Harnessing the Informal Sector for growth in Nigeria

Lately, many African nations have experienced the Africa rising revival, however, it has not necessarily created decent jobs to accommodate the nation’s growing population. Deepening unemployment crisis remains a huge plague African government are caught up with trying to mediate through various interventions, that is yielding insufficient impact. What this could mean perhaps, is that a government should not be trying to create jobs but rather, focus on enabling freer markets, creating and implementing better policies and providing infrastructure to support the process of job creations.

Interestingly, African countries pay very minimal attention to the role the informal sector plays in fostering growth ─ creating new alternative industries that brings stability for young people who would have otherwise been unemployed, to create earn a living and create jobs. For example, the sudden growth in the Nigerian entertainment and technology industry has given birth to new crops of “informal entrepreneurs” in the social entrepreneur and tech-prenuership sector.

The power of those who earn a daily or informal income cannot be undermined as, as African Development Bank in 2013, reported that 55% of Sub-Saharan Africa’s GDP and 80% of the labour force is informal sector driven. Nine in ten city and rural dwellers including those in the formal sector have an informal job as a means of support to earn a living or supplement the formal earnings; in Nigeria, it is called a “side-hustle” and majority of this sector’s employees are young people and women demographic.

The growth of the informal sector in Nigeria like in most African countries stems from government failures and the hidden opportunities that become available when governments fail. Although the informal sector is an avenue to create a reasonable source of livelihood for many, it has a lot of challenges and often faces opposition from monopolized vested interest and sometimes government agencies. It is also without income security and other benefits that are inclusive in the formal employment framework.

In Nigeria, 80% of the formal sector’s employee particularly, of the banking and telecommunication sector is temporary staff. As such, they do not enjoy the perks of income security, health and other social benefits available. These informalities more often than not overlap poverty in both formal and informal sector employees in Nigeria.

Factors explaining the informal sector growth in Nigeria

The proliferation of the informal section is often associated with the growing poverty rate and weakness of economic conditions to create jobs. According to African Development Bank, advance and middle-income economies have smaller informal sector opportunities because things already function as they should.
Citing that the vast opportunities are available in poorer countries and there is a need for informal sector development, as the lack of an organised system would mean that there are opportunities to create jobs and more income as opportunities were laying around in the challenges needing solutions.

Employers of labour in the informal sector have an advantage in some in a way, because of cost reduction related to permanent wages, retirement pensions and other social benefits of formal employment. For example, for a non-profit, hiring, a small and independent consultant to handle its project structures and fundraising strategy for a period of time, seems a better alternative than a permanent candidate for the position.

Besides, poverty and social security, the growing increase of informal sector activities are closely related to a society characterized by weakness in three main institutional scopes; taxation, regulation and private property rights.

Taxation bureaucracies and the complicated fiscal process are preventing the informal sector operation from transiting from informal to formal activities. Which also means the government is losing a lot of money it would have otherwise generated in tax revenues. The lack of structure, support and the complicated requirements associated with business legalization is also a huge barrier facing such transition.

Further, limited or no access to capital is a vital constraint for people working in the informal sector. The fact that informal sector activities are more often than not, a means to an end and not a choice, makes this challenge even more grievous.
Therefore, the sector participants often lack necessary skills, education and training which could become major impediments to growing these sorts of businesses to a more formal structure.

Other factors such as limited access to technology, lack of power and all round poor general infrastructure makes the informal sector operation a huge challenge. Due to its contributions to the economies and its potentials, informal sector development plans should be inclusive in all African nations’ development agendas.

Harnessing Nigeria’s Informal Economy

Recognizing, supporting and organizing the informal has a vital role to play in job creation and economic growth. As the profitable activity create a lot of stability and maintains sanity in the labour market. With the current economic state in Nigeria, proper informal sector regulation, development and support, could be beneficial to the economy.
This could be done by raising government awareness, fostering the availability of information on the sector and the removal of the bureaucratic processes that impairs growth and expansion of this sector.

Government Awareness: Going by the statistics, the Nigerian government is losing a lot of money in taxation in the informal sector. Government and policy-makers should recognize the importance of the informal sector and the role it plays in the economy.

Associating the sector to illegal endeavours or as something that should be destroyed in an attempt to building mega-cities will not create the amount of jobs needed to absorb the growing unemployment population.

There is a need for policies to be coordinated and for strategies to be implemented to render support to the sector in the process of formalizing the sector to be organised, better regulated and taxed.

Further, effective regulatory framework, better governance, better services, improved business environment and improving access to finance, power, technology and infrastructural development will be essential to easing the process of such transition.

This will also require promotion of social protection and support to small to medium size businesses, which accounts for a large percentage of the country’s informal sector. However, the government and policy-makers must be aware of and sensitive to the heterogenic nature of this sector.

A recent study on West African economies suggested that government in dealing with the informal sector should differentiate between the various (small, medium, large) classes informal firms, as implications of policies affect them differently.

The large informal sector organisations play a more significant role in the economy, in comparison to the small and medium ones. As such, specific policies should be adopted that brings informal firms into formal regulation by creating systematic approaches which will determine and monitor what class of the informal sector begins paying taxes and when it should transition to the formal sector.

Access to Financing: Limited or no access to financing facilities is one of the major factors responsible for the impediment of this sector. Facilitating access to better credit and financing channels such as low interest and less complicated application process of micro-credit is a necessary step to encouraging informal activities to transition to the formal economy.

Access to Information: Because the informal sector has been neglected and ignored by the government for so long, this has meant that there is little or no knowledge or information available for this sector. For example, the activities in this sector are often invisible and untraceable in official statistics.

For the better analysis of the sector and its contribution to economic growth and its impact, it is important that data is gathered and maintained for analysis and to better understand the working conditions, economic and employment impact of the informal sector.

In conclusion, the informal sector activities should not be seen as an obstacle to overcome in the process of economic growth, but rather, an integral part of the solution to Nigeria and Africa’s economic drought, particularly now.

About rebeccaidd

Development expert, exploring inequality research in Nigeria! Passionate about public policy! Follow me on twitter @enobong
This entry was posted in Africa, Development and Economic growth, Economic Growth, Poverty, Uncategorized and tagged , , , , , , , , , , , . Bookmark the permalink.

4 Responses to Harnessing the Informal Sector for growth in Nigeria

  1. Segun says:

    You have made very great points here, especially now that African economies are struggling, and oil price is no longer a hot commodity, harnessing the informal sector could create maximum impacts. It’s time for government across Africa to get creative in making intelligent decisions, something uncommon with African leaders!

  2. Esther Ibewaju says:

    I dare to say the informal sector in Nigeria is biggest job creator right now. The amount of money that makeup artist alone make every weekend untasked is enough incentives for government to organize this sector, but it seems like a lot of work so they couldn’t be bother. Now that oil is useless let’s see what the government will do. I am certain Linda Ikeji is not tasked, it’s too much hard work to organize and create IP rights that will regulate her for greater good

  3. OTO says:

    Nigeria is a high-spending country. If only the govt would regulate VAT properly, they’d reap trillions of naira.

  4. Sunday Okpanachi says:

    A very apte reflection on one of the sectors that could serve as a labour sponge for Nigeria, especially at this time when unemployment and poverty run very high in the economy. Over to our policy makers. Sunday Okpanachi

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