Neglect of the informal economy perpetuates income inequality

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This article first appeared in my weekly column in the Business Daily on February 12, 2017


The Gini Coefficient (GC) measures income inequality where a value of 0 represents absolute equality and 100 absolute inequality. Countries with high GCs have a very wide gap between the richest and poorest while those with low GCs are more income equal. Countries with the lowest GC and thus are the most equal are Norway, Australia and Switzerland; the most unequal are Niger, Congo and the Central African Republic. As you can imagine Africa performs very poorly with regards to income inequality; the least unequal is Seychelles which is 71st. Kenya is 147th out of 187 countries assessed, with a score of 47.7. While the GC is not a perfect measure, it does have an indicative quality that helps countries get a sense of where they stand with regards to the levels of income inequality when compared to others.

There is a link between informality and inequality; a study by the University of Bath (UoB) found that high degree of inequality leads to a bigger informal sector. This is not a surprise for those who live in Africa where income inequality prohibits millions of Africans from entering the formal market or accumulating wealth due to a number of variables. Firstly, most informal workers are poor and most of the working poor are informally employed. Most informal workers are without secure income, employments benefits and social protection. This is because, as the UoB study argues, the activities of informal firms are often hidden from public scrutiny and not subject to labour standards such as minimum wages, decent and non-hazardous working conditions. Workers in the informal sector are vulnerable as they are paid less than formal workers and do not have benefits such as health insurance or even workplace insurance in the event of an debilitating accident at work.

Image result for jua kali

(source: https://softkenya.com/directory/wp-content/uploads/2013/07/jua-kali-industries.jpg)

Secondly, the informally employed tend to have lower education and rates of literacy and tend to have lower wages. According to the ILO, wages are on average 44 percent lower in the informal sector. This explains why informality often overlaps with poverty. Additionally informal firms usually do not have the business and financial management skills, or sales and marketing skills to drive the performance and management of their businesses; as a result they tend to be chronically poorly managed. Thirdly, informal firms often are denied access to formal credit lines and thus cannot improve or expand. These factors link informality to poverty as millions do not have the skills to improve business performance and are unable to access credit lines that could do the same; thus they are stuck in a rut of poverty and informality.

An additional means through which informality and inequality are related is linked to the fact that because those who work in informal sector tend to be the poorer segment of the population, they often cannot afford access to goods and services via formal channels. The most obvious means through which this is demonstrated is with regards to housing and shelter. Informal workers often work and live in informal structures of very poor quality. They live and work in structures that pose a risk to their welfare. With regards to education, if children are not absorbed into the public education system, they often attend informal schools with poor facilities and where teachers may not even be formally trained. The same applies to access to health services; while there are some good clinics often run by religious groups or non-profits in areas of high housing and business informality, millions of low income people access healthcare through informal channels such as unregistered clinics and pharmacies. This exposes them to counterfeit drugs and unlicensed health care workers.

Image result for informal school kenya

(source: http://www.mediamaxnetwork.co.ke/wp-content/uploads/2016/02/Children-listen-to-their-teacher.jpg)

Given that income inequality and informality are related, it is important that the continent begins take the informal sector seriously and provide structures that support it. Interventions should not only aim to improve the quality of goods and services deployed through informal channels, informal businesses ought to be provided with the technical and financial support they need to truly graduate out of poverty. In supporting the informal sector, Africa will better bridge the gap between rich and poor.

 Anzetse Were is a development economist, anzetsew@gmail.com

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