Training and Skills

Lastly, the informai sector affects economie development through the provision of training and skills.

It has been estimated that 83.5% of all new entrants into the informai sector are young illiterates or primary school leavers, most of whom are equipped with only the most basic literacy skills which makes them unprepared for direct entry into production. Sorne form of on-the-job training is therefore required of them [Grey-Johnson, 1990]. Apprentices are normally provided with subsistence during their apprenticeship. Often they pay for their training, thereby providing an additional source of capital to informai sector enterprises.²⁰ The payment they make vary by activity, by relationship to the instructor, and by duration of the training. Through the apprenticeship system skills are passed along from one ethnie group and one generation to another, diffusing to smaller towns and villages via markets and entrepreneurial mobility, and, in this way, contribute positively to skills development in the economy [Horton et al, 1992).

lLO surveys generally suggest that over 80 percent of all informai entrepreneurs in Africa acquired training via the informai apprenticeship, and just about 1 0 percent did through the modem sec tor.

20 In Lomè (Togo), apprenticeship fees have become su ch a major ~art of_ the income of sorne of the arti~a~s that their workshops look more Iike vocational training schools than product10n umts. Severa! of the artisan associations (e.g., the hau·dressers) have set mirlimum fees for apprenticeship training (Grey-Johnson, 1990)

28

Their study on the Gambia in 1980 closely confirms these figures by discovering that 86 percent of entrepreneurs in the study sample obtained training informally as against 4 percent who had formally.

Since these studies found educational levels to be very low this explains why much training had not been via formai training sources whose medium of instruction is not one of the local languages.

In general, the prevalence of very low levels of education in informai enterprises has implications for future diffusion of skills. According to the literature, an appropriate training framework ought to be devised to augment the skill diffusion capabilities of the informai sector. Certainly, different sub-sectors require different types of training, but the consensus is that education and training-whatever its form-should be part of the same learning pro cess and are therefore inseparable.

While training focus more specifically on the acquisition of skills, education, on the other hand, enables the trainee/leamer to modify and adapt these skills to different situations. As Hirschowitz put it- himself a pioneering advocate of such a training development framework-training should not focus too narrowly on the acquisition of skills to perform a particular task. If it does, "without any theoretical underpinning (backed by education), transferring that skill to the work place and adapting it to changing work circumstances become very difficult" [Hirschowitz 1993].

2.4 Small-scale Enterorise Development Strategy

Many writers are of the view that, in general the informai sector may serve as a 'seedbed' from which larger enterprises would emerge. However, they also contend that certain factors tend to constrain small-scale enterprises in the informai sector from graduating. Before examining sorne of these constraints, it is relevant to review sorne arguments that these writers use in justifying the expansion of micro and small-scale enterprises as a desirable strategy. They include the following:

29

i) Any successful industrialization must have an indigenous base; expansion of micro and small-scale enterprises in the informai sector would help develop entrepreneurial and managerial skills as a basis for efficient indigenous investment in medium and large-scale enterprises [Steel, 1992]

ii) Because small-scale enterprises tend to be relatively labour-intensive, a strategy to expand the sector is likely to be consistent with income distribution objectives whilst allowing for sustained productivity increases through improvements in technology [Steel, 1992]. This will assist small-scale enterprises to graduate under conditions very much conducive to increased efficiency, as contended by Oyejedi [in Onyeiwu, 1991].

iii) Small-scale enterprises can respond flexibly under difficult and changing conditions because they do not depend heavily on infrastructure, and because their typically low level of technology allows product lines and inputs to be changed at relatively low costs [Morawetz in Steel, 1992]

iv) Formai sector absorption of labour in the Third World will be limited by high capital costs per job and by the diversion of international investment (and aid?) to Central and Eastern Europe.

Indigenous growth will come about through the expansion of small and micro-scale enterprises [Grey-Johnson, 1990; Owoye, 1993].

This review of sorne of the problems and constraints to expansiOn often encountered by small enterprise owners in the informai sector is premised on the argument that that involuntary (horizontal) growth is less desirable than evolutionary (vertical) growth. The latter is an objective operators of informai sector enterprises (in particular those in manufacturing and production) aim to attain.

According to writers such as Biggs et al [1987] and Kilby [1988] the growth of firms from micro or small to medium and larger categories, is not as widespread as might be expected. Both writers biarne this on entrepreneurial and policy bottlenecks that often prevent graduation into larger firms.

Onyeiwu's study which focused more on entrepreneurship reached a similar conclusion. He observed and concluded that the rate of graduation <?f small firms found mostly in the informai sector was "not

30

only unimpressive, cases of stagnation and business failure were numerous" [Onyeiwu, 1991]. The study set to assess graduation problems amongst small enterprises in the informai sector in Eastern Nigeria, relative to stagnated firms. Onyeiwu concludes that entrepreneurs in the former were able to adopt innovative management strategies. ²¹ This includes market surveys as a tool for managing the production process and avoiding the problem of excess capacity, tools "that are not only absent in non-graduated ones, they are also very uncommon amongst microenterprises and small businesses in Africa". His study thus isolates managerial bottlenecks as prevalent among informai producers and as a factor that determines an enterprise's growth prospects. However, managerial deficiency can simply be an end to sets of causes or means. One of these relates to a socio-economic variable namely, the level of an entrepreneur's educational attainment which is usually tao law among informai producers.

It is easy to explain how education can relate to managerial efficiency. Law levels of education simply tend to blur producers' vision to recognize and respond to market niches and advantages for the long-term good of the business, bath in terms of output and productivity, and in terms of surplus-making opportunities for longer-term investment. Thus two of the main problems that can be isolated as affecting firm expansion are law educationallevel and managerial deficiency.

Educational attainment can also be correlated with other factors and variables that would necessarily affect productivity of artisans in the informai sector. Among these is technical training, which is also often described as lacking in the sector.

21 His methodological approach is inspiring. Onyeiwu used longitudinal data covering a period of thirty years to discover which of the firms-interviewed thirty years earlier in fifteen Nigerian cities-had survived in 1991, graduated, stagnated, or died. Field assistants were sent to addressees of the 250 entrepreneurs of micro and small enterprises interviewed by Kilby in 1960. Where an entrepreneur was not physically located, long-term residents in or ~ound the building,. the landlord and others were interviewed about the whereabouts of the entrepreneur or members of his fanuly. On the bas1s of this approach, 23 % of the firms were traced.

31

As the literature points out, often is the case that output of the informai sector is of poor quality and that productivity is low, in part because of inadequate equipment and in part because of an insufficient lev el of technical skills-knowledge of not just management techniques but of production techniques such as those that introduce quality in product design. Where such skills are lacking, there is the likelihood that operating efficiency of microenterprises would be reduced.

Lack of credit and seed financing is also frequent! y cited as the number one constraint that impacts on the productive activity of, especially, the upper-tier informai sector entrepreneurs which require relatively large investible capital and funds. Inspite of this, opinions differ on the extent to which credit is a problem. One school asks: is credit really a limiting constraint on growth of small enterprises, and if so to what extent and in what respect. To this school, factors that suggest that credit is a constraint include, first of all, total dependence of small enterprises on persona! savings ( derived usually from agricultural produce, trade or past wage employment), friends and relatives, informai financial practices, etc.

In the literature, writers observe that, in general, the informai sector faces a discriminatory, hostile and dualistic financial sector or system, constituting, on the one band, the legally regulated part (central banks, commercial banks, near banks, and insurance companies) and, on the other, institutions that are virtually outside the established legal framework but whose participation in the savings-investment process on an informai basis "enables large numbers of small informai business in developing countries to remain in operation" [Chipeta 1993]. Moneylenders, rotating savings and credit associations (ROS CAs) are examples of widespread informai financial institutions about which more is now being discovered.

32

Formal financial institutions (FFis) are usually strict in their insistence for borrowers to provide mortageable collateral or equivalent guarantees to loans, unlike the counterpart sector where there is little or no need for collateral other than perhaps one's verbal promise to repay the loan. Interest rates are high but loans are available quickly, and repayment encouraged by mutual confidence and social pressure (combined with a residual threat of violence in the event of non-payment). Chipeta [1993]

expressively summarizes FFis' attitude as follows: they either underestimate borrower credit-worthiness or overestimate the administration, collection and risk of extending credit to them. And Quarcoo [as summarized in Chi peta 1993] adds in agreement: FFis do not take into account in their cost-benefit calculations, the extemal economies that extension of credit to informa! borrowers would yield to the rest of the economy such as the potential emergence of an indigenous entrepreneurial class and the creation of opportunities for high employment and rising standards of living of communities.

According to many writings, lack of demand is another problem that affect prospects of further growth of informal sector enterprises in Africa. Steel's study [1992] examines the issue more closely and, in his conclusion, he associates falling demand of informal products with increased cost of inputs and equipment that many countries have been experiencing since the period of economie reforms.

Steel noted that, consequently, micro and small-scale enterprises are not able or ready to pass on fully, the increased and high cost of raw material and equipment to consumers in the form of high priees, especially when there is already weak demand and an inflow of competing imports.

Finally, growth of informal sector enterprises is hampered by the regulatory framework for all businesses. Although the extent to which this is so varies from place to place, and among informal activities, the literature suggests that a typical regulatory system has the following elements, all of

33

which affect the informai sector: regulations conceming legal access to property; a license from the state or local authority to function as a business in a given workplace; minimum standards of hygiene for the workplace and for the output of the enterprise ( especially those selling food and drink);

minimum wages and limitations on the firing of workers; minimum standards of physical infrastructure and buildings for housing business premises; national and local taxes on property and income and (usually local) taxes on business permits; and application of formai accounts to enterprise operations.

But whilst concem for informai sector activities and regulations are raised in the literature, two types of question (just mentioned here in passing) are often asked: a) which regulations are economically and socially justifiable (and hence should be continued) and which are unjustified; and b) which otherwise desirable regulations could be suspended as part of an effort to encourage informai sector activities.

2.5 An Overview

Literature on the informai sector has extensively dealt with the problems of identifying an informai sector activity on the basis of numerous definitions. We should not however give up and merely regard the sector as one which is "all things to all men". Importantly, despite the fact that sorne of the definitions reviewed in the literature have sorne notable ambiguities and drawbacks associated with them, we should regard that each one of them is contributing to our understanding of the informality concept. That by the 14th International Conference of Labour Statisticians of 1987, almost seems to come to general acceptance:

"The informai sector consists of small-scale, self employed activities with or without hired workers, typically operating with a law leveZ of organization and technology, with the primary objective of generating employment and incarne for their participants, to the extent

34

these activities are carried out without forma! approval from authorities and escape the administrative machinery responsible for enforcing tax and wage legislation and other similar instruments concerning fiscal matters and conditions of work, they are concealed''²².

There can be many justifications for assisting informal sector enterprises to grow. The review of the Iiterature also tries to identify and review sorne key areas through which the informal sector can affect a country's overall economie development process (See Section 2.3). These and other considerations that follow the section all signify the role of the sector. And finally, the last part of the Chapter discusses sorne of the key constraints identified in other researches and writings that impose threats to enterprise growth in the sector.

22 Statistical Abstract of the Gambia, 1995

35

CHAPTER THREE: RESEARCH METHODOLOGY, DATA AND SCOPE

3.1 Introduction

Due to definitional and classification problems, attempts to measure the size, structure, and other characteristics of informai sector activities, are often fraught with difficulties. This is not surprising as the "raison d'être" of the informai sector phenomenon is to defy observation. In the words of Abumere et al [1998]²³ "the quintessential element of the informai sector is precisely that it defies measurement".

This chapter is divided into two main sections. The first discusses sorne of the methodological issues on which debate still continues, and how sorne of these issues are handled in this study. The next section touches on the 1 research methodology that was used to obtain the data required to satisfY key portions of the study objectives. Specifies about the methodology are discussed under different subsections. This includes the study area and sample selection procedures, the pre-survey and the survey, the survey data variables, data analysis issues and scope of the study.

3.2. Methodological issues

Being a somewhat hidden sector that mainly defies observation as stated earlier, the informai sector is not easy to measure, especially in research where sorne form of measurement is required. The researcher th us faces a number of methodo1ogical concems that are worth y of note.

First of all the researcher finds himself in the midst of continuous debate about how such a diverse '

sector is to be defined; so he despairs the moment he attempts to make one on his own. To date, and

23 Abumere, S.I et al [1998] The Informai Sector in Nigeria's Development Process, Development Policy Center;

Research Report, No.l; p.l5

36

as mentioned in the last chapter, no one definition is universally accepted and none has been free of criticism.

Sorne writers begin their methodological review with a typology of informai sector activities, if only because there are certain categories of informai activities that are not of interest to them [ Abumere et al, 1998].²⁴ Several typologies exist, but two are quoted in this study. The first by Hart [1973, as seen in Abumere, 1998], distinguishes two types of informai sector activities, one which is legitimate, and the other which is illegitimate, with both terms used in their very ordinary dictionary meaning. The second by Feige [1990] classifies informai sector activities as the illegal, the unreported, and the unrecorded.²⁵ An economy, according to Feige, is unrecorded when it causes downward bias in official statistics, and is unreported when the activities therein generate income that should be reported to the tax agencies but is/was not.

It is, as a matter of methodological procedure, required that a researcher propose an operational definition of at least the type(s) of informai sector activities he/she tries to focus on. Guided by the afore-mentioned typologies, the one proposed in this study regards informai activities as legitimate activities carried out in small-sized enterprises but outside the long arms of government. What this would mean is that as far as the government and its agencies are concemed, there is no detailed record of the activities in question, notwithstanding the fact that enterprises carrying out such activities

"operate be fore their very eyes". It also means that the enterprises are themselves unregistered with the tax authorities and worker unions and do not meet tax payment obligations. They also defy

24 Ib.d

1 'p.l3

25 Feige, E. L [1990] Defl.Iling and Estimating Underground and Informai Economies: The New Institutional Economies Approach, World Development, Vol. 18, pp. 989-1000

37

regulations in respect of wages, labour, pensiOns and social security, work, health and safety practices, among others.

After providing an operational definition for the study, a researcher must then proceed to tackle the ali-important methodological question of how to obtain data which is reliable or within tolerable limits of error, from within a sector that is hardly ready to give information. To this end, however, writers have identified different sources and methods from which evidence can be adduced. One is the so-called participant observation method whereby the researcher lives and work with informai sector enterprise operators in order to obtain empirical data on production methods, income and expenditure patterns, apprenticeship and training, work problems and constraints, as well as survival strategies that are employed to stay in operation.

However, the weakness of the method, and which is why it was not adopted in this study, is that only one informai activity can be studied at a time. It is therefore inappropriate to use in a study that covers four different informai sector activities within the manufacturing sub-sector.

Other methods are the micro and macro methods where, in the case of the former, the researcher undertakes an individual survey, or relies on past survey and/or census reports, business and tax records, etc; and, in the case of the latter, on published macro data, such as national population census, to obtain useful secondary information on certain attributes of the informai sector, rural or urban.

As for micro methods, decision has to be made between using longitudinal or temporal data and point data. Whereas point data refers to data collected at a specifie point in time, longitudinal data on the

38

other hand covers a period of many years. Onyeiwu's study helps to demonstrate differences between the two.²⁶

Onyeiwu's study examined graduation problems amongst sorne microenterprises and small businesses in the informai sector in Eastern Nigeria. Using a list of enterprises once previously studied thirty

Onyeiwu's study examined graduation problems amongst sorne microenterprises and small businesses in the informai sector in Eastern Nigeria. Using a list of enterprises once previously studied thirty