Workable policies for the informal structure of the Nigerian economy, By Bolutife Oluwadele

The informal sector is ubiquitous in Nigeria. It constitutes nearly 60 per cent of the economy. It provides over 60 per cent of the nation’s employment. It also generates more than 80 per cent of the quintessentially life-essential services such as housing, transport, water, power, food, clothing and personal care, among others. The potential of the informal sector is enormous but is being choked by many bottlenecks. Crafting proper, workable and sustainable policies towards supporting the sector and giving it remains crucial to moving Nigeria’s economy onto the path of sustainable growth and higher standards of living.

The Nigerian economy is characterised by a large informal sector with a sizeable share of its output, labour force, income and economic activities. Understanding the informal structure of the economy better will help us formulate workable policies that can spur growth, reduce poverty and improve the living conditions of citizens. In this regard, this article explores and analyses the structure of the informal sector in Nigeria, its size, the challenges and needed policy direction to maximise its potential.

The informal sector is an essential part of the Nigerian economy. It accounts for approximately 65 per cent of the country’s labour force, about 45 per cent of GDP, and 60 per cent of total domestic investment, which suggest that the informal sector holds the key to boosting growth. Despite its size, studies of the Nigerian informal sector are limited mainly due to the underground nature of most of its members.

The Significance of the Informal Sector in Nigeria

The informal sector is the major contributor to Nigeria’s economy because it involves economic activities that are not under the control of the government and are not conducted according to the rules and regulations of formal businesses. These activities are small-scale retail trade, agriculture, transport, construction and a host of service-provision jobs. The sector is reported to account for employment of about 65 per cent of Nigeria’s labour market, 84 per cent of urban productivity and 65 per cent of rural productivity.

It covers a considerable part of employment. According to the International Labour Organization (ILO), over 65 per cent of working Nigerians are in the informal sector (a moderate estimate). The sector also contributes significantly to the country’s gross domestic product (GDP) by creating commodities and services to cater to the needs of the local population. Moreover, the flexible and adaptable nature of the sector makes it the most responsive part of the economy, especially in times of recession or national economic crisis.

Challenges Faced by the Informal Sector

The informal sector’s importance can hardly be overstated. This is so because it employs more than 80 per cent of Nigeria’s labour force, and is capable of widening the base of tax collection; it pays taxes, creates wealth, enables poverty reduction, reduces inflation limits, and so on. Nevertheless, this sector is characterised by many problems that make it difficult for it to be effective and efficient. Some of the problems include: 

1. Lack of access to finance: Small businesses run on credit and operating capital but they often find it difficult to access formal sources of finance, from loans to credit to bank accounts. This means they can barely expand, diversify, invest in technology and training, or improve their operations.

2. Regulatory Impediments: Operating in the informal sector means staying away from government regulations, and this may result in proprietors having to face harassment from the authorities or fines. This can act as a destabilising factor and slow down growth.

3. Inadequate infrastructure: Informal sector enterprises are often deprived of basic physical infrastructure, such as those facilitating power supply, reliable water supply, transport networks and so on, which they are unable to afford, though they badly need them. This makes the enterprises less productive, and less competitive in relation to those in the formal sector.

4. Skills gap: Many workers in the informal sector are not skilled enough to boost their productivity and earnings. The poor availability of formal schooling and vocational training contribute to this skills gap in employment.

5. Social protection: Workers in the informal sector are often excluded from social protection programmes, such as health insurance, pensions and social assistance schemes. This renders them even more vulnerable to economic shocks and health crises.

 Case Studies: Successful Policy Interventions

1. Kenya’s Micro and Small Enterprises (MSE) Act: The Kenyan government enacted the country’s Micro and Small Enterprises (MSE) Act to promote, develop and regulate micro and small enterprises. The MSE Act created the Micro and Small Enterprises Authority (MSEA) of Kenya, a government agency that provides support services, training and access to finance to informal businesses.

2. Pradhan Mantri Mudra Yojana (PMMY) Scheme in India: As a new scheme that was started in April 2015, providing loans to small- and micro-enterprises, it has been able to support financing for informal businesses that often operate with cash and it facilitates them by allowing them to increase their scale and get more formalised businesses.

3. Rwanda’s Umurenge SACCO Programme: This is a strategy to promote financial inclusion in Rwanda and it involved the establishment of Savings and Credit Cooperative (SACCO) programmes intended to improve the access to and use of savings and credit services by the underserved and the poor, particularly those in the informal sector. Access to finance for informal commercial and domestic enterprises now stands at 51.3 per cent.

Policy Recommendations for Nigeria

To harness the potential of the informal sector and address the challenges it faces, policymakers need to develop targeted strategies and policies. First, a comprehensive analysis of its current contribution pattern and future potential must be done by and for policymakers. A whole range of drivers are behind this important shift, and, in turn, tailored strategies, policies and programmes will propel these drivers to their full potential. Here are a few policy recommendations:  

1. Integrated Financial Services

• Microfinance Institutions (MFIs): Expand the microfinance network that provides small credits and lending facilities for informal sector businesses. Encourage linkages between MFIs and commercial banks to widen the scope and scale of outreach and financial inclusion.

• Mobile Banking: Use mobile banking platforms that facilitate access to banking services for informal firms, including digital payment systems for transactions and savings.

• Financial Literacy Programmes: Implement financial literacy programmes to teach informal sector entrepreneurs how to manage their finances, get access to credit and use financial services.

2. Simplified Regulatory Frameworks

• Making registration easier: Make it easier for businesses to register, including informal firms that want to formalise, and make it possible for them to do so under one roof, in one-stop shops for business registration and tax compliance and access to government facilities.

• Tax incentives: Implement tax incentives such as lowering rates or granting exemptions for formerly informal businesses. Subsidise or grant support to get into the formal sector in the first place.

• Regulatory support: create units to help informal businesses with regulatory requirements and processes to find and legislate for compliance.

3. Infrastructure Investments

• Market Facilities: Improve and modernise market facilities to create safe and enabling environments for informal traders. Water, sanitation and waste management must be readily accessible.

• Transportation Networks: Better roads and railways connect people to global networks and markets. Provide adequate technical support for transportation infrastructure to allow for increased productivity and efficiency, as well as more effective utilisation of resources. A considerable number of people can be lifted out of poverty simply by investing in road construction and maintenance.

• Access to Utilities: Open access to reliable electricity, clean water and internet access for informal sector enterprises. Roll out community infrastructure programmes to meet local priorities.

4. Vocational Training and Education

• Skills Development Programmes: Design and implement vocational training programmes that meet the needs of informal sector workers. Identify and train workers in in-demand skills such as carpentry, tailoring, agriculture and technology.

• Public-Private Partnerships (PPPs): Encourage a collaboration of educational institutions, non-governmental organisations (NGOs) and private sector enterprises to deliver programmes. Combine the strengths of the different stakeholders for maximum impact.

• Lifelong Learning: Incentivise facilities to have in-house opportunity for adults to attend workshops, seminars and take online courses and be given certification and accreditation. For those who want to further their knowledge, incentives should be given to the employer.

5. Social Protection Programmes

• Health Insurance: Promote affordable health insurance schemes, starting with the informal sector. Establish partnerships with private insurers and community health organisations.

• Pension Plans

Set up pension programmes for the informal workforce. Design flexible contribution schemes so that informal workers can save for retirement.

• Unemployment benefit schemes: Establish unemployment schemes to support informal workers in times of economic downturn; make the schemes as broad-based as possible.

6. Market Access Initiatives

• Organising Local Markets, Trade Fairs and Exhibitions: Order informal businesses to display their goods and services at local markets, trade fairs and expositions. Connect businesses and build networks with potential purchasers and collaborators.

• E-commerce Platforms: Build e-commerce platforms that work for informal sector entrepreneurs. Train them in digital marketing, sales online and logistics, among other ways, to present sellable goods on online platforms.

• Export Promotion: Support informal economy businesses to access export markets via export support, market intelligence and trade facilitation services.

7. Legal Support Services

• Legal Aid Centres: Set up legal aid centres in neighbourhoods and at workplaces, staffed by qualified lawyers, to ensure access to affordable legal services for legal questions regarding workplace conditions or contract disputes. The legal aid centres could offer workers and businesses services such as the drafting of contracts, mediation or arbitration of disputes, avenues for expressing grievances relating to regulatory compliance, etc.

• Advocacy Groups: Establish advocacy groups that can represent the interests of the informal sector in policy making and negotiations. Formalise workers’ interests and voice.

• Public Legal Education: Launch public legal education campaigns to educate citizens about their legal rights and obligations, including employment laws, regulatory standards for businesses and consumers, and the responsibilities of the government.

8. Comprehensive Data Collection

• Conduct Regular Surveys and Studies: Regularly survey and study the informal sector; compile data on employment, income, business operations and challenges, among others.

• Policymaking: Use the above information for policymaking.

• Data Sharing Platforms: Set up data-sharing platforms, where researchers, policymakers and stakeholders can access information on the informal sector. Utilise open-data platforms to maximise transparency.

• Impact Assessment: Create mechanisms to measure the impact of policy interventions towards the informal sector. Continuously monitor and evaluate programmes and make in-flight course corrections where data analytics indicate.

9. Public Awareness and Engagement

• Raise Awareness: Augment public awareness campaigns through the media, outreach campaigns and educational programmes that highlight the informal sector and its contribution to the economy and the structural challenges it faces.

• Community Encouragement: Encourage community initiatives to assist informal businesses; for example, local trade fairs and community markets can be organised as a platform for informal entrepreneurs to display their assortment of merchandise.

10. Multi-stakeholder Collaboration

• Federal, State and Local: Partner across different levels of government because the informal sector tends to be unevenly distributed across geography, and local informal economies have differing needs. Coordinated informal sector policies promote intergovernmental cooperation.

• Engage the Private Sector: Involve the private sector in supporting the informal sector through CSR initiatives, including mentoring programmes and investment in community development projects.

• NGOs and IOs: Co-opt the expertise and resources of non-governmental organisations and international bodies to carry out capacity-building measures, technical assistance and knowledge exchange.

Conclusion

The informal sector is ubiquitous in Nigeria. It constitutes nearly 60 per cent of the economy. It provides over 60 per cent of the nation’s employment. It also generates more than 80 per cent of the quintessentially life-essential services such as housing, transport, water, power, food, clothing and personal care, among others. The potential of the informal sector is enormous but is being choked by many bottlenecks. Crafting proper, workable and sustainable policies towards supporting the sector and giving it remains crucial to moving Nigeria’s economy onto the path of sustainable growth and higher standards of living.

The Way Ahead: If implemented, these recommendations will foster an enabling environment for informal businesses to thrive and boost economic growth and living standards. To harness the informal sector’s potential, policymakers should place it at the front and centre of national development strategies, including in their policies, programmes and projects. They can begin by strengthening mechanisms that foster economic growth and improve the well-being of their poor citizens. They should complement this effort by shifting towards more equitable and sustainable development policies and strategies. The informal sector is the backbone of Nigeria’s economy, therefore its development will not only move the economic structure of the country but also enhance the pursuit of economic development and improve the life of millions of Nigerians as well.

Bolutife Oluwadele is an author, chartered accountant and public policy scholar based in Canada. Email: bolutife.oluwadele@gmail.com