he COVID-19 pandemic is particularly threatening to informal entrepreneurs and the people who depend on them. Off the books and unable to access formal systems, these entrepreneurs are unlikely or unable to tap into health services or other relief measures. Meanwhile, workers in informal enterprises are usually excluded from social welfare systems.
It gets worse. In some countries, lockdowns implemented to control the spread of disease have completely closed essential marketplaces, often in a punitive fashion. Says the Zimbabwe Chamber of Informal Economy Associations, “whenever there is an outbreak, either cholera, or typhoid fever, informal economy workers and traders are blamed as the causes, now we have COVID-19, they are victims again.” Zimbabwe’s government destroyed informal marketplaces and vendors’ stalls because they lacked the capacity to provide sanitization and did not possess legal titles. Confidential sources in Papua New Guinea—whose identities are being withheld at their request—told the Center for International Private Enterprise (CIPE) that authorities enforcing lockdowns have beaten women informal traders.
The informal economy – often referred to as the “hidden” or “underground” economy—comprises anywhere from 51% to 82% of non-agricultural employment across Latin America, Sub-Saharan Africa, and Asia. The informal economy exists parallel to the formal economy as a space outside of a government’s ability to effectively regulate, protect, and tax. While it provides livelihoods as well as goods and services to millions of people, the informal sector is also associated with low productivity, low growth, tax evasion, and unfair competition.
Challenges facing the informal economy must not be ignored as we think though pandemic responses and recovery efforts. Yet its largely hidden nature makes it easy to overlook. The crisis has disrupted informal businesses’ access to supply chains and their ability to distribute commodities, increasing food insecurity. Furthermore, the informal sector will likely only grow as formal employment drops. Business recovery will be stunted wherever informal status limits access to mainstream opportunities such as acquiring lines of credit, rights to public services, enforceable contracts, and business support services.
Public systems will be tested as tax revenues fall due to both recession and growing informality. Meanwhile, the regulatory and institutional weaknesses fostering informality in the first place could be compounded if trust in institutions drops, further accelerating entrepreneur withdrawal from formal ecosystems. Disparities in society are aggravated by the formal-informal divide and those in the informal sector are easily disenfranchised by their lack of legal rights.
Coordinating Solutions
Methods for coping with disruption can be found within the informal sector itself. These methods, particularly ecosystem approaches, digital solutions, and collective action, offer hope for more innovative solutions suited to the needs of informal communities. Ultimately, building bridges to formality will offer the best opportunity and strengthen public systems.
One way to understand the specific problems and assets of the informal sector is through an ecosystem lens. In 2018, CIPE and SITE Enterprise Promotion mapped the ecosystem in Mathare, an informal settlement in Nairobi. The purpose of this exercise was to link Mathare and the greater Nairobi economy, to engage entrepreneurs collectively in policy dialogue, and to understand the barriers facing entrepreneurs. These barriers included public waste management, sanitation, electricity, clean water, and storage space for perishable goods – all of which have implications in a public health crisis.
Having identified ecosystem gaps, CIPE and SITE convened public-private dialogue in search of solutions. This dialogue revealed opportunities for better planning and linkages. The county government committed to include the community in the budget planning process and to set aside open spaces that can be used for trading spaces. A process for allocating workspaces had the advantages of facilitating service delivery to business clusters and facilitating business linkages to the greater Nairobi economy. On the groundwork of the ecosystem initiative, SITE formed a partnership with the county chamber to link outside businesses with distributors in the Mathare market. Members of a stakeholder advisory group have continued to engage ward managers and sub-county administrators to allocate trading spaces and improve water and sanitation services.
Digital solutions might seem beyond the reach of informal business, but in recent years relatively sophisticated platforms have appeared. Twiga Foods combines a mobile ordering platform, a licensed distribution facility, transparent pricing, and financial services to bring informal vendors into the formal market for produce and other retail goods. Another successful digital platform is Lynk, a website and smartphone application connecting independent service workers such as cooks, electricians, and plumbers to households or formal businesses seeking specific services. These platforms have evolved, gaining functionality to build confidence in transactions, thereby demonstrating the informal entrepreneur community’s capacity to work and collaborate outside of public regulation.
Thus, the digital market offers new opportunities for market entry and relationship building. Mobile phone banking platforms could facilitate access to formal financial services—as M-Pesa did—by reducing the transaction costs of serving informal business and allowing businesses to build credit histories through digital payments. A cashless economy also facilitates transparency and auditing of transactions for compliance with tax laws and other regulations. Although growing linkages to formal financial services are indeed welcome, it is important to remember that the path to innovative financial services still depends on an enabling regulatory environment for e-payments and fintech, and that the growth potential of financial customers is still tied to their legal status.
Ecosystem analysis and digital platforms offer ways to coordinate solutions to the business and social challenges facing informal entrepreneurs. Yet successful coordination of solutions requires a third element: the organization of informal business, principally through associations. Throughout the COVID-19 pandemic, CIPE has observed business associations leading and coordinating business responses, sometimes being better informed and prepared than governments. Informal sector business associations continue to actively inform members about safety practices and financial relief, conduct charitable relief efforts, and communicate priority business needs to policymakers.
Zimbabwe’s informal vendor associations are advancing advocacy efforts to draw attention to the sector’s struggles. A joint statement endorsed by the Vendors Initiative for Social Transformation, Bulawayo Vendors and Traders Association, National Vendors Union Zimbabwe, and Zimbabwe Chamber of Informal Economy Associations (ZCIEA) calls for an “immediate stop to the demolitions across the country.” The statement highlights the situation in Gweru, a city in central Zimbabwe, where the government gave informal traders a single day to empty their stalls. The short notice, along with a lack of capacity to secure transport and storage, meant that many of their goods were destroyed. For a poor business community, needlessly losing what little capital they possess will prove devastating in both the short and long term. In response, the associations called on the government to provide alternative trading spaces and to consult representatives of the sector as it creates new policies. Town hall meetings organized by CIPE in collaboration with ZCIEA could be a model for consultation, as could participatory decision-making. The bottom line is that an inclusive democratic decision-making process is required to better empower the informal sector.
What Can Be Done?
Economic informality has persisted through decades of attempts to suppress or reform such activity. There are no quick fixes and no universal answers. However, CIPE has compiled the following list of lessons from its work with on-the-ground partners and extensive literature reviews. These lessons can help mitigate harm, open up opportunities, and promote inclusive market systems.
• Heavy-handed enforcement of legal and tax compliance displaces business and threatens livelihoods without solving the problem.
• Informal associations and networks facilitate information and resource sharing and access to services.
• A mix of positive and negative incentives is required to shift business behavior toward formal compliance and away from undeclared activity.
• Most micro-enterprises are not suited for growth and therefore will not benefit from formal status. It is better to offer informal business owners social protection than to push them into formality.
• Creating linkages to formal value chains may be an effective way to encourage and enable greater formalization with its attendant benefits.
• Short-term financial relief may save some businesses with low cash reserves, but it is important to use policy-reform to build resilience and a more robust business ecosystem.
• Consultation and innovation will produce some of the most effective arrangements that promote efficiency, meet informal sector needs, and promote complementarity with formal systems.
A resilient recovery is unachievable without hearing and substantively including the voices of business owners who operate outside the formal system. Democratic governance can produce policies that increase economic activity and mitigate poverty in informal communities. Consultation, citizen participation, and collective action through informal sector associations create the space to build capacity, negotiate rules that work, and build commitment to public services and market solutions. Informal entrepreneurs are resourceful and can provide solutions if the system extends them an opening.
a global affairs media network
The Informal Sector: Facing Crisis on the Outside of the System
June 27, 2020
Informal economies are uniquely threatened by the COVID-19 pandemic, as they often lack access to infrastructure and services available to participants in the formal economy. Pandemic recovery efforts must take into consideration the particular challenges faced by informal entrepreneurs.
T
he COVID-19 pandemic is particularly threatening to informal entrepreneurs and the people who depend on them. Off the books and unable to access formal systems, these entrepreneurs are unlikely or unable to tap into health services or other relief measures. Meanwhile, workers in informal enterprises are usually excluded from social welfare systems.
It gets worse. In some countries, lockdowns implemented to control the spread of disease have completely closed essential marketplaces, often in a punitive fashion. Says the Zimbabwe Chamber of Informal Economy Associations, “whenever there is an outbreak, either cholera, or typhoid fever, informal economy workers and traders are blamed as the causes, now we have COVID-19, they are victims again.” Zimbabwe’s government destroyed informal marketplaces and vendors’ stalls because they lacked the capacity to provide sanitization and did not possess legal titles. Confidential sources in Papua New Guinea—whose identities are being withheld at their request—told the Center for International Private Enterprise (CIPE) that authorities enforcing lockdowns have beaten women informal traders.
The informal economy – often referred to as the “hidden” or “underground” economy—comprises anywhere from 51% to 82% of non-agricultural employment across Latin America, Sub-Saharan Africa, and Asia. The informal economy exists parallel to the formal economy as a space outside of a government’s ability to effectively regulate, protect, and tax. While it provides livelihoods as well as goods and services to millions of people, the informal sector is also associated with low productivity, low growth, tax evasion, and unfair competition.
Challenges facing the informal economy must not be ignored as we think though pandemic responses and recovery efforts. Yet its largely hidden nature makes it easy to overlook. The crisis has disrupted informal businesses’ access to supply chains and their ability to distribute commodities, increasing food insecurity. Furthermore, the informal sector will likely only grow as formal employment drops. Business recovery will be stunted wherever informal status limits access to mainstream opportunities such as acquiring lines of credit, rights to public services, enforceable contracts, and business support services.
Public systems will be tested as tax revenues fall due to both recession and growing informality. Meanwhile, the regulatory and institutional weaknesses fostering informality in the first place could be compounded if trust in institutions drops, further accelerating entrepreneur withdrawal from formal ecosystems. Disparities in society are aggravated by the formal-informal divide and those in the informal sector are easily disenfranchised by their lack of legal rights.
Coordinating Solutions
Methods for coping with disruption can be found within the informal sector itself. These methods, particularly ecosystem approaches, digital solutions, and collective action, offer hope for more innovative solutions suited to the needs of informal communities. Ultimately, building bridges to formality will offer the best opportunity and strengthen public systems.
One way to understand the specific problems and assets of the informal sector is through an ecosystem lens. In 2018, CIPE and SITE Enterprise Promotion mapped the ecosystem in Mathare, an informal settlement in Nairobi. The purpose of this exercise was to link Mathare and the greater Nairobi economy, to engage entrepreneurs collectively in policy dialogue, and to understand the barriers facing entrepreneurs. These barriers included public waste management, sanitation, electricity, clean water, and storage space for perishable goods – all of which have implications in a public health crisis.
Having identified ecosystem gaps, CIPE and SITE convened public-private dialogue in search of solutions. This dialogue revealed opportunities for better planning and linkages. The county government committed to include the community in the budget planning process and to set aside open spaces that can be used for trading spaces. A process for allocating workspaces had the advantages of facilitating service delivery to business clusters and facilitating business linkages to the greater Nairobi economy. On the groundwork of the ecosystem initiative, SITE formed a partnership with the county chamber to link outside businesses with distributors in the Mathare market. Members of a stakeholder advisory group have continued to engage ward managers and sub-county administrators to allocate trading spaces and improve water and sanitation services.
Digital solutions might seem beyond the reach of informal business, but in recent years relatively sophisticated platforms have appeared. Twiga Foods combines a mobile ordering platform, a licensed distribution facility, transparent pricing, and financial services to bring informal vendors into the formal market for produce and other retail goods. Another successful digital platform is Lynk, a website and smartphone application connecting independent service workers such as cooks, electricians, and plumbers to households or formal businesses seeking specific services. These platforms have evolved, gaining functionality to build confidence in transactions, thereby demonstrating the informal entrepreneur community’s capacity to work and collaborate outside of public regulation.
Thus, the digital market offers new opportunities for market entry and relationship building. Mobile phone banking platforms could facilitate access to formal financial services—as M-Pesa did—by reducing the transaction costs of serving informal business and allowing businesses to build credit histories through digital payments. A cashless economy also facilitates transparency and auditing of transactions for compliance with tax laws and other regulations. Although growing linkages to formal financial services are indeed welcome, it is important to remember that the path to innovative financial services still depends on an enabling regulatory environment for e-payments and fintech, and that the growth potential of financial customers is still tied to their legal status.
Ecosystem analysis and digital platforms offer ways to coordinate solutions to the business and social challenges facing informal entrepreneurs. Yet successful coordination of solutions requires a third element: the organization of informal business, principally through associations. Throughout the COVID-19 pandemic, CIPE has observed business associations leading and coordinating business responses, sometimes being better informed and prepared than governments. Informal sector business associations continue to actively inform members about safety practices and financial relief, conduct charitable relief efforts, and communicate priority business needs to policymakers.
Zimbabwe’s informal vendor associations are advancing advocacy efforts to draw attention to the sector’s struggles. A joint statement endorsed by the Vendors Initiative for Social Transformation, Bulawayo Vendors and Traders Association, National Vendors Union Zimbabwe, and Zimbabwe Chamber of Informal Economy Associations (ZCIEA) calls for an “immediate stop to the demolitions across the country.” The statement highlights the situation in Gweru, a city in central Zimbabwe, where the government gave informal traders a single day to empty their stalls. The short notice, along with a lack of capacity to secure transport and storage, meant that many of their goods were destroyed. For a poor business community, needlessly losing what little capital they possess will prove devastating in both the short and long term. In response, the associations called on the government to provide alternative trading spaces and to consult representatives of the sector as it creates new policies. Town hall meetings organized by CIPE in collaboration with ZCIEA could be a model for consultation, as could participatory decision-making. The bottom line is that an inclusive democratic decision-making process is required to better empower the informal sector.
What Can Be Done?
Economic informality has persisted through decades of attempts to suppress or reform such activity. There are no quick fixes and no universal answers. However, CIPE has compiled the following list of lessons from its work with on-the-ground partners and extensive literature reviews. These lessons can help mitigate harm, open up opportunities, and promote inclusive market systems.
• Heavy-handed enforcement of legal and tax compliance displaces business and threatens livelihoods without solving the problem.
• Informal associations and networks facilitate information and resource sharing and access to services.
• A mix of positive and negative incentives is required to shift business behavior toward formal compliance and away from undeclared activity.
• Most micro-enterprises are not suited for growth and therefore will not benefit from formal status. It is better to offer informal business owners social protection than to push them into formality.
• Creating linkages to formal value chains may be an effective way to encourage and enable greater formalization with its attendant benefits.
• Short-term financial relief may save some businesses with low cash reserves, but it is important to use policy-reform to build resilience and a more robust business ecosystem.
• Consultation and innovation will produce some of the most effective arrangements that promote efficiency, meet informal sector needs, and promote complementarity with formal systems.
A resilient recovery is unachievable without hearing and substantively including the voices of business owners who operate outside the formal system. Democratic governance can produce policies that increase economic activity and mitigate poverty in informal communities. Consultation, citizen participation, and collective action through informal sector associations create the space to build capacity, negotiate rules that work, and build commitment to public services and market solutions. Informal entrepreneurs are resourceful and can provide solutions if the system extends them an opening.
