This memorandum analyzes the informal economic and recommends strategies at strengthening the sector, with a view to creating wealth and increasing the economic base of the state. The contribution of the informal sector to the growth of the economy is quite significant, it’s better placed to absorb unutilized resources which the formal sector is not willing or able to use. Through linkages with the formal sector, informal businesses would be better empowered as the production and industrial base of the economy.
The informal sector has no tendency to wither; it should be strengthened with policy reform for optimum contribution to the growth of the economy. To strengthen the informal economy, the following is recommended:
- Create incentives for businesses to join the formal economy, by simplifying the procedures required to obtain business permits and licenses, and make them affordable to all entrepreneurs- formal and informal.
- Improve the business climate by clarifying and streamlining legal codes and eliminating duplicative or superfluous and strict laws, while making private property rights accessible to all citizens, clearly defined, and strongly enforced.
- Raise awareness about commitment to eliminate barriers to business entry, while demonstrating the benefits of removing these barriers and expanding formal markets, and
- Reform overly bureaucratic agencies by strengthening their capacity to administer laws efficiently, effectively, and inexpensively.
All over the world, especially in the global south, two economies exist: the formal and informal economy also called “System D.” The entrepreneurs and employees in System D lack protection under the law, access to formal sector services such as market credit, and are prey to corrupt officials and operate under harsh business conditions. The sector “is made up of businesses that produce legitimate goods and services without proper permits and legal status because they are locked out of the formal-legal economy by a maze of regulations, excessive procedures, high tax rates, and other barriers to market entry” (Chen, 2007). And when government increases tax rates in the formal economy, it creates an additional incentive for the informal sector to boom. This is the case of moral hazard. As barrier to market entry increases, informality increases. The sector plays important roles in the growth and development of the economy. It:
- Provides productive outlets for a large number of people who prefer or have to be self-employed. This sector therefore contributes to the state and national economy in terms of output and employment;
- Provides competition in the economy;
- Provides outlets for experienced specialized manpower from the medium and large scale enterprises who wish to be self-employed, using minimal capital;
- Reduces the level of unemployment, though many such employed could be underemployed;
- Stimulates and enhances innovation and adaptation; and,
- Helps in the mobilization of capital and human resources which would otherwise have been laid waste and idle thereby increasing the utilization of virgin reusable materials.
Lagos is among the league of the world’s mega cities. Concerns about mega city status are mega urban problems which Lagos has to contend with. Top among the concerns are street trading, poor sanitation, poor infrastructure, filthy environment and congestion. These problems are caused by influx of people into the city with a very weak, ineffective and uncontrolled urban management planning in place in recent past.
The greater number of opportunity seekers that migrate to Lagos, in search of better jobs and quality of life, are mostly unskilled and unemployable, and most usually end up in the informal sector. The role of the sector therefore in providing employment and complementing the formal sector should not be trivialized when considering its effects on the urban management system (Abiodun, 1997).
Strengthening the Informal Economy
Government’s initiative to formalize the informal sector makes sense from a public policy viewpoint, arguably to maximize the positive externalities that new businesses bring about. Just like every human being, individual businesses makes rational decision and respond to incentive. They choose to do business formally or informally from a rational cost benefit analysis. If the costs of doing business in the formal economy exceed the benefits, the informal economy would likely strive.
The state has a responsibility to enhance benefits the formal economy might offer to System D (Lawanson, 2011). This memo recommends reduction of costs and obstacles to market entry. It’s worth mentioning that benefits in the form of business opportunities have proven to be a key factor when used combined with obstacles elimination as an incentive for business incorporation. However, change of business traditions such as forms of business arrangements or business operations might not be useful. Individuals may not change their business habits if they do not see a benefit. Again the cost of adapting to new rules and forms might exceed the expected benefits. In those cases, instead of imposing forms it would be better to recognize the existing form and strengthen it making it “economy in-formation.” This “Tokyo model” supports informal sector growth (Echanove, 2012). The experience demonstrated in the “economy in-formation” encourages informal businesses to gradually upgrade into the formal economy. It’s on record that the informal economy after World War II built Tokyo’s economy. This is a lesson Lagos and Nigeria, can study, refine and adopt.
Evidence elsewhere suggests that informal economy is a means to address the issue of unemployment, poverty and crime. Most governments have created a favourable framework for promoting the informal economy. For instance, China, after the mid- 1990s, often considered the Asian miracle – there is no miracle there. China took advantage of System D and promoted policies to strengthen the informal sector for growth. The informal economy in Lagos is a window of opportunity, strengthening the sector is an entry point to increasing the economic base of the state.
Interest in strengthening the informal economy has been renewed worldwide, indicating recognition of its contributions to development. Its persistence is driven by a number of factors including unemployment, poverty and migration. As Khotkina (2007) noted “unemployment and impoverishment set in motion a massive transfer of population into the informal economy.” Informal economy is not the excusive preserve of Lagos. Globally, more than half of all employed people work off the books. And that number is expected to climb over the next decade. “Estimates are that the informal economy around the world is [worth] about $10 trillion a year.”
Studies on industrial development of different countries have shown that the informal sector constitutes an integral part in the overall industrial sector and plays an active role in the growth and development of these countries. In Nigeria, this sector accounts for about 70% of the total industrial employment, generates about 6.2 percent of the aggregate employment in the United States, 22.3 percent in China, about 80 percent in India, as well as about 50 percent employment in Israel (Maryland, 2004, Quarterly Newsletter of IYMC, 2005).
The informal sector, if given the needed support and regulatory framework, could be a major player in combating unemployment in the country. We cannot underestimate the role of System D in Lagos state economic growth. To function adequately and contribute more to economic development; government should strengthen the sector by linking it to the formal sector and providing the enabling environment for growth of the sector.
Omoruyi Austin Aigbe, a development consultant, wrote from Abuja. You can provide feedback to him via email@example.com