the “informal sector” in africa may 27 and 29, 2014 econ 3510, arch ritter source: class notes
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The “Informal Sector” in Africa May 27 and 29, 2014 ECON 3510, Arch Ritter Source: Class Notes. Outline. Some Description Past Theorizing Definition of the Informal Sector Origins and Roots of Informal Economy Comparison of “Formal” and “Informal Sectors” - PowerPoint PPT PresentationTRANSCRIPT
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The “Informal Sector” in AfricaMay 27 and 29, 2014
ECON 3510, Arch Ritter
Source: Class Notes
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Outline
1. Some Description2. Past Theorizing3. Definition of the Informal Sector4. Origins and Roots of Informal Economy5. Comparison of “Formal” and “Informal
Sectors”6. Impacts of the Informal Sector on the
National Economy and Society7. Public Policy and the Informal Sector
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Artisanal Mining, Tanzania
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1. Some Description– Presence everywhere– Variation among Countries– Diversity of Informal Enterprise within
countries•High-end to low-end•Sophisticated to “last resort” enterprise
– Rural and Urban IS– Men, Women and Children in the Informal
Sector
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Informal Employment in Non-Agricultural Employment for Africa, circa 2000
Country Informal Labour Force as % of Total
Non-Ag. L.F. Women Men
Self -Employment as % of Total
Informal Employment
Benin 93% 97% 87% 95%Chad 74 95 60 93Liberia 78.5%Guinea 74 87 66 95Kenya 72 83 59 42S. Africa 51 58 44 25Sub-Saharan Africa, 72 84 63 70Source: ILO, Men and W\omen in the Informal Economy, Geneva, 2002 pp 19-20
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Quantitative Significance of the Informal Economy: The Case of Liberia
Category Number Category NumberTotal Employment 1,278,477Open Unemployment 83,323
(5.7%)
Formal Sector
AgricultureIndustryServicesOther
231,584(15.8%)
34,9499,026
141,63943,162
Informal Sector
AgricultureIndustryServicesOther
1.146.893(78.5)
642,26016.460
114.689367.006
World Bank, Liberia: Employment and Pro-Poor Growth, November 19, 2010
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Liberia: Employment Status,Percentage of total
Urban Rural TotalPaid Employee 22.8 11.2 17.0Self-Employed with employee
3.9 1.6 2.1
Self-Employed without employee
31.1 32.5 32.1
Unpaid Family Worker 29.9 53.9 47.8Domestic Employee 1.1 0.7 0.8Apprentice 0.6 0.0 0.2Total 100.0 100.0 100.0
World Bank, Liberia: Employment and Pro-Poor Growth, November 29, 2010
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The Significance of the Informal Sector: The Kenyan Case
Non-Farm Economic Activities in Rural Households. Kenya, circa 1979
Number of Non-Farm Activities per Sample
Household
Western Province
National
012345
6 or more
44.332.811.8
4.03.11.52.5
49.626.413.0
4.72.51.32.4
Total 100.0 100.0
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Past Theorizing regarding the Potential Role of the Informal Sector
Older Views:Adam Smith: Normal activity; purely
competitive; preferable to monopoly
Karl Marx: Replace the activities with large scale industry and organization;
- A backward “lumpen proletariat”
Socialist Theorizing:Replace it; Central Planning; Economies of
Scale; Collectivization
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Past Theorizing regarding the Potential Role of the informal Sector
Mainstream “Development Economics” 1945-72Small Enterprise Usually Ignored
– W. W. Rostow, – W.A. Lewis, – Raul Prebisch, – Capital-Centred Theorizing, – Dependency Theorizing …
Some Voices in the Wilderness:– Indian Cottage industry,– Community Development Theorizing
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The Informal Sector Gets Discovered!
•Keith Hart, 1972, focusing on Ghana;
•ILO, 1970s, Study in Kenya;
•Parallel interest in Underground Economies of Western countries [“Shadow Economies”]
•Hernan DeSoto, 1989 re Peru;
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The Informal Sector gets Discovered!•Underground Economies in Centrally
Planned Economies get ‘discovered’ , 1980s [“Second Economies,” ]
•Informal Economy and Underground Economy in Transitional Countries (E.Europe and former Soviet Union)
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Definition of the Informal Sector based on Institutionalization and Legality
Area of the Economy Process of Production or Distribution
Final Product
Formal Economy +++ Legal +++ Legal Household Economy (for
home use)
Informal Economy (sometimes home-based)
+++ Legal
+/- “Extra-Legal”
+++ Legal and Vital
+++ LegalUnderground or Shadow
Economy+ (Process);
- ve (Tax Avoidance)
+ Usually Legal
Criminal Economy --- Illegal ---Totally Illegal
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Origins and Roots of Informal Economy
Why does it exist?
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Origins and Roots of Informal Economy
1.Normal Out-growth and accompaniment tp Home-based economic activities2.Traditional and often Pre-Colonial Economy and Society,
e.g. African traditional economic activities …. Mixing with modern types of activities as well
3. Slow Growth of Employment in the Formal Economy
(due to excessive capital intensity, economic stagnation ……….)
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4. State Controls and Bureaucratic Regulations– Note differences among various types
of societies and economic systems. •- Hernando De Soto: “The Other
Path”– Registration Blockages
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Registration Blockages: Starting a Formal Business
Country Number of Procedures
Time Required, Days
Cost as % of Per Capita Income
Burundi 11 43 215.%Kenya 12 30 40.0South Africa 6 22 6.0Tanzania 12 29 41.5Zambia 6 18 28.6Zimbabwe 10 96 432.7Sub-Saharan Africa
10 46 111.4
Canada 1 5 0.5%
World Bank, WDI 2009, pp. 276-278
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4. State Controls and Bureaucratic Regulations, continued:– Regulations
• Labour Laws , • Health & Safety Regulations, • Minimum Wage Legislation, • Environmental controls and rules• Zoning Regulations
– i.e. some IS entrepreneurs may prefer to remain “informal” to evade regulations and taxation
– Greater relevance for middle-income countries
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5. Informal Sector as a Social Safety Net
• “Last resort” activity for those with no better alternative, and no other safety net
• Low “Barriers to Entry” permit almost anyone to find some income earning activity– Examples in Liberia: street vending of basic foods;
scratch card venders, soap venders and other street retailers;
Result: Low productivity, near subsistence income
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Comparison of “Formal” and “Informal Sectors”
Characteristics “Informal Sector”
“Formal” Sector
Ease of Entry
Resource UseOwnershipScale of
OperationTechnologyOrganization
Income
Low Barriers to Entry
Local ResourcesFamily Ownership
Micro to SmallLabour IntensiveSimpler
Variable; from sales
High Barriers to Entry
Foreign Resources Often Foreign
Medium to LargeCapital IntensiveBureaucratic
Formal Wages & Profits
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Comparison of “Formal” and “Informal Sectors” continued
Characteristics “Informal Sector”
“Formal” Sector
Skill Acquisition Outside the School System (Informal Apprenticeship)
Formal Educational System
Labour Market Competitive and Unregulated
Uncompetitive, (maybe unionized) and Regulated
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Comparison of “Formal” and “Informal Sectors”, continued
Characteristics Informal Economy
Formal Economy
Taxation
Regulation
Untaxed except for LicensingMainly Unregulated
Taxed
Highly Regulated (Labour legislation, minimum wage, health and safety, environmental)
Public Policies Unprotected and unassisted
Protection and Assistance (credits, trade protection, infrastructure investment,
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The Positives: What are they
The Negatives: What are they
On Balance,
Impacts of the Informal Sector on the National Economy and Society
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The Positives:1. Production of low-cost goods and
services mainly for low income people2. Job Creation3. Income Generation4. Social Safety net function5. Development of Entrepreneurship
Impacts of the Informal Sector on the National Economy and Society
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The Positives, continued:6. Training: informal apprenticeship
systems7. Domestic Value Added (using domestic
inputs rather than imported inputs)8. Appropriate Technology?9. Foreign Exchange generation10. Generation of Savings and
Investment
Impacts of the Informal Sector on the National Economy and Society
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Impacts of the Informal Sector on the National Economy and Society (Continued)
The Negatives:1. Tax avoidance and evasion2. Low productivity and low incomes in “Last
Resort” activities3. Minimal prospects for improvement in some
low level “Last Resort” activities4. Health & safety standards ignored5. Environmental laws & regulations ignored
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Impacts of the Informal Sector on the National Economy and Society (Continued)
The Negatives, continued:6. “Self-exploitation” ? ?7. Perhaps Child labour; reduced access to
learning8. Links with criminal economic activities
sometimes9. Irreverence and non-compliance with some
concerns of the state.
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Public Policy and the Informal Sector?
Should governments do anything in support of micro and small enterprises?
Why or why not?
What types of public policy would be relevant?
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Public Policy and the Informal Sector?
Possible Supportive Policies:
1.Low cost licensing2.Security of tenure3.Physical security4.Micro-credit5.Basic training e.g. in book-keeping6.Technical extension services
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Public Policy and the Informal Sector?
Possible Supportive Policies, continued:
7. Public provision of infrastructure (market stalls, water, electricity)
8. Encouragement to “graduate” to “formality”? – But note aversion to paying taxes and
government regulation
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Potential Contribution of the Informal Economy for Future Development??
Replace it? OR
Can it be a Foundation for Future Development?
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1. Development of Entrepreneurship: transferrable to other sectors and up-graded enterprises
2. Training: gradual up-grading of skills?3. Steadily increasing productivity leading to
higher incomes, one hopes 4. “Graduation” of enterprises, into the
formal economy, with tax-paying and acceptance of regulations
5. Improved environmental standards
Potential Contribution of the Informal Economy for Future Development??
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7. Better jobs and higher incomes in future
8. Increased generation of Savings and Investment
9. Foreign Exchange generation and savings (continued domestic Value Added using domestic inputs rather than imported input)
Potential Contribution of the Informal Economy for Future Development, continued ??
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10.“Last resort” activities will diminish and disappear with the expansion of the formal economy – one hopes…….
12. Many low productivity activities will evolve into higher productivity activities or else disappear.
Potential Contribution of the Informal Economy for Future Development, continued??
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The Informal Sector and Future Development:
Two concurrent future scenarios:A.Some “Last resort” and “dead end” activities will
diminish and disappear with the expansion of the formal economy and general increases in incomes, hopefully.
B. Other activities will evolve, improve and “graduate”. Thence, they should help to provide a foundation for
future enterprise development and economic improvement