Ethiopia: Informal Sector Brings Formal Hope

 

Hailemariam Desalegn is seen as a close ally of Meles Zenawi

opinion

In recent years, many African countries have experienced a growth revival, but this has not necessarily generated decent jobs. Unemployment remained high among youth and the adult African population.

Little attention has been paid to the role of informal sector in fostering growth and creating jobs. In fact, the informal sector contributes about 55pc of Sub-Saharan Africa's GDP and 80pc of the labour force. Nine in 10 rural and urban workers have informal jobs in Africa and most employees are women and youth.

The prominence of the informal sector in most African economies stems from the opportunities it offers to the most vulnerable populations such as the poorest, women and youth. Even though the informal sector is an opportunity for generating reasonable incomes for many people, most informal workers are without secure income, employments benefits and social protection.

This explains why informality often overlaps with poverty. For instance, in countries where informality is decreasing, the number of working poor is also decreasing and vice versa.

The informal economy is often associated with increasing poverty and weak employment conditions. According to the African Development Bank (AfDB), middle-income countries have smaller informal sectors but higher unemployment rates than the poorest countries. By investing through informal channels, African entrepreneurs seek to reduce costs related to wages, retirement pensions and other social benefits.

Beyond poverty and social issues, the prevalence of informal activities is closely related to an environment characterized by weaknesses in three institutional areas, namely taxation, regulation and private property rights. Higher taxes and complicated fiscal process may prevent informal sector operators from formalizing their activities. Long requirements for registration as well as licensing and inspection requirements are also barriers faced by the informal sector.

Moreover, limited access to capital is an important constraint for operators working in the informal sector. Lack of skills, education and training are also impediments to the formal sector in Africa.

Other factors include the limited access to technology and poor infrastructure. Furthermore, the informal sector does not seem to be on the development agenda of African countries or their multilateral development partners.