Informal Sector is Key to Achieving Vision 2030

Kenya’s informal sector is known by the popular Swahili name “juakali” which means hot sun (‘the hot sun’ referring to the typical outdoors situation of such entrepreneurs). It refers to the many small businesses and kinds of artisanship which proliferate on sidewalks or in alleys without benefit of offices, factories, or showrooms. Such work, referred to by economists as informal sector production or the “parallel economy,” occupies the majority of the productive population in poor countries such as Kenya. Sadly, the government has not taken an initiative of training such entrepreneurs and creating working space for them. This has greatly reduced the potential of a booming industry to develop. Developing the informal sector would lead to faster attainment of most of the estimated projects outlined in the vision 2030 plan.

First, level of basic education and IT compliance will increase. General (primarily academic) education provides a better rate of return than technical education which is far more costly, yet only provides a similar economic benefit. The high cost of technical education is a great drain on educational budgets. Moreover, these costs are typically unsustainable. As a result, equipment is usually out of date, whilst staff salaries below market rates mean that only the most marketable artisans become teachers. Such problems lead the training provided to have little correspondence with work practices in the real world, thus reducing the employability of the graduates from technical schools. This in turn reinforces the popular prejudice against technical education as inferior.

Moreover, given limited capacity of most developing country education ministries, technical education programmes are undesirable as they are more complex to plan than purely academic programmes.  Coming up with an adequate program to train people technical skills from an early age in schools should be the stepping stone. Most schools should have basic computer training which progresses as one graduates to upper classes.  This is the only way Kenya can convert from an agricultural to an industrial economy which has the potential to rapidly expand.
Secondly, unemployment levels will greatly reduce. Workers are unemployed because they lack the necessary skills to perform an assortment of jobs available to them in the informal sector. Since the sector is not regulated, the government is not aware of the workers’ need for training. However providing them with adequate training would greatly rectify the unemployment problem. Further, if enough workers were to receive training, it is probable that the problem of chronic unemployment would begin to be addressed in formal terms. Subsequently, crime and poverty will reduce. According to World Bank analysts “Kenya’s informal sector constitutes 98 percent of all businesses in the country, absorbs annually up to 50 per cent of new non farm employment seekers, has an employment growth rate of 12-14 percent.” contributes 30 percent of total employment and 3 percent of GDP.”

The next step for the government would simply be regulating this sector. A proper system of accounting should be developed to earn revenue from taxes. This revenue can be used to offset most of the government’s domestic and foreign debt and to realize projects such as free  education, health care and create retirement schemes. Regulating the system  protects the informal sector from exploitation such as duplication of  manufactured goods with fake ones and also controls pollution of the  environment among other things.

An  area probably similar to the EPZ should be set up for such entrepreneurs with  incentives to motivate them to set up businesses. For example tax cuts for the  first 3 years of operation so that the business can expand. Such an area has  the potential to turn into a industrial area and eventually a city. This goes a long way into making Kenya  an industrial economy and a big player in the global markets with countries like Japan,  USA and Germany.  As it only contributes 3% of the economy’s output but takes on 30% of the total  work force, it can be established at this juncture that though the informal  sector hires a lot of workers it contributes relatively little of the country’s  output.

Developing  this sector would also play a key role in promoting uniform development in all  regions of the country. We can establish two key points about the relationship  between the formal and informal sectors. First, wage differentials between the  agriculture and industrial/government sector cause farmers to migrate to urban  areas where they are pushed to find work within the informal sector. Second, a  point stems from the first; the bulk of the informal sector is concentrated  within urban areas or major cities. A program that enables these entrepreneurs  to carry out their businesses anywhere if given government incentives will help  curb rural to urban migration, congestion in urban areas, underdevelopment in  rural areas and unequal development of regions.

It is  therefore a clear necessity that Kenya needs to start paying  attention to the informal sector and start working on unleashing the untapped  potential locked up in this sector if she wants to attain its dream of being a  world class economy by the year 2030.

Steve Biko is the CEO of Hidalgo Group and can be reached  here.