Informal sector is the new economic reality in developing countries

World Bank lead economist for Kenya Apurva Sanghi. PHOTO | FILE 

By ALLAN OLINGO

In Summary

Bio

• Current position: World Bank’s lead economist for Kenya, Rwanda and Eritrea.
• Education: He holds degrees in physics and economics and a PhD from the University of Chicago.
• Experience: Lead author of the Intergovernmental Panel on Climate Change’s (IPCC’s) Special Report on Extreme Events. Was the team leader of the joint World Bank-UN flagship project on the economics of disasters. He has worked on development topics ranging from infrastructure and climate change to microfinance and agricultural economics.
• Background: Headed of the economic growth cluster of the World Bank’s Poverty Reduction and Economic Management Department in Washington DC. Before joining the World Bank, he worked in the private sector consulting for the Thailand Development Research Institute and held teaching and research positions at the University of Chicago, Thammasat University in Bangkok and Yale University.

Kenya is facing challenges in the implementation of its Vision 2030 economic plan. The World Bank’s programme leader for Kenya Apurva Sanghi spoke to Allan Olingo on some of these bottlenecks.

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How can the government formalise the growing informal sector in order to make it a tax base?

I don’t think they should be forced to become formal. Informal is the new economic reality. Over 80 to 90 per cent of the jobs are in the informal sector. With the liberalisation of lending, this sector has received a boost. Given this economic reality, the only way to get real gains from this sector is to boost their production.

We should not be in a rush to formalise, but instead to improve the business environment, simplify tax procedures, then the informal businesses will be roped into the tax base.

In the World Bank survey of 2013, one of the two top reasons for businesses’ desire to remain informal was tax procedures and ease of doing businesses, yet more than 50 per cent of them would like to be formal.

How then do we increase productivity in the informal sector?

In Kenya, it has a big advantage compared with its peers because of its ability to leverage the mobile money platform and to provide market information and opportunities, especially in rural areas. Here we have farmers and business people who have access to market information and are able to use it to better their production within their various sectors. The country is also now leading in terms of access to finance.

This eases doing businesses for the informal sector. The government has also simplified business registration and access to services, which are again integrated through technology. With all these initiatives, there should be an increase in productivity within the informal sector.

There has been a shift in the contribution of sectors to the Kenyan GDP, with manufacturing and agriculture stagnating over the past decade. Do you think the government policy should now shift to support upcoming sector like services?

Our report shows that agriculture is the mainstay of Kenya’s economy while manufacturing has stagnated. It has not created enough jobs for Kenya’s growing working age population. Most of the jobs are created by the informal economy and are concentrated in low-productivity areas such as trade, hospitality and jua kali.

Improving the ease of doing business is vital for job creation and higher productivity. However, there is still a need for creating job opportunities for the rural poor, for poverty reduction and achieving shared prosperity.

What is pulling up the Kenyan economy is services industry at 54 per cent. Whether the government policies are supporting this sector remains to be seen. In fact, one could argue that manufacturing or agriculture hasn’t received much attention compared with services.

We have seen more creation of jobs within the services sector compared with any other sector of the Kenyan economy. What is the reason behind this?

At the moment, the unemployment rate in the country stands at 50 per cent of the population over the past five years. Where will these jobs come from? These jobs come from the formal and informal sector, with the latter taking a bigger share with regards to the number of jobs.

But in terms of quality of jobs, they come from the formal sectors mostly in modern services sector like banking, insurance, telecommunications and hospitality. Some modern services are creating high value and quality jobs but not high in numbers. That is the dichotomy Kenya is facing.

Everybody wants high quality and high productivity jobs but services cannot create many such jobs. The good news is that the growth in formal jobs in services is much higher that agriculture and manufacturing.

On our Vision 2030, the World Bank projects that the economy’s dynamics do not go hand in hand with our targets? Why is this?

The Vision 2030 says that in order for the country to grown to middle-income state by 2030 it needs a sustained growth of 7 per cent till then. Now few countries have been able to sustain that kind of growth. Looking at Kenya’s own history, there has been only one episode since Independence of continued five-year growth, which was 1 per cent from 2002 to 7 per cent in 2007.

Secondly, Vision 2030 envisions 7 per cent growth, yet since Independence the economy has growth to this target only four times in the past 50 years with the highest being 8.4 per cent in 2010. This puts the challenge in contest, raising the question where this growth will come from.

The 2016 Kenya Country Economic Memorandum report mentions a drop in savings. How is this happening?

Short-term growth is driven by investment and capital. In the case of Kenya, the saving has not only been declining but has dropped below its peers like Tanzania, Senegal and Cambodia. Kenya is a consumption-driven society, which is choking savings.

Most of the recent growth in the country has been consumption driven, which has been coming at the cost of savings. We can split the savings into national, domestic and foreign savings. There is so much that Kenya can borrow from abroad, and there is only so long the country can do this.

In our report, we recommend that the medium to long-term focus to the country should be to mobilise domestic savings. The policy agenda should be on this spectrum. In order to meet the country’s Vision 2030 targets, savings have to double. Globally, only China and a few oil producing countries have been able to do this.

What has been constraining Kenya’s savings?

There are many factors and one is the current macro fiscal set of issues. We have a high and growing recurrent wage bill with a thin tax bill. This reduces public savings. The second is the pension system. There is strong evidence that a pay as you go systems reduces the national savings.

What can be done to shore them up?

The country has done well by moving to a fully funded pension system. The country also needs to recognise the role of savings and credit organisations in terms of mobilising savings and channelling them into investments.

Finally, the real deposit interest rates have been negative. This means that Kenyans are paying money to the bank to keep their money there. The rising spread between deposit rates and lending rates. Points to decreased meaningful competition within the banking sector.

Mobilising resources isn’t enough. These resources need to be spent efficiently. When it comes to the quality of public investment, Kenya isn’t there yet and is actually lagging behind.