1. FEB 13, 2012
The Informal Sector, Africa
The purpose of this paper is to provide a working definition of
the informal sector, to track its size and growth over time, and to
survey the political and economic factors that influence it.
OVERVIEW OVERVIEW
Context Context… pg1
Definitions… pg2
Across Africa, there are varying definitions with respect to what con‐
stitutes the informal sector. Furthermore, many countries do not col‐ SECTOR COVERAGE
lect data at all. For these reasons, “it is difficult to make strict compari‐
sons within and between coun‐ Informal Sector Share… pg3
tries. Nonetheless, the available Our Study… pg4
“One of the most impor‐ data clearly indicates that the
tant characteristics of informal sector represents both CHARACTERISTICS
the labor market in Afri‐ a significant component of gross Women in the Labor Force… pg4
ca is the prevalence of domestic product and employ‐ Labor Force by Education… pg5
ment in most African countries”
informal employment, (Verick1). From among the vari‐
National Poverty Line… pg6
which according to some ous approaches to defining and
figures now accounts for measuring the informal sector, BUSINESS FRIENDLINESS
the analysis that follows will ref‐
72 percent of non‐ Doing Business in SSA… pg7
erence the International Labor
agriculture employment Organization’s (ILO) statistics on Ease of Doing Business Index… pg7
in sub‐Saharan Africa…” the size of the informal economy No. of Procedures Req’d… pg8
as well as its definitions, while
incorporating additional data Time to Start… pg8
from the World Bank.
Time to Prepare Taxes… pg9
Employment in the informal economy relates the estimated number of Tax Rate… pg9
persons in informal employment to the total number of employed
persons in the non‐agricultural sector. In terms of size and growth, the WORLD & POLICY
informal economy is an important part of economic, social and politi‐
Globalization… pg10
cal life in most developing, as well as some developed economies. In
countries with high rates of population growth or urbanization, the Trade Liberalization… pg10
informal economy tends to absorb most of the growing labor force.
Foreign Direct Investment… pg12
“One of the most important characteristics of the labor market in Afri‐
Policy & Closing Remarks… pg13
1
Source: Dr. Sher Verick: “The Impact of Globalization on the Informal Sector in Africa”; Economic and Social Policy
Division, United Nations Economic Commission for Africa and Institute for the Study of Labor.
1

2.
ca is the prevalence of informal employment, which according to some figures now accounts for 72 per‐
cent of non‐agriculture employment in sub‐Saharan Africa, 78 percent if South Africa is excluded. Other
studies claim that a vast majority of jobs created in the 1990s were outside the formal sector” (Verick). It
is clear why the informal sector matters; the next step is to appropriately define it.
Definitions
The ILO has established a set of working definitions as relates to informality. The organization proposes
that while the terms “informal sector”, “informal economy”, “employment in the informal sector” and
“informal employment” might seem interchangeable, they are not. In fact, the nuances associated with
each term are extremely important from a technical point of view. The following table2 will serve as an
easy reference for the reader to differentiate between various terms and grasp concepts going forward:
(a) Informal economy All economic activities by workers or economic units
that are – in law or practice – not covered or suffi‐
ciently covered by formal arrangements
(b) Informal sector A group of production units (unincorporated enter‐
prises owned by households) including “informal
own‐account enterprises” and “enterprises of infor‐
mal employers”
(c) Informal sector enterprise Unregistered and/or small‐scale private unincorpo‐
rated enterprises engaged in non‐agricultural activi‐
ties with at least some of the goods or services pro‐
duced for sale or barter
(d) Employment in the informal All jobs in informal sector enterprises (c), or all per‐
sector sons who were employed in at least one informal sec‐
tor enterprise, irrespective of their status in employ‐
ment and whether it was their main or a secondary
job
(e) Informal wage employment All employee jobs characterized by an employment
relationship that is not subject to national labor legis‐
lation, income taxation, social protection or entitle‐
ment to certain employment benefits
(f) Informal employment Total number of informal jobs, whether carried out in
formal sector enterprises, informal sector enterprises,
or households; including employees holding informal
jobs (e); employers and own‐account workers em‐
ployed in their own informal sector enterprises; and
own‐account workers engaged in the production of
goods for own end use by their household
(g) Employment in the informal Sum of employment in the informal sector (d) and
economy informal employment (f) outside the informal sector
2
Source: Reproduced from S. Elder and M. Corley: “Measuring the informal economy: Statistical challenges”, in
Policy Resource Guide on the Informal Economy.
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3.
When combined with the definitions above, the matrix3 below is an especially useful tool:
A + C = Persons in Informal Employ‐
ment
Matrix: Employment in the Informal Economy
A + B = Persons Employed in the In‐
Production Units Informal Jobs Formal Jobs formal Sector
C = Informal Employment outside the
Informal Sector Enterprises A B Informal Sector
B = Formal Employment in the Infor‐
Other Units of Production C D
mal Sector
A + B + C = Total Employment in the
Informal Economy
SECTOR COVERAGE
Informal Sector Share
For our analysis, we sample 17 Sub‐ Figure 1: Share of persons employed in the informal sector in
Saharan African (SSA) countries for which total non-agricultural employment (%) by country code
the ILO has data on the “share of persons
90
employed in the informal sector in total
80
non‐agricultural employment (%)” – using
70
the definitions from the above matrix, this
60
data represents A + B (persons employed
50
in the informal sector). Figure 1 shows
40
how this metric varies across the sample
30
countries – Kenya has the highest share of
20
persons employed in the informal sector at
10
79 percent and Tanzania has the lowest at
0
8.5 percent. To get “total employment in
the informal economy”, however, we also
need C (informal employment outside the
informal sector). The ILO had “C” data for seven of the 17 countries we sampled, so we have chosen to
show the distribution of this data in quartiles in Figure 2 below although we omitt it from further statis‐
tical analysis run on the 17 country data sample.
The distribution for A + B, share of persons in the informal sector, has a median value of 49.5 percent
and the distribution for C, informal employment outside the informal sector, has a median value of 13.5
3
Source: Reproduced from Rafael Diez de Medina: “Statistical Update on Employment in the Informal Economy”;
ILO Department of Statistics
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percent. Given these median values, the implied median value for A + B + C, total employment in the
informal economy, is 63 percent.
Our Study
Figure 2: Quartile distribution of informal sector employment In his study, Dr. Verick sites sources indi‐
cating that the informal sector in Africa is
0 20 40 60 80 100
dominated by trade related activities, with
services and manufacturing accounting for
only a small percentage of the sector – a
A + B majority of informal sector workers are
active in retail trade. In SSA, 70 percent of
the workers in this sector are self‐
employed, with the remainder in wage
employment. “Street vending is one par‐
C
ticular informal activity that is prevalent on
the continent… [representing] 80.7 percent
0 ‐ 25% 25 ‐ 50% 50 ‐ 75% 75 ‐ 100%
of all economic units surveyed in urban
areas in Benin, with women making up
over 75 percent of vendors” (Verick).
There are a number of socioeconomic factors that correlate with varying levels of informal employment.
In this study, we look at female labor participation rates,
prevalence of poverty, education levels, globalization, and
specific issues affecting the ease of doing business. Our “… informal employment is
analysis supports the assertion that “informal employment characterized by the lack of
is characterized by the lack of decent work or deficits in decent work or deficits in
comparison with employment in the formal segment of the
economy” (Verick). In the following sections, we will ex‐
comparison with employment
plore each of these factors by presenting the results of our in the formal segment of the
own analysis along with that of other reports. Due to the economy.”
limited data points, we use simple regression models and
do not try to fit multiple regression models. While there are
many potential variables that influence the formation and growth of the informal economy, this prelim‐
inary analysis indicates that the observed factors are important contributors to the phenomenon.
CHARACTERISTICS
Women in the Labor Force
The labor force participation rate is a measure of the proportion of a country’s working age population
that engages actively in the labor market, either by working or looking for work. It provides an indication
of the relative size of the supply of labor available to engage in the production of goods and services. We
regressed the female labor force participation rate against the share of persons in the informal sector.
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To best fit the sample data, we log‐
transformed both the dependent and in‐
Figure 3: Regression of female labor participation on share of
dependent variable – this relationship is
persons in informal sector | log-transform of X and Y
commonly referred to as elastic in econo‐
metrics. We interpret the elasticity as the
5
4.5 percent change in y (the dependent varia‐
4 ble), while x (the independent variable)
3.5 increases by one percent. For this model,
3 we conclude that a one percent increase in
2.5 female labor force participation rate would
2 y = 1.6059x ‐ 2.9714 yield a 1.6 percent increase in the share of
1.5 R² = 0.3327
1
persons in the informal sector. The scatter
0.5 plot in Figure 3 has an R‐square of .33,
0 which suggests that the variation in female
3.6 3.8 4 4.2 4.4 4.6 labor force participation (independent va‐
riable) explains 33 percent of the variation
in share of persons in the informal sector.
The t‐statistic of 2.55 indicates that the relationship is statistically significant at the 95 percent confi‐
dence level. To fit the model, we removed Tanzania from the data sample. With a female labor force
participation rate of 88.8 percent and a share of persons employed in the informal sector of only 8.5
percent, Tanzania was a statistical outlier.
An important aspect of informalization is the significant representation of women in informal employ‐
ment in Africa, where most women are normally self‐employed or unpaid home‐based workers (Chen4).
In terms of aggregate output, it is estimated that the contribution of women is larger on average than
that of men.
Labor Force by Education
From our original sample of 17 countries, there were only 7 countries with data on labor force by level
of educational attainment. Figure 4 shows that across countries, there is a discernable relationship be‐
tween education levels and informal sector share. In general, as education increases, informal sector
share tends to decrease. Moreover, there appears to be education thresholds that when reached, put a
ceiling on the informal sector. For instance, in every case where the informal sector comprises less than
20 percent of persons employed, at least 25 percent of the labor force has attained a secondary educa‐
tion. In every case where the informal sector comprises more than 20 percent of persons employed, less
than 15 percent of the labor force has attained a secondary education.
4
Chen, M.A. (2001) “Women in the informal sector: a global picture, the global movement”, SAIS Review, Winter‐
Spring 2001.
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6.
The key takeaway is that poor human capi‐
tal increases the probability of participa‐ Figure 4: Labor force education levels by gender and share of
tion in the informal sector. Skill mismatch persons in informal sector (in percent)
– which occurs when job seekers lack the
skills sought by employers – is a pheno‐ 90 F_Primary M_Primary F_Secondary
menon related to low education levels. 80 M_Secondary IS
“This problem is evident in the labor mar‐ 70
kets of many African countries where 60
school leavers seek a job in the public sec‐ 50
tor, but as a consequence of downsizing 40
and retrenchments, there are few oppor‐ 30
tunities. At the same time, [labor partici‐ 20
pants] do not have appropriate skills for 10
other forms of formal sector employment 0
in industry or service activities” (Verick). BW ET MG MU RW ZA UG
The result is that many labor force partici‐
pants end up unemployed or find work in
the informal sector, waiting for an opportunity to join the formal sector.
National Poverty Line
Figure 5: Regression of share of persons in informal sector on We regressed the share of persons in the
% population below poverty line | log-transform of X and Y informal sector against the percentage of
the population living below the nationally
4.5
defined poverty line. To best fit the sample
data, we log‐transformed both the depen‐
4.0
dent and independent variables. We in‐
3.5 terpret the elasticity as the percent change
in y (the dependent variable), while x (the
3.0 independent variable) increases by one
y = 0.2665x + 2.7836 percent. For this model, we conclude that
2.5 R² = 0.2398 a one percent increase in the informal sec‐
tor would yield a 0.27 percent increase in
2.0
the percentage of the population living
2.0 2.5 3.0 3.5 4.0 4.5
below the nationally defined poverty line.
The scatter plot in Figure 5 has an R‐square
of .24, which suggests that the variation in the share of persons in the informal sector (independent va‐
riable) explains 24 percent of the variation in the percentage of the population living below the national‐
ly defined poverty line. The t‐statistic of 2.1 indicates that the relationship is statistically significant at
the 95 percent confidence level.
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Regarding causality, it makes sense that informal sector size affects poverty levels and not the other way
around because wages are usually much lower in the informal sector. Consequently, rates of poverty are
higher amongst workers and families who rely on informal employment.
BUSINESS FRIENDLINESS
Doing Business in SSA
We have discussed some of the characteristics of the informal sector with respect to workers; however,
there are also characteristics with respect to enterprises (Becker5):
 There are low set up costs and entry requirements
 Operations are typically on a small scale with only a few workers
 Skills required for the business activities are usually gained outside formal education
 The production of goods and services is labor intensive
Of these characteristics, one in particular has policy implications. The fact that there are low barriers to
entry in the informal sector – there are low set up costs and entry requirements – makes it an appealing
alternative for entrepreneurs. On the other hand, there are certain policy initiatives that can encourage
formal sector growth. Specifically, we pull from the World Bank Doing Business Database to examine
data for the ease of doing business index, the number of procedures required to register a business, the
time required to start a business, the time it takes to prepare and pay taxes, and the tax rate.
Ease of Doing Business Index
Figure 6: Quartile distribution for Ease of Doing Business Index The ease of doing business index ranks
(1 = most business-friendly regulations) economies from 1 to 183, with first place
being the best. A high ranking means that
0 50 100 150 200
the regulatory environment is conducive.
In Figure 6, the range of the 17 country
sample shows that there is heterogeneity
Rank
across countries, with some countries
ranking significantly higher than others.
0 ‐ 25% 25 ‐ 50% 50 ‐ 75% 75 ‐ 100% Mauritius is the most business friendly,
with a ranking of 23, while Benin is the
least business friendly, with a ranking of
175. The median is Tanzania, with a rank‐
ing of 127. The 2011 quartile rankings, for the most part, remained consistent with 2010, indicating nei‐
ther relative progress nor relative regression over the period.
A major aspect of the ease of doing business is the cost of doing business. According to Verick, “the cost
of starting a business in SSA represents 215.3 percent of GNI per capita, which is over three times higher
than the next most expensive region (Middle East and North Africa)”. Again, there is significant hetero‐
5
Becker, K.F. (2004) “The Informal Economy”, SIDA Report – March 2004.
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geneity in SSA with percentage ranges from 8.6 percent of per capita GNI in South Africa to 1,442.5 per‐
cent in Zimbabwe.
Number of Procedures Required
Figure 7: Number of procedures currently required to register
Start‐up procedures are those required to
a business versus number of procedures cut over past 5 years
start a business, including interactions to
obtain necessary permits and licenses and
0 5 10 15 20
to complete all inscriptions, verifications,
and notifications to start operations. Fig‐
ure 7 shows the quartile distribution from Procedures
Required
our 17 country sample for number of pro‐
cedures required. Rwanda has the least
number of required procedures with 2, Procedures
while Uganda has the most required pro‐ Cut
cedures, with 16 – the median is 6. OECD 0 ‐ 25% 25 ‐ 50% 50 ‐ 75% 75 ‐ 100%
high income countries average 5 proce‐
dures; the United States averages 6.
When comparing countries with this metric, we also looked at improvement over the five year period
from 2006 to 2011. Rwanda, which boasts the minimum value of only 2 required procedures in 2011, is
also one of the most improved over the period having cut 7 procedures. Mali cut the most procedures
(8), going from 12 in 2006 to 4 in 2011, but on a relative basis, Rwanda is still the best performer (having
cut 77.8 percent from 2006 levels). There are also countries that made no changes – Zambia and Zim‐
babwe remained at 6 and 9 required procedures respectively over the period. It’s interesting to note
that Zambia, which was the leader in 2006, is now at the median in 2011.
Time to Start
Figure 8: Time currently required to start a business versus de- The time required to start a business is the
crease in time required over past 5 years (in days) number of calendar days needed to com‐
plete the procedures to legally operate a
‐20 0 20 40 60 80 100
business. If a procedure can be speeded up
at additional cost, the fastest procedure,
Days Required independent of cost, is chosen. Figure 8
shows the quartile distribution for the time
it takes to start a business across our 17
country sample. At 3 days, it takes the least
Days Cut amount of time to start a business in
Rwanda. At 90 days, it takes the most
0 ‐ 25% 25 ‐ 50% 50 ‐ 75% 75 ‐ 100%
amount of time to start a business in Zim‐
babwe. The median time to start a busi‐
ness is 19 days. OECD high income countries average 12 days; the United States averages 6 days.
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When comparing countries with this metric, we also looked at improvement over the five year period
from 2006 to 2011. The most improved country – on both an absolute and relative basis – is Liberia,
which cut the time it takes to start a business by 62 days over the period – from 68 days in 2006 to 6
days in 2011. This represents a decrease of 91.2 percent from 2006 levels. There was, however, a coun‐
try that actually increased the time it takes to start a business over the five year period. Uganda went
from 28 days in 2006 to 34 days in 2011. Nonetheless, the median decrease was 16 days on an absolute
basis and 45.2 percent on a relative basis.
Time to Prepare Taxes
Figure 9: Time currently required to prepare and pay taxes The time to prepare and pay taxes is the
versus decrease in time required over past 5 years (in hours) time, in hours per year, it takes to prepare,
file, and pay (or withhold) three major
‐200 0 200 400 600 800
types of taxes: the corporate income tax,
the value added or sales tax, and labor
Hours Required taxes, including payroll taxes and social
security contributions. Figure 9 shows the
quartile distribution for the time it takes to
prepare and pay taxes across our 17 coun‐
Hours Cut try sample. At 132 hours, it takes the least
amount of time to prepare and pay taxes
0 ‐ 25% 25 ‐ 50% 50 ‐ 75% 75 ‐ 100%
in Zambia, while at 654 hours, it takes the
most amount of time to prepare and pay
taxes in Cameroon. The median time to prepare and pay taxes is 201 hours. The United States averages
187 hours.
When comparing countries with this metric, we also looked at improvement over the five year period
from 2006 to 2011. The most improved country on an absolute basis is Lesotho, which cut the time it
takes to prepare and pay taxes by 240 hours (a decrease of 42.6 percent from 2006 levels). On a relative
basis, the most improved country is South Africa, which cut the time it takes to prepare and pay taxes by
42.9 percent (150 hours). There are, however, countries which added to the number of hours required
to prepare and pay taxes – Zimbabwe (the worst performer in the category) added 26 hours to the
process bringing it to 242 hours in 2011. The median, which represents the performance of five of the
sample countries, is zero change over the period.
Tax rate
Total tax rate measures the amount of taxes and mandatory contributions payable by businesses after
accounting for allowable deductions and exemptions as a share of commercial profits. Taxes withheld
(such as personal income tax) or collected and remitted to tax authorities (such as value added taxes or
goods and services taxes) are excluded. Figure 10 shows the quartile distribution for the tax rate across
our 17 country sample. At 66 percent, Benin has the most aggressive tax rate, while Zambia has the
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most business‐friendly tax rate at 14.5
percent. The median tax rate for the 17 Figure 10: Current tax rate versus decrease in tax rate over
country sample is 35.7 percent. The United past 5 years (in % of corporate profits)
States averages 46.8 percent.
‐20 0 20 40 60 80
When comparing countries with this me‐
tric, we also looked at improvement over
the five year period from 2006 to 2011. Current Rate
The most improved country on an abso‐
lute and relative basis is Lesotho, which
decreased its tax rate from 26.2 percent to
16 percent over the period, representing a Decrease
39 percent decrease from 2006 levels. The
worst performer on an absolute and rela‐ 0 ‐ 25% 25 ‐ 50% 50 ‐ 75% 75 ‐ 100%
tive basis is Botswana, which increased its
tax rate from 17.2 percent to 19.4 percent over the period – a 12.8 percent increase over 2006 levels.
WORLD & POLICY
Globalization
The final section of our paper surveys the role and impact of globalization in the development of the
informal sector. As the term ‘globalization’ tends to be conceptually broad, we will focus on two aspects
generally associated with the phenomenon – trade liberalization and foreign direct investment (FDI).
Trade Liberalization
Figure 11: Quartile data for trade as percent GDP over 5 Referencing journal submissions from the
year period International Labor Organization and
Women in Informal Employment Globaliz‐
70 lower 25th %tile median
75th %tile upper ing & Organizing (WIEGO), we will observe
60 the potential impact that trade liberaliza‐
50 tion has on the informal sector by em‐
ployment status and by region (Africa).
40
Figure 11 shows quartile data for the 17
30 SSA countries in our sample. The graph
20 indicates that trade as percent GDP has
generally decreased from 2005 to 2010.
10
The lower quartile has trended slightly up,
0 the median has remained flat and the up‐
2005 2006 2007 2008 2009 2010
per quartile has trended noticeably down.
It is not accurate, however, to say that
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trade has decreased because the prices of all things are equal to the amount spent on them divided by
the quantities of them sold. Thus, while quantities sold (i.e. trade activity) may have increased, it is poss‐
ible that downward pressure on prices is depressing aggregate value.
A study by Carr6 does a good job of outlining the impact of liberalization policies on employment from
the perspective of employment status. She proposes that there are three broad categories of informal
sector workers/producers, each of whom can be affected either positively or negatively by trade and
investment liberalization as follows:
Owners and Owner­Operators (of Informal Enterprises) –
On the positive side, globalization is providing many new economic opportunities for small
businesses through increased access to global markets. There is a fast growing demand in
North America, Europe and Japan for commodities such as shea butter and shrimps that can
provide increased incomes for small businesses in the South.
On the negative side, many small businesses are closing because of competition from imported
goods. For example, most small­scale oil processing businesses in India have closed down fol­
lowing a change in trade policy that allows imported soya oil from the United States of Ameri­
ca.
Self­Employed (own­account­workers, heads of family businesses, unpaid family workers) –
As with owner operators, the own­account workers can have new economic opportunities pro­
vided through trade and investment liberalizsation. However, without effective organizing,
these workers usually are not able to take advantage os such opportunities because they lack
access to the credit, training, technologies and market information needed. Women are most
likely to suffer from lack of access to needed resources and information.
On the negative side, many own­account workers also suffer from competition from imported
products. For example, most women who earned an income from producing sisal bags in
Kenya are now without this source of income because imitation bags from Southeast Asia have
replaced their product. Also in Kenya, Uganda and Tanzania, women who used to earn an in­
come from smoking and selling fish have lost their source of livelihoods following the estab­
lishment of fish processing factories which have been set up to export fish from Lake Victoria
to Europe as a result of investment liberalization policies. In such situations, own­account
workers move into less remunerative informal sectors such as petty trading or resort to piece­
6
Carr, M. (2001) “Globalization and the informal economy: how global trade and investment impact on the work‐
ing poor”; Women in Informal Employment Globalizing & Organizing.
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work in garment factories or factory farms where working conditions and earnings are much
less attractive.
Wage Workers (employees of informal enterprises; casual workers; homeowners or industrial
outworkers, domestic workers, temporary and part­time workers, unregistered workers) –
There is growing evidence to suggest that globalization has served to increase the number of
informal wage workers and to increase the insecurity of the existing informal workforce. With
the breakdown of a social contract between employers and employees, and the ‘race to the
bottom’ as corporations move from country to country in search of the lowest wage rates,
workers are subject to low wages, lack of benefits, and lack of security in their workplace. At
the same time, governments are now less able to respond to the vulnerable and disadvantaged
sections of the workforce because revenues are decreasing as tariffs and taxes are reduced as
part of the globalization process. One estimate is that as much as one­third of total tax reve­
nue may have been lost in many countries as a result of trade liberalization.
Source: Carr (2001)
Foreign Direct Investment
Referencing journal submissions from the International Labor Organization and Women in Informal Em‐
ployment Globalizing & Organizing (WIEGO), we will observe the potential impact that Foreign Direct
Investment has on the informal sector. Figure 12 shows quartile data for the 17 SSA countries in our
sample. The graph indicates that the range
of FDI as percent GDP has broadened from
Figure 12: Quartile data for FDI as percent GDP over 5 year
2005 to 2010. This is because Liberia has
period
experienced outsize FDI relative to GDP,
50.0% lower 25th %tile median but the other countries have remained
75th %tile upper relatively consistent.
40.0%
If foreign direct investment were concen‐
30.0% trated in the labor‐intensive sector, the
theory is that there should be positive im‐
20.0%
pact on employment and potentially wag‐
10.0% es. “However, the majority of FDI flows in
Africa have been in the extractive sector,
0.0% which [is] capital intensive. Therefore, such
2005 2006 2007 2008 2009 2010
investments are unlikely to have a signifi‐
‐10.0%
cant direct impact on employment in gen‐
eral and in the informal segment of the
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economy in particular” (Verick). Theoretically, the determinant factor is whether investment flows to
labor or capital and so far it is flowing to capital. Still there have not been many studies on this topic.
The impact of FDI on informal employment will also depend on the type of linkages the in­
vestment will have with other sectors. An example of this situation is if a foreign company un­
dertakes an investment that requires considerable backward linkages with suppliers, and in
order to keep costs low and operations flexible, the company subsequently taps into the infor­
mal sector. This implies that such FDI flows would result in growth of the informal sector em­
ployment. However, it is also plausible that foreign companies only sub­contract to domestic
enterprises in the formal sector, reflecting their desire to reduce risk and uncertainty in a
long­term business relationship, or perhaps as a result of foreign investment regulations. In
this case, employment is likely to rise in the formal sector.
Source: Verick
Policy & Closing Remarks
There should be policies aimed at assisting integration of the informal sector with the global economy.
According to Verick, the main policy areas to target are:
 Access to credit and insurance for businesses. “As a consequence of informality, and in particu‐
lar due to the lack of property rights and hence collateral, businesses in the informal sector are
constrained in their ability to access credit in the formal sector” (Verick). The poor typically turn
to family of money lenders who charge crippling interest rates.
 Secure property rights. Ownership of assets is key to capital formation as property can be used
as collateral to secure financing. “The establishment of secure and enforceable property rights
was one of the fundamental factors in the development of capitalist economies in the West…
The challenge is, however, to extend property rights to those in the informal sector who have
been outside the scope of the legal system” (Verick). To achieve this, ownership of assets needs
to be assigned through titling. With the assignment of legally recognized property rights, the
poor in the informal sector are subsequently able to participate in the formal economy.
 Bridging the digital divide. Information Technology reduces information asymmetry. With
access to the internet, workers and businesses can know what’s going on in the markets in
which they operate. Mobile communication is also key to reducing inefficiency and closing the
information gap. Other hard forms of infrastructure such as roads and utilities are also essential.
 Extending social protection. Most workers in the informal sector do not pay taxes , which rend‐
ers them ineligible for social security benefits. “Moreover, in many African countries, there are
often no public forms of social insurance or protection… Even with the growing number of
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schemes, the proportion of informal workers covered by any form of social protection remains
very small in African countries” (Verick). This needs to be addressed by policy makers.
In closing, the factors that contribute to informal sector growth and the poor conditions that often ac‐
company it are really development concerns. Access to education, information, infrastructure, adequate
housing and ownership, and fair wages are all necessary for development as they are the conduit
through which development is achieved. While globalization is inevitable, ideally, it will not only in‐
crease competition, but will also increase access.
14