Empowering Africa’s informal economy through cross-border trade

Analysis in brief: The importance of the informal economic sector in job creation has long been known. This reality has not led to concrete measures to assist this off-grid portion of national economies. This may change as economists predict that the expansion of regional trade can not only boost the informal sector but prompt improvements.

African governments acknowledge the importance of their informal economies but do so grudgingly. Informal economies exist because formal economies do not offer enough jobs required by a population. Governments laud the informal sector for giving livelihoods to most of their working-class demographic but seem embarrassed that this reality is so. When heads of government show off symbols of their country’s economic progress to the press and visiting dignitaries, they host tours of new shopping malls, industrial parks and commercial transportation infrastructures. They do not go to the markets where most of their citizens buy their food, clothing and personal items.

Consequently, national policies that promote the informal sector are absent from national economic development plans, policies and annual budgets. People consider the informal sector as a local matter that should be regulated by municipal governments. Influenced by established businesses who pay taxes, local governments may view the diverse vendors and services dealers of the informal sector as nuisances to be removed from the streets or relocated to communal complexes far from their customers. Additionally, governments prioritise issuing business licenses, policing businesses to meet health and safety standards and preventing consumer fraud. Consequently, they have a difficult time dealing with the unregulated informal sector.

Policymakers grapple with the question of how a government can assist the informal sector to become more productive, so that its workers can develop into formal sector business people. Either a lack of ideas or a lack of political will have been responsible for little progress made in the matter. However, the economists at the African Development Bank (AfDB) have reinvigorated the discussion by taking a macroeconomic look at the role of the informal sector. They believe that expanding the informal economy through cross-border trade is the way to boost incomes, expand business opportunities for participants and provide an additional source of national tax revenue. Further, these ideas have now been put into place as part of the launch of the African Continental Free Trade Area (AfCFTA).

In Sub-Saharan Africa, most work is done ‘off the books’

In Sub-Saharan Africa, 85% of workers earn their livelihoods in the informal sector, and when including North Africa, the figure is nearly the same continent-wide (83%). With nearly nine out of 10 jobs in the informal economy, it is the formal economy that is the economic anomaly in people’s lives. Certainly, Africans would prefer the benefits, better working conditions and relative security and stability of formal sector work. However, in the absence of such jobs in their developing countries, particularly young people, turn to ad hoc opportunities. The informal sector offers work experience in a difficult employment landscape and teaches entry-level skills, allowing workers to attain certifications and open formal businesses in a wide variety of trades, from beauticians to butchers.

Despite South Africa’s relatively developed formal economy, nearly four million workers, most of them under the age of 30, earn livings in the gig economy in which individuals provide services to consumers at an on-demand basis. The gig economy is growing at 10% per year. Ride-sharing companies like Bolt and Uber are growing at 18% per year, offering entry level work opportunities. While some practitioners of the on-demand economy – where workers are hired and paid for one job at a time, be it cleaning a house or tutoring a student – do well financially, most practitioners use the work as ‘scaffolding’ to raise them to the next level of employment.

The International Monetary Fund defines the informal economy as an economic activity that would earn tax revenue and raise GDP if such activity were recorded. However, informal activity is strictly ‘off the books’, not because it is illegal – criminal activity like drug selling is not considered part of the informal economy – but because its practitioners cannot afford to register companies formally and pay taxes, although many must pay rent for workspaces and other expenses. The foremost benefit that national governments can bring to informal workers is to provide legal and regulatory frameworks in which the sector can thrive. By viewing the informal sector as a means for economic advancement that feeds and expands the formal sector, rather than as competition to the formal sector to be quashed, governments can finesse their economic development policies by utilising a thriving sector already in place. Because most informal sector workers are women, governments aiming for gender empowerment can boost this sector to also achieve these goals.

Moving the informal sector out of market stalls into cross-border trade

Formalising the jobs of millions of Africans requires time, foresight and imaginative policies rooted in the needs and realities of the informal sector itself. AfDB economists, working on the African Continental Free Trade treaty, identified the need to boost African informal sectors because regional trade could benefit from the participation of the informal sector. Cross-border trade will provide the regulations that would improve the informal sector. These regulations are lacking at local and national levels, such as health, safety and quality standards on traded goods. As the AfCFTA was developed, it was realised that the informal sector would need access to financing in order to thrive. Data and revenue collection would need to be uniformed and accessible to traders, who would also be required to ensure decent working conditions and protections for their workers to qualify for cross-border trading licenses.

Concurrently, after learning that 90 million Africans fall ill from food sickness annually at a cost of US$16 billion in lost productivity, the African Union and International Livestock Research Institute are designing a framework for a continent-wide food guideline for the informal food sector. To be ready in 2025, the guideline will need to be followed as a prerequisite for cross-border trading.

Having examined the challenges faced by the informal sector, the AfDB economists included one of the most beneficial innovations for small-business people into the AfCFTA: the Pan-African Payment and Settlement System. This significantly cuts the cost of cross-border trading by eliminating the need for third-party currency conversions. At present, such conversions cost African businesses US$5 billion annually, and four out of five transactions of intra-Africa trade are wedded to this system. Payments must then be sent through Europe or the US before they reach their intended recipients. This Pan-African payment system is more flexible and more business-directed than mobile money platforms like M-PESA.

The critical points:

• Nearly nine out of 10 African workers earn their livelihoods in the informal sector
• The informal sector is the gateway into the formal sector economy and should be encouraged through national policies
• The African Continental Free Trade Area will boost intra-African trade by offering new opportunities to informal businesses