Discussion of results
4.1. Currency in circulation and Money supply in Nigeria: 1960-2010
As shown in Figure 1, the gap between broad money supply (M2) and currency in
circulation was not pronounced until in 1995 when the gap opened and continued to widen up to
2010. From Table 2, in 1960, 1970, 1980, 1990, 2000 and 2010, M2 (in Million Naira) in
absolute terms was 272.40, 978.20, 15,100.00, 68,662.50, 1,036,079.50 and 11,525,530.30 while
currency in circulation was N154.2Million, N370.4Million, N3,589.5Million, N16,212.5Million,
N310,496.3Million and N1,378,134.4Million respectively. These are indications of growth and
developments in both formal and informal economic activities in the country and the impacts of
various monetary and fiscal policies that have been implemented in the countries.
Table 2: Currency in circulation and Broad money supply in Nigeria
Year
Currency in Circulation
Million Naira
Money Supply
M2 Million Naira
Currency to
M2 Ratio in
Per cent*
1960 154.2 272.4 56.61
1961 160.2 292.8 54.71
1962 174.7 325.4 53.69
1963 183.3 361.8 50.66
1968 202.2 515.3 39.24
1964 214.7 430.5 49.87
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102030405060
Percent
1960 1970 1980 1990 2000 2010
Year
Figure 2: Currency in circulation to M2 Ratio in per cent from 1960 to 2010
Source: Authors‘ computation from M2 and Money in circulation
4.2 Ratio of currency in circulation to M2
As shown in Figure 2, there is an overall decline in the ratio of currency in circulation to
money supply. In 1960, 1970, 1980, 1990, 2000 and 2010, the ratio was 56.61, 37.87, 23.77,
23.61, 29.97 and 11.96 per cent respectively. This implies that the informal sector monetary
activities especially the cash transactions are gradually declining as they may have been
changing their cash transactions into other payment systems like cheque. The ratio reduced from
30.67 in 2001 to 10.97 in 2009 but upturned in 2010 to 11.96. The reason for the overall decline
in the ratio showing decrease in the informal sector is not far-fetched. There is growing
awareness among the people for banking services as the effect of globalisation becomes more
obvious in everyday economic activities. Economics agents are now moving from cash based
transactions to other payment options such as e-payment. However, the progress made so far in
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this direction is not satisfying as many are still unbanked in the country and by extension in the
sub-region.
4.3 Ratio of currency outside bank to M2: 2000 - 2013
Table 3 shows that the ratio of currency outside the banking system to M2 from 2000 to
2013. The ratio is smaller in value compared with the ratio of currency in circulation to M2. This
is because the later comprises the currencies in- and outside the banking system and may be
better indicator of the informal sector as some informal activities have their monies in the
banking system. Following an increase in the ratio between 2009 and 2010, both ratios declined
towards 2013. Currency outside bank to M2 ratio reduced from 9.39 to 8.81 while currency in
circulation to M2 ratio reduced from 11.96 to 10.66 in 2010 and 2013 respectively. This implies
that the informal businesses gradually crept into the formal banking system within the period. A
development that may not be unconnected with the financial inclusion as well as the cash-less
policies of the monetary authorities. The observed reduction in the prevalence of the informal
Table 3: Currency outside the Banking system and Broad Money in Nigeria: 2000 - 2013
Year
Broad
Money M2
Currency in
Circulation
Currency
Outside
Banks
Ratio of
Currency
Outside Bank
to M2*
Ratio of
Currency in
Circulation
to M2*
2000 1036079.5 310496.3 274010.6 26.45 29.97
2001 1315869.1 403506.0 338671.2 25.74 30.67
2002 1599494.6 463153.0 386942.3 24.19 28.96
2003 1985191.8 502254.5 412155.2 20.76 25.30
2004 2263587.9 545803.0 458586.5 20.26 24.11
2005 2814846.1 642388.2 563232.0 20.01 22.82
2006 3674641.9 779254.2 690841.5 18.80 21.21
2007 5809826.5 960774.4 737867.2 12.70 16.54
2008 9167067.6 1155566.8 892907.8 9.74 12.60
2009 10780627.1 1181541.9 927236.4 8.60 10.97
2010 11525530.3 1378134.4 1082295.1 9.39 11.96
2011 13303494.5 1566046.4 1245135.4 9.36 11.77
2012 15483847.5 1631717.1 1301160.6 8.40 10.54
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2013 14734882.8 1571034.8 1298533.8 8.81 10.66
Source: CBN (2013) web site http://www.cenbank.org/rates/mnycredit.asp?year=2010
*Authors‘ computation
sector is policy induced during the last three years, 2010 to 2013. If the policies implementation
is sustained with other incentives and initiatives as discussed later for formalising the informal
sector, the dream towards complete formalisation of the informal sector will be achieved earlier
than envisaged.
4.4 Informal-Formal Sector Transmission (INFOSTRA) Model for Economic Integration
in West African Sub-region
According to Meagher (2013) ‗growing awareness of the size and organisational potential
of informal economies in the era of globalisation has triggered a profusion of research on
linkages between the formal and informal economies, moving in a range of empirical and
theoretical directions‘. There is a need for countries to work decisively to transform their large
traditional informal sector to modern formal sector in order to promote economic growth and
regional agenda within their sub-region.
Shrinking Fluctuating Expanding
Informal
Sector Semi-
formal
Sector
Formal
Sector
Market Access
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Informal in Size Formal Sector
Sector Semi-formal Sector
Set of Input Incentives Outcomes:
by each country: Country Specific Benefits:
Recognition of activities - Boosts Planning
Enumeration and Registration - Increases employment
Inputs supply support -Enhances Consumption
Training, Education and Advice -Increases Production
Medium to Long –Term Business: -Reduces poverty
o Entity Tax holidays - Boosts public revenue
o Financial Supports -Improves public
confidence and support
Cross country/Sub-regional
Benefits:
-Enhances production
- Aids economic
integration
-Boosts trade
-Aids labour mobility
-Catalyses monetary
and financial policies and
Key union implementation
Direction of flow
Figure 3: Informal-Formal Sector Transmission Model for Economic Integration
Source: Authors‘ construct
With the foregoing, it is pertinent to make some fundamental assumptions. It is assumed
that all countries in the West Africa sub-region possess the political will and administrative
acumen to encourage avalanche of informal sector organisations within their domain of influence
to gradually transmit to formal sector in order to have access to international market within the
sub-region in which artificial barriers to free trade must have been removed through regional
bloc membership.
From the INFOSTRA model diagram as shown in Figure 3, the left hand side of the
diagram depicts a set of incentive variables that is expected to be carried out by governments of
countries within the regional bloc. For informal sector to migrate to formal sector in the case of
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Africa where poverty is widespread and informal sector serves as bail out for the vulnerable
people, it is expected that government will recognise the various activities within the informal
sector of the economy. For government policies to achieve its aim of promoting formalisation of
economic activities, it is necessary for government to carry out enumeration and registration of
informal sector activities.
However, the registration should be done with caution and public enlightenments in order
to have more informal businesses enumerated. In West Africa, public policies must be well
communicated to the people particularly at the grass root because many may misunderstand or
misinterpret government intention. This is because many past administrations in these countries
have failed in their social contracts to the people. Another formalisation input of the informal
sector is provision of input supplies supports by the governments of various countries in West
Africa. Training and advisory services as most of them do to agricultural sector by providing
extension services to farmers in different locations and settlements is equally a necessary
ingredient for informal sector formalisation.
Financial supports to formal sector are also important incentives that must be given in
order to encourage mass drift of economic actors from the informal sector to the formal sector. If
government through her agencies provides financial supports in form of low interest loans to the
formal sector of the economy, many operators in the informal sector will be encouraged to
formalize their activities.
The intention of the above mentioned incentives is to ensure that the informal sector
shrinks in size as indicated by upward arrow in figure 3. The next line of action will be that the
communication gap between the state and the informal sector will start to close at the instance of
the incentives and the sector begins to open up for interaction with the government particularly
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on issues that impede informal sector operations. This is the semi-formal stage of transformation
of the informal sector to mainstream formalisation of economic activities and it is recognised that
this stage can fluctuate in size.
The resultant outcome of continuous interaction between the state and the informal sector
is the final stage of formalisation which gives the informal sector units the rights and privileges
reserves for corporate organisations. Once an organisation is formalised it becomes an entity that
can enjoy the rights and privileges under commercial and property laws. Its employment
contracts are also expected to be formalised (Chen, 2012) so that labours‘ rights, welfare issues
such as pensions, retirement‘s benefits are guaranteed under the employment contracts with its
employees.
The macroeconomic benefits of transforming a country‘s crude informal sector to a
sophisticated modern formal sector can be divided into two under regional arrangements. The
benefits can be country specific and cross country in nature (sub-regional benefits). Each country
within the West Africa sub-region will benefit from formalising their informal organisations and
opening up of market access through removal of all form of artificial barriers to trade including
tariff and non tariff measures within the sub-region through ratifications of conventions under
Economic Community of West African States (ECOWAS) which has been working to ensure
regional integration of the sub-region. Such country specific benefits include improvements in
planning and plan implementation. Since it is easier to plan with formal organisations than
faceless informal sector, the expansion of formal sector in any country no doubt will boost
formal employments and improve the level of work decency as indecent work and poor working
conditions will reduced drastically.
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Once formal employments increase, it will automatically increase productivity as more
factors are now employed. In the long run, government revenue will increase as businesses
mature in number and scope. The maturing formal organisations will cooperate with the
government in paying corporate tax that will increase government revenue base. The extinction
of informal sector or the shrinking of the same will reduce poverty incidence as more people get
better employment contract deals in the formal sector.
The cross-country or sub-regional benefits of formalising the informal sector include a
larger market for products and services produced anywhere within the region. This will enhance
intra- regional trade which is currently less than 10% when considering Africa as an entity. West
African countries are not trading sufficiently with themselves as they should. South African
Development Cooperation (SADC) for instance accounts for about 33% of intra-African trade
according to UNCTAD (2012) trade statistics. Formalisation of informal sector in West Africa
and execution of conventions and commitment to free movement of goods and services, free
movement of people and improved road networks and other infrastructure within the sub-region
will promote economic integration as well as improvement in the quality of life of the people.
Market access can be aided by availability of information to the organisations that can
benefits from the removal of all form of artificial barriers to trade within the region. When
information is asymmetry in nature, it will reduce trade that could have taken place when
information is available. Formalisation of organisations in West Africa will reduce lemon in
intra-regional trade. Lemons are sub-standard products sold under the pretence of quality
products and thrive when there are hidden information that could also lead to hidden actions
among organisations. Lemon sales are characteristics of underground economic activities which
could be reduced through formalisation of economic activities.
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4.5 Linking formalisation of informal sector to inter-regional trade in West-Africa
Theoretically, economic integration involves some basic stages that must be achieved in
subsequent order. These are: achievement of free trade area, the erection of uniform custom duty
against non-member of the regional organisation often called custom union followed by the stage
of common market for goods, services and factors and the next being economic union which
involves the synchronization of economic policies among member states in a regional
arrangement. The last stage is the monetary union involving common monetary policy and
common currency. The integration and subsequent formalisation of informal sector within the
sub-region will boost the drive towards the achievement of these steps as volume of trade is
expected to increase which will necessitate the need for a common currency among West Africa
countries.
Realistically, achieving a formalising and formalised informal sector promotes the
proliferation of cottage industries in each country. These thriving industries leverage on the
available resources in their domain based on Heckscher-Ohlin proposition that countries would
specialise in the production of commodities on which they have factor endowment. By so doing,
varieties of goods and services are made available and commerce is boosted within the sub-
region through free trade arrangements.
Further, the formalisation of the informal sector will boost the implementation of
monetary and banking policies such as financial inclusion and cash-less policies as presently
being implemented in the region. Formalising the informal sector also has the potential of
encouraging the expansion of the West Africa Monetary Zone (WAMZ) beyond its current five
countries as the remaining eleven countries would be attracted into the zone. It should however
be noted that there is need for macroeconomic stability within the region to ensure that the law of
24. Page 24 of 29
one price holds such that interest, exchange and inflation rates will converge among member
states within the regional arrangement.
5.0 Conclusion and recommendations
5.1 Conclusion
The paper examines the informal sector, market access and economic integration. There
are a lot of literatures on the informal sector, the legal economic activities that are not officially
captured, highlighting on its relevance in employment generation and production of goods and
services. To the best of our knowledge, none of the existing literature on any of the West Africa
countries has linked the sector with market access and economic integration. The current effort is
an addition to stock of literature in this area. For Nigeria, with the ratios of currency in
circulation and currency outside bank to broad money, the informal sector is indicated to have
fallen between 1960 and 2010. Following a slight increase in the ratios between 2009 and 2010,
both ratios declined towards 2013. Currency outside bank to M2 ratio reduced from 9.39 to 8.81
while currency in circulation to M2 ratio reduced from 11.96 to 10.66 in 2010 and 2013
respectively. The informal sector is shown to be shrinking in Nigeria with monetary indicators.
The informal sector can be transformed into formal sector through the adoption of
Informal-Formal Sector Transmission (INFOSTRA) Model for Economic Integration. The model
rests on the assumption that there is political and administrative will among countries to
formalize the informal sector due to its importance. In the model, inputs incentives like
enumeration and registration of the informal business as well as business tax exceptions for
medium to long term would transform the informal sector into formal sector. With market access
for the formal sector, countries would benefits in the areas of growth, employment, poverty
reduction and public support. Across the countries in the economic integrating region, trade
would be boosted; labour mobility would be aided geographically and occupationally as well as a
25. Page 25 of 29
fast-tracked monetary and financial union would be achieved. Market access enhances regional
economic integration and vice versa. A formalised informal sector boosts market access. Formal
sector and market access promotes the achievement of economic integration in all ramifications.
5.2 Policy recommendations
The paper therefore recommends the following:
Countries in the West-African sub-region should agree to transform the informal sector
to formal sector over a defined period of time.
Immediate census and registration exercise of the informal sector with high level of
publicity without cost to the actors in the sector. In the present state of ICT penetration in
West Africa, the cost of collecting information through media like telephone and optic
mark reader is expected to be infinitesimal which governments of various countries
should bear for the long run benefits.
Upon registration, the governments should exempt the registered informal businesses
from any form of tax payments for five to ten years but individuals could pay personal
income tax as being done in Lagos State, Nigeria for artisans.
Harmonization of the activities of all government agencies in West African Countries that
have the capacity of working for the transformation of the informal sector to formal
sector.
Small and medium scale enterprises development agencies in respective countries should
step up advisory, training and education of informal sector participants to improve their
efficiency towards transforming it to formal sector. The agencies may also collaborate
with existing higher institutions in the training while government could establish the
26. Page 26 of 29
Informal Sector Institute to enhance training, education and transformation of the sector
to formal sector.
Financial supports for the formal sector businesses would have to be stepped up through
micro-finance institutions and small and medium scale enterprises development agencies.
As more businesses in the informal sector metamorphosed into the formal sector, the march
towards full economic integration in West Africa is achievable within very short time.
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