Jua-kali artisans make frying pans at Kibuye market in Kisumu for sale on 10 April 2013.Photo : JACOB OWITI/NATION.
According to the 2016 Kenya Country Economic Memorandum and the
latest Kenya Economic Update both recently released by the World Bank,
the country’s working age population increased by 3 million between 2009
and 2013 though only 2.6 million jobs were created, and almost 90 per
cent of these were in the informal economy.
Most new labour market entrants found jobs in low-productive sectors such as trade and hospitality, predominantly as non-professionals. Informal traders, including small retailers and street vendors, are ubiquitous in Kenya’s cities where they commonly operate from unplanned open spaces and street pavements, or from small stalls in informal markets such as Kariokor, Nairobi.
The informal sector is Kenya’s largest employer with four out of five Kenyans working there. Over half of the jobs are created in rural areas, and the sector will continue to absorb urban and rural unskilled youth. These trends are similar to other countries such as India, which has witnessed the rise of one-person establishments, and where the informal sector accounts for a significant percentage of employment.
For instance, the sector accounts for 80 per cent and 99 per cent of Indian manufacturing employment and establishments, respectively. The country witnessed a broader trend of the informal sector moving into urban areas. Since 2013, Kenya has seen the same, with 90 per cent of the 630,000 additional informal jobs created in urban areas.
What constitutes the informal economy has been debated given that in practice, there are linkages and inter-dependencies between the informal and formal sector and areas of economic activity that display characteristics of both sectors.
Commonly referred to as jua kali, the informal sector has been part of Kenya’s economic reality for over three decades. According to a 2013 informality survey conducted by the World Bank, informal firms are typically small, with three-quarters hiring only one employee, have low productivity, with most firms paying staff the minimum wage or less.
Jua kali entrepreneurs are young. Nearly three-quarters of the surveyed owners of firms are under 40 years, and a majority of enterprises were established after the year 2000. Also, many of jua kali firms owners have some form of education, with three-quarters having undergone vocational training or secondary school.
The current generation of Kenyans is the most educated, but employment prospects are dim, and in some cases worse than their parents. Only one in four youths will find a wage job, and only a small fraction will be formal. The rest will work where their parents are—in family farms and informal household enterprises.
Informal establishments typically stay small and do not create additional jobs once set up. Access to finance is their major challenge and only 9 per cent of firms surveyed used banks to finance their operations. Other challenges include access to utilities such as land and corruption.
Nairobi residents have become accustomed to the frequent running battles between hawkers and county askaris, justified because the former lack the necessary licences.
Although informal business owners are aware of the benefits of operating formally, particularly improved finance and credit options, most opt to stay informal because of cumbersome registration procedures and to avoid paying taxes. Besides, Kenya’s minimum wage is the highest among peer countries, and this may also be pushing firms towards informality.
Dominance of the informal sector in terms of employment poses a challenge to realising Kenya’s ambitious Vision 2030 goals. This is because, first, workers are going into the lowest productivity sectors: trade and hospitality.
Second, labour productivity is growing fastest in sectors that employ few workers, most notably modern services. Third, manufacturing is declining, thereby not attracting higher productive staff.
While bringing some of the larger, more productive firms into the formal sector and expanding Kenya’s tax net could benefit the country’s growth, in reality, the majority of job entrants will still end up in jua kali. There will remain a large cadre of informal firms for whom the costs of registration outweigh the benefits.
These small enterprises nonetheless provide a vital source of income and employment to the majority of Kenya’s poor and unemployed, and many of them may grow into more dynamic enterprises.
For that reason, they also merit support. In rural areas in particular, leveraging the mobile money platform to offer market information could further support microenterprises to increase their survival rates and maximise their opportunity to grow.
Kenyan mobile phone apps such as iCow and M-Farm are examples of how small-scale rural enterprises can benefit from improved access to information and therefore, receive better financial returns.
Job creation in the sector is projected to increase from 664,000 new openings in 2013 to 859,000 in 2017. Partnerships in project management and buy-in between local authorities and informal traders will therefore be crucial. Take the failed example of the Muthurwa market, a $9 million project that created the then largest market in East and Central Africa.
It was constructed in 2007 for thousands of traders who previously sold goods on the streets of Nairobi. A few years later, the market lay in a dilapidated state due to lack of management and support infrastructure.
In contrast, in Bamako, the government delegated the management of markets to informal traders and this resulted in improved market conditions and increased tax collection.
These are valuable lessons to be learned in the push toward formalising the informal sector, and in ensuring the maximum contribution of the informal sector to Kenya’s economy.
Apurva Sanghi is a Program Leader & a Lead Economist at the World Bank, Nairobi. Jane Kiringai is a Senior Economist at the World Bank, Nairobi.
Most new labour market entrants found jobs in low-productive sectors such as trade and hospitality, predominantly as non-professionals. Informal traders, including small retailers and street vendors, are ubiquitous in Kenya’s cities where they commonly operate from unplanned open spaces and street pavements, or from small stalls in informal markets such as Kariokor, Nairobi.
The informal sector is Kenya’s largest employer with four out of five Kenyans working there. Over half of the jobs are created in rural areas, and the sector will continue to absorb urban and rural unskilled youth. These trends are similar to other countries such as India, which has witnessed the rise of one-person establishments, and where the informal sector accounts for a significant percentage of employment.
For instance, the sector accounts for 80 per cent and 99 per cent of Indian manufacturing employment and establishments, respectively. The country witnessed a broader trend of the informal sector moving into urban areas. Since 2013, Kenya has seen the same, with 90 per cent of the 630,000 additional informal jobs created in urban areas.
What constitutes the informal economy has been debated given that in practice, there are linkages and inter-dependencies between the informal and formal sector and areas of economic activity that display characteristics of both sectors.
Commonly referred to as jua kali, the informal sector has been part of Kenya’s economic reality for over three decades. According to a 2013 informality survey conducted by the World Bank, informal firms are typically small, with three-quarters hiring only one employee, have low productivity, with most firms paying staff the minimum wage or less.
Jua kali entrepreneurs are young. Nearly three-quarters of the surveyed owners of firms are under 40 years, and a majority of enterprises were established after the year 2000. Also, many of jua kali firms owners have some form of education, with three-quarters having undergone vocational training or secondary school.
The current generation of Kenyans is the most educated, but employment prospects are dim, and in some cases worse than their parents. Only one in four youths will find a wage job, and only a small fraction will be formal. The rest will work where their parents are—in family farms and informal household enterprises.
Informal establishments typically stay small and do not create additional jobs once set up. Access to finance is their major challenge and only 9 per cent of firms surveyed used banks to finance their operations. Other challenges include access to utilities such as land and corruption.
Nairobi residents have become accustomed to the frequent running battles between hawkers and county askaris, justified because the former lack the necessary licences.
Although informal business owners are aware of the benefits of operating formally, particularly improved finance and credit options, most opt to stay informal because of cumbersome registration procedures and to avoid paying taxes. Besides, Kenya’s minimum wage is the highest among peer countries, and this may also be pushing firms towards informality.
Dominance of the informal sector in terms of employment poses a challenge to realising Kenya’s ambitious Vision 2030 goals. This is because, first, workers are going into the lowest productivity sectors: trade and hospitality.
Second, labour productivity is growing fastest in sectors that employ few workers, most notably modern services. Third, manufacturing is declining, thereby not attracting higher productive staff.
While bringing some of the larger, more productive firms into the formal sector and expanding Kenya’s tax net could benefit the country’s growth, in reality, the majority of job entrants will still end up in jua kali. There will remain a large cadre of informal firms for whom the costs of registration outweigh the benefits.
These small enterprises nonetheless provide a vital source of income and employment to the majority of Kenya’s poor and unemployed, and many of them may grow into more dynamic enterprises.
For that reason, they also merit support. In rural areas in particular, leveraging the mobile money platform to offer market information could further support microenterprises to increase their survival rates and maximise their opportunity to grow.
Kenyan mobile phone apps such as iCow and M-Farm are examples of how small-scale rural enterprises can benefit from improved access to information and therefore, receive better financial returns.
Job creation in the sector is projected to increase from 664,000 new openings in 2013 to 859,000 in 2017. Partnerships in project management and buy-in between local authorities and informal traders will therefore be crucial. Take the failed example of the Muthurwa market, a $9 million project that created the then largest market in East and Central Africa.
It was constructed in 2007 for thousands of traders who previously sold goods on the streets of Nairobi. A few years later, the market lay in a dilapidated state due to lack of management and support infrastructure.
In contrast, in Bamako, the government delegated the management of markets to informal traders and this resulted in improved market conditions and increased tax collection.
These are valuable lessons to be learned in the push toward formalising the informal sector, and in ensuring the maximum contribution of the informal sector to Kenya’s economy.
Apurva Sanghi is a Program Leader & a Lead Economist at the World Bank, Nairobi. Jane Kiringai is a Senior Economist at the World Bank, Nairobi.
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