This chapter is divided in three parts. Part One reviews conceptuai issues, including sorne defmitions of the informai sector in the literature. The second part highiights major areas in which the informai sector could positively affect economie development. Part Three looks into sorne salient justifications for small-scale enterprise development in the informai sector as a desirable strategy in African countries. This discussion lays the foundation for a review of problems and constraints facing expansion of informai sec tor enterprises.
2.2 Concepts and Definition Issues
Before the 1970s, the informai sector was regarded as part of an assembly of traditionai, backward and unproductive activities operating at the margins of deveioping societies. However, this perception soon changed significantly following publication in 1972 of ILO's classic Kenya Employment Mission report. This report mainly highlighted the fact that rural depopulation (migration) and resultant urban growth did not give rise to high open unemployment but rather to the deveiopment of small-scale activities, providing rural migrants and urban dwellers unable to gain empioyment in the modem sector, with a means of living and surviving [Charmes, 1988]. By the early 1980's, sorne 40 million workers in Africa were earning their livelihood in the informai sector. Their incomes allowed an additional 200 million children, out-of -school youths and the disabled to survive. All these facts converge with other evidence to show the in~aluable contribution the sector was making in African economies [Aboagye, 1985].
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Although it was the lLO mission report that brought the informai sector to popularity, the literature notes that the concept had been in use in Keith Hart's pioneering study on the urban poor in Ghana in
Hart, for his part, observed that western-based economies was ill prepared to accommodate the realities of production, employment, and income as prevailing in African economies, and that it was the application of western theories to planning in Africa that led to a total marginalization of a good chunk of producers now working in the non-formai sector of the economy. In other words, western-based theories, upon which much of Africa' s social and economie development strategies were founded, constituted what Augustine Owoye [1993] would call "a biased search for modernity".
Like many other writers, Hart associated the informai sector with two other terms; first, urbanization, in the sense that the sector is largely urban-based where almost all microenterprises are founded, and which become most attractive for most rural migrants8. Second, marginalization and poverty, referring to those unable to gain employment in the modem sector, and the urban poor whose demand for basic goods and services would have otherwise been left if they were to come solely from the formai sector.
Although ironically very few countries . in Africa had pursued employment as an independent objective of development, it was hoped that with the available measures of industrialisation, sufficient
7 Hart's study, entitled "Informai Incomes Opportunities and Urban Employment in Ghana" was done in 1971, but was only published later in the Journal of Modern African Studies, No. 11, 1973. Because of its late publication in relation to the lLO mission report in 1972,some people thought that the latter, fust discovered the term "informai sector"
8 See Owoye. A in The Courier ACP-EU, No; 137, Jan-Feb. 1993, who described the informai sector urban-based, but in reality a transplantation of rural skills which, on closer examination are revealed mostly as skills of the old social order of occupation handed down from generation to generation.
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employment would be created for large numbers of job seekers. In other words, hopes had been raised for automatic absorption of existing surplu_s of labor in subsistence sectors into the modem sector.
However, according to Hemmer and Mannel [1989], industrialization in these countries yielded two major effects, namely the growth effect and the distribution effect. Whilst the growth effect has been significant, they noted that the distribution effect and, in particular, the employment effects has been rather unsatisfactory. They blamed this on the biased manner in which industries have been located-mainly in cities-which not only created disparities in expected wages and incomes in favor of the urban centers but also triggered an unprecedented rural exodus of able-bodied workers looking for jobs in the so-called industrial centers. Realizing however that the industries had no sooner started than they lost capacity to absorb the available workforce, many migrants then settled for marginal activities outside the formai sector, marking the start of an informalization process that now seems to haunt policymakers and development planners.
The informai sector is, as Grey-Johnson rightfully put it, "different things to different people".
According to sorne, the term informai sector is useful shorthand to point to a section of those who apparently had been excluded from the fruits ofindependence. Renee, and just in the same way Hart's study concluded, the informais were the marginalized responding to the challenges of economie underdevelopment and poverty [King, 1988].
Other authors have tried to explain (the ongm of) the informai sector from a socio-cultural perspective. Hyden (1990] for example, writes that an informai economy emanated in Africa from the continent's "long tradition of open, competitive marketing at flexible and negotiable priee" and which
"continued to flourish, independent of, and against legal powers, demonstrating its vigor and persistence".
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Indeed, g1ven the reality of African economies, the v1gor and persistence demonstrated by the informai sector is, in Hugon's [1988] thinking, certainly very commendable. Many activities that would ordinarily devolve on households, central government, or the industrial system in an advanced country are undertaken by small trading units in the cities of the Third World. For example, street laundries, food kiosks, and carriers, are commonplace in African cities because households lack a range of consumer durables (such as washing machines, gas cookers, transport vehicles, cameras) to do these themselves. Also, traditional healers stand in for official health services in most, if not all, African cities. Thus without the vigor of the informai sector, survival will become a luxury that only a few people could afford to enjoy.
The goal of economie development is to raise standards of living among the population. As far as writers like Fields [1988] are concemed, for most people these standards are determined by their labor earning power. And for many, the best available job is one which is not "formal" or "modem"-in the sense these terms are used to refer to activities in factories and offices-nor is the worker unemployed in the standard lLO sense of not working for pay but actively looking for work. The worker, employed in a non-modem activity, needs to be counted somewhere. Fields termed that place where the worker holds a job and eams income the informai sector, distinct from the modem, formal or what others still prefer to call, the structured sector.
According to King [1987] the "informa.l sector" concept, in sorne ways, almost precisely parallels the notion ofnon-formal education. Both concepts came into vogue at the same time and shared common set of assumptions about the formal sector. Also, both concepts had almost immediate appeal to donor agencies, multilateral and bilateral, particularly because they fitted very well with what King himself described as "the agencies' desire to rethink more aid for the poorest"[King, Ibid.]. Finally, both
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concepts are still routinely used to describe the world of work, training and education that lie beyond the :frontiers of formai schools and formai employment.
But since it came to vogue almost three decades ago, continued debate has still not produced agreement on a precise definition of the term informai sector. Because the term applies to diverse sets of activities, almost entirely outside strict official regulation, somewhat opposing views and definitions continue to persist. Inherent methodological difficulties in dealing with the sector are another source of misconception. Definitions therefore tend to differ between pers ons and institutions, depending on their orientation and interest in the sector. In Grey-Johnson's language, "most attempts to de fine the informai sector despair even be fore beginning to do so ... because the sector do es not seem to fit properly into the conceptual 11lots of (western) development economies". Little wonder therefore that when the first real attempt was made to define and integrate informai forms of production in prevailing economie theory it met up with a host of conceptual, definitional, and measurement difficulties.
The lLO made the first real attempt to define the informai sector by employing a seven-point multiple operational definition which is the obverse of characteristics of the formai sector. In its Kenya Employment Mission Report, 1972 [Op. cit] the lLO defined the sector as a system of "doing things characterized by; a) ease of entry, b) reliance on indigenous resources, c) family ownership of enterprises, d) small-scale of operation, e) labor intensive and adapted (rudimentary) technology, f) training obtained outside formai system, and g) unregulated and competitive markets".9
9 According to Charmes (1988), multi-criteria defmitions are generally inspired by the classical theory of competition, which views the informai sector as an illustration of the market economy-pure and perfect but segmented (i.e. not diJ:ectly linked to the official, modem market).
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One cannot wholly agree with the above listed characteristics. Firstly, entry is not especially easy, particularly in the upper-lier informai sector that Garry Fields [1988] argued should be distinguished from the easy-entry informai sector requiring relatively small capital or seed financing.
According to Fields, the informai sector should not be conceived of as a free-entry sector since average capital investment required in the upper-tiers could be substantial enough to discourage easy and free entry. For example, whereas an initial capital of US$67 was required in less remunerative activities such as street trading and radio repairs in Kenya, by contrast, evidence from Yaounde (Cameroon) estimated that initial investment capital required in production (woodworking and metalworking) and services were $1,608 and US$421 respectiveli0. However, many ofthese upper-tier enterprises are able to deal with capital constraint by prolonging the life of machinery and equipment- an efficient response by informai producers to relatively expensive capital.
Secondly, operators in the sector do not always rely on indigenous inputs, as argued by lLO.
Certainly, in many cases, the input used in production and manufacturing is imported-leather in leatherworks; cloth and ink in tailoring, batik and dyeing activities; gas and metal in welding, and so on.
Thirdly, notwithstanding Augustine Oyowe's [1993] observation that the sector is "characterized mainly by a strong sense of solidarity and kinship ... where its dynamism lies", ownership of informai sector enterprises need not necessarily be by the family. Moreover, considering that one of the sources of funds to start a new business in the informai sector is contribution from friends, it is therefore
10 See, "The Informai Sector in the 1980s and 1990s", OECD Development Center Studies, Paris 1991, p. 32. See also p 42 relating to a study in the Philippines where fixed assets per enterprise in a sample of 402 enterprises in manufacturing or production, was estimated at $1 200 per ente1prise.
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possible for non-family members to gradually become joint owners of businesses that they have helped to establish. In this way, ownership would not exclusively be (through) the family.
Fourthly, it is not clear whether all or only sorne, or even just one, of the multi-criteria definitions of the lLO must apply at any one time before an activity can be considered as in the informa! sector.
And finally, although the criteria used in the lLO multiple operational definition captures a pure competitive market ( see footnote 19), sorne of them are relatively complex and cannot be reduced to simple observations. This may explain why sorne authors have tried to break down complex criteria into simpler and more specifie observations, Sethuraman [1981a] being one such author.
Sethuraman used an enterprise-based survey to propose a key for identifying an informa! sector activity. The key: a) all enterprises or production units with less than a maximum number of workers (usually ten)11, orb), an enterprise with more than the suggested maximum number of workers that satisfies at least one of the following criteria: it operates ille gall y; it works on an irregular basis; it is located in a temporary structure or in the open; it does not use electric power; it does not depend on formal credit institutions; it does not rely on formal distribution networks; most of its workers have less than six years of schooling.
Whilst in practice such a key could easily help to distinguish informa! activities from formal ones, the criteria involved are certainly not without drawbacks. Firstly, that enterprises in the sector do not depend on electricity can no longer be admissible in present times. Through in:frastructural development- however minimal this may appear to be-many informa! sector enterprises in A:frican countries could be seen relying on electricity for a variety of purposes. The support initiatives of the
11 In actuality, the informai sector enterprise is often characterized by fewer than ten employees engaged in each finn or establishment.
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government, NGOs, and local banks toward Jua Kali enterprises in Kenya are cases in point. Through these initiatives, all Jua Kali sheds are now fully equipped with electricity, telephones, water, and even rest rooms 12 .
Secondly, by using the enterprise-based survey approach (i.e. the enterprise as the unit of observation) as the catchall methodology, Sethuraman could be said to have referred exclusively to the localised part of the sector. In this way, the non-localised part, which broadly refers to home and household activities, were ignored [Charmes, 1988] 13
Finally, for whatever reason, Sethuraman's key neither defined illegality nor even ranked it as one of the criteria that could be used to characterise the informai sector. In this regard, he is unlike many writers who consider illegality as perhaps the single most important criterion of explaining informality.
After characterizing informai activities according to his key, Sethuraman then defined the sector as one consisting of "small-scale units engaged in the production and distribution of goods and services, whose primary objective is to generate employment for the participants rather than to maximize profits" [Sethuraman, 1981]. Again, the argument regarding profit maximization is open to question.14.
12 See, Worid Banlc Sub-Saharan Africa, From Crisis to Sustainabie Growth: Long Term Perspective Study, 1989, p.121
13 Whilst the enterprise methodology has formed the basic procedure in most empirical research on the informai s~;ctor, sorne authors have argued that this methodoiogy should be complemented further by a househoid-based survey approach in which the household becomes the unit of observation. This requires that a household module is added at the Ievei of each enterprise surveyed, and an enterprise module is added to the household questionnaire.
14 Unless otherwise reveaied by participants themselves, it will be a gross overstatement to generaiize, as Sethuraman did, that participants in the informai sector enter the sector prirnarily for the sake of generating employment for themselves. lt will be an interesting question to putto participants in the sector regarding their motive(s) for entering the sector. Sorne may say for skills, others for empioyment generation and, perhaps not surprisingiy, others may reveai profit making as the underiying objective to pursue. According to the World Bank, about 5000 informai craftsmen in the Kumasi "Suame Magazine" in Ghana, have flourished during the country's economie recovery program, in response to Iurking business
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Mazumdar [in Lubell, 1991] defined informality as a labor market phenomenon that could explain differences in income at the lower end of the income distribution scale. The informais therefore constitute a reservoir of low-wage, non-permanent wage eamers working in activities unprotected by company policy, govemment regulations or trade union actions. This definition therefore includes low-income eamers such as housemaids, shoe-repairers, shoeshine boys, night watchmen, roadside bicycle repairers and tailors, etc. Many of these activities are not unprotected by any form of po licy, nor is entry into them through specialized govemment employment agencies. Bosses can hire and fire apprentices at will without fear of trade union actions. Wages are not dependent on legislation, and worker entitlement to basic allowances or other benefits is almost zero. Mazumdar's labor market approach of defining the informai sector is an outcome of what is referred to as the "segmentation"
analysis adopted for the urban labor market in developing countries often used for manpower planning purposes.
Retuming to the issue of illegality, a number of studies, mostly concemed with Latin America but which can be extended to other developing countries in Africa, identified informality with illegality:
illegal in the sense that informai sector enterprises do not comply with regulations pertaining to fiscal, employment and other matters because of flaws in the tax system and in other laws and regulations.15 Such studies focus on the degree of conformity to institutional and legal frameworks for economie activities as key to defining the sector. They are part of a larger number of writings (in Latin American) which consider the regulatory :framework as an obstacle to the development of micro and
opportunities, and profitable markets. See, Sub-Saharan Africa, From Crisis to Sustainable Growth: World Bank 1989, p121
15 Although activities operating outside the legal system (such as drug trafficking, prostitution, or where applicable, parallel money exchanging) are informal, they form a very negligible portion-or none at all-of what is thought of as the whole informal sector.
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small enterprises m the informai sector. State regulations, taxes and levies, squeeze struggling indigenous entrepreneurs and force new labor into extra-illegality [Takundwa, 1996], observations which tend to posit a direct relationship between thom y regulations and the degree of informalization.
Hemando de Soto is perhaps the most pro minent proponent of this illegality proposition. In his central policy prescription for Peru, (and by implication other countries in the Third World), de Soto saw little or no positive role for govemment in dealing with the informai sector. As far as he is concemed, people tum informai-and in the context it is used here, illegal-because of harsh and rather unfriendly govemment restrictions.
However, there are limits to the effectiveness of de Soto's approach. Sorne selective regulations are necessary firstly, to protect society from activities like prostitution, petty theft and burglary, as well as congestion from improper location and housing of enterprises in city centers and peripheries.
Secondly, whilst regulations have elements which could hamper the development of the informai sector others are justified for "the good of the community"
Thirdly, there are sorne writers who do not focus on the informai sector solely in terms of the labor force employed [Nihan, 1976; Charmes, 1990] but as economie units with productive potential and accomplishments. For these writers, if average incarne were to rise and horizontal growth achieved (i.e. enterprises graduate into medium-scale enterprises) then govemment intervention is necessary to regulate and keep entry in the sector low. How this can be achieved clear. In any case, appropriate actions would require the state to incur costs in the form of compensation to be paid to the otherwise
Thirdly, there are sorne writers who do not focus on the informai sector solely in terms of the labor force employed [Nihan, 1976; Charmes, 1990] but as economie units with productive potential and accomplishments. For these writers, if average incarne were to rise and horizontal growth achieved (i.e. enterprises graduate into medium-scale enterprises) then govemment intervention is necessary to regulate and keep entry in the sector low. How this can be achieved clear. In any case, appropriate actions would require the state to incur costs in the form of compensation to be paid to the otherwise