informal economy

Untapped Market Intelligence in the Informal Economy

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This article first appeared in my weekly column with the Business Daily on April 8, 2018

The role of the informal economy, or Micro and Small Enterprise (MSEs) in driving Kenya’s, indeed Africa’s, economy is increasingly being recognised. The 2016 MSME Survey by the Kenya National Bureau of Statistics revealed that the sector contributed about 34 percent to GDP. Furthermore, about 90 percent of employed Kenyans sit in the informal sector. It is therefore a puzzle as to why this sector is not recognised as an expert reservoir of knowledge on purchasing habits as well as consumer and market intelligence in the country.

The reality is that most Kenyans buy and sell goods and services in the informal economy. A report on retail in Africa by Deloitte in 2015 indicated that about 90 percent of retail purchases in Africa are conducted in the informal economy. This must be partly informed by the fact that the sector knows how to continue to meet consumer demands and purchase preferences.  Informal businesses are good at deciphering and interpreting trends then creating goods and services that meet the demand for that trend affordably. This indicates an intelligence not only in anticipating consumer needs, but an innovation capacity that allows the sector to translate consumer desires in products available for sale. An example of this is how furniture makers have foreign catalogues, magazines and pictures of furniture that they can replicate at a fraction of the cost for the domestic market.

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(source: http://nitibhan.com/tag/informal-retail/)

There is often the misconception that the informal sector is only for low income Kenyans; nothing could be further from the truth. Middle class Kenyans rely on the informal sector for everything from food, to fashion, furniture and fun. Going to a local for a drink and meal is common, buying basic food items from the local kiosk is an everyday occurrence and going to markets to buy second hand clothing is commonplace. The informal sector is aware of the fact that consumer demand is informed by global trends and preferences. The ubiquitous nature of smart phones means that young people can see hot trends abroad and demand the same in the domestic markets. Thus, informal businesses have to be able to quickly respond to trends and make hot items available locally. Again, this demonstrates a level of market knowledge in the sector that is often ignored and dismissed by most.

It can be argued that if you want scalable market intelligence to inform product development and marketing strategies, the informal economy is the best place to go. Informal retail vendors have a consistent history of responding to trends, anticipating consumer purchasing habits and converting formal and expensive retail items into something you can take home for yourself. Sadly, most companies do not connect how their own purchases and spending habits are captured in a sector that is neglected statistically and in terms of market research. Indeed, some companies even seem unaware of how they rely on the informal sector to push their own products and penetrate markets.

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(source: https://www.zedbooks.net/blog/posts/women-informal-economy-urban-africa/)

In short, informal businesses understand trends, customer preferences and purchase habits. They innovate to meet retail needs and ensure that consumer demands for goods and services are met affordably and consistently. They are likely the largest untapped reservoir of market intelligence in Africa.

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

 

 

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TV Interview: The State of Unemployment in Kenya

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On March 4, I was part of a TV panel discussing the state of unemployment in Kenya, the concerns, dynamics and recommendations on the way forward.

Priorities for the Next Administration: Fiscal Policy, Informal Economy and Light Manufacturing

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This article first appeared in the Business Daily on November 29, 2017

With election season over, it is time for the incoming administration to develop priority areas for action. There are three core areas that need urgent attention and should form part of the priority plan.

The first issue is fiscal policy where decisive action has to be taken. Kenya has been on a path of unsustainability defined by aggressive growth in expenditure, subpar revenue generation and growing debt. With a debt burden of KES 4.4 trillion, it is important that the incoming government detail a plan that will put the country on a more sustainable fiscal path. The plan should include strategies to reduce overall expenditure, improve the divide between recurrent and development expenditure, and improve the absorption of development funds. Non-priority spending has to be ruthlessly cut, while revenue collection improved. At the moment expenditure is growing at over 14 percent while revenue collection is only growing at about 12 percent; this is resulting in expanding borrowing requirements. Policy action has to be taken to ensure the growth of revenue collection is higher that growth in expenditure. This issue is urgent because both Moody’s and Fitch (credit rating agencies) are considering a downgrade in Kenya’s credit rating due to our debt position. This would have negative implications in that any new foreign debt would be more highly priced. Thus, government must get expenditure under control, reduce borrowing and improve revenue generation, which leads to the next point.

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(source: https://www.capitalfm.co.ke/business/files/2015/10/TREASURY-BUILDING.jpg)

The second point of focus should be the informal economy where 90 percent of employed Kenyans earn a living. The administration has yet to table decisive action to make the sector more productive and profitable. While the ultimate focus should be to pull more informal enterprise into the tax net, at the moment there are limited incentives to formalise. Threats of increasing taxation of informal business will merely push activity in this sector further underground and even spark social unrest. Instead, national government should create programs in partnership with county governments to improve the productivity and profitability of informal businesses. The program should include support to informal enterprise in financial and business management, improvements in access to and use of technology, improve informal business premises, concessionary financing packages and business mentorship. Over the next five years, a focus on strengthening the performance of the sector will create a boost in incomes which will not only increase the spending power of Kenyans, but also put the sector on a path where plans for formalisation become more feasible. Only through such action can the government sustainably expand the tax net and increase revenue collection.

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(source: https://farm6.static.flickr.com/5062/5581243427_2cf2343c46_o.jpg)

Finally, government needs to focus on truly developing light manufacturing, and that can only happen by boosting agriculture. Whether its food and beverages, leather and leather products, textiles and apparel, a solid agricultural base is required to develop light manufacturing. There are two segments of agriculture that need attention. The first is subsistence farming where over 70 percent of rural labour is locked in largely unproductive agricultural activity. National and county governments have to work with farmers to make their farming more productive, improve storage facilities, help with market access and create options for agro-processing and value addition through light manufacturing. The second segment of agriculture is export-oriented agriculture with it fairly productive, dominant in the sub-sectors of tea, coffee, floriculture and horticulture. Government must create and implement a 5 year plan focused on value addition of this sector by linking export farming to local manufacturing and value addition. Linked to this is the textile value chain which desperately needs revival so that local farmers can supply EPZ firms that tap into the AGOA clothing and apparel market. A process of backward integration is required that builds the value chain from cotton farming, to milling and fabric manufacture, and finally textile and apparel product development and manufacture for export.

If government focuses on these three areas with determination and grit, the next five years can put the country on a more sustainable fiscal path, spur formalisation, expand the tax base, create new and better quality jobs, and reorient the country’s economic structure through building light manufacturing. In doing so, the economy will be more diversified, productive, robust and resilient.

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

Leverage devolution to make Kenya’s economy more resilient to politics

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

A few weeks ago the Kenya Private Sector Alliance stated that the business community had lost more than KES 700 billion in just four months of electioneering. This figure was arrived at by costing not only business lost due to disruptions linked to protest and general unrest, but deferred investment decisions as well.  The economy’s performance this year is weaker than last year. The economy expanded 4.7 percent in Q1, down from 5.9 percent 2016, with Q2 at 5 percent, down from 6.3 percent last year. Previous analysis indicates that the Kenyan economy tends to slow down in an election year by about 1.2-1.4 percent. Of the 10 elections the country has had, 7 have been associated with slower economic growth and it takes about 26 months for the economy to fully recover from an election.

While there is warranted concern about the extent to which economic performance is tethered to politics and elections, other dynamics in the country have also negatively informed growth this year. These include the drought which led to a contraction in agriculture which constitutes about 30 percent of the economy. Additionally the interest rate cap negatively affected the financial sector which constitutes about 10 percent of the economy with knock-on effects felt in a contradiction in access to credit particularly to SMEs. Thus even without the effects of the election, at least 40 percent of the country’s economy was struggling this year.

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(source: https://softkenya.com/kenya/wp-content/uploads/2011/11/Kenya-Economy.jpg)

That said, there does need to be an examination as to why economic performance during election years tends to be more muted than would have been the case if there were no election. Clearly key investment decisions from the private sector tend to be deferred in an election year while any decisive action in policy is deferred by government. The question now becomes what can be done to make the economy more resilient to politics and elections such that Kenyans are buffered from related uncertainties. Leveraging devolution with a focus on county governments and county private sector is key to achieving this.

The first step in building resilience is by encouraging a fundamental shift in the mind-set of county governments. At the moment county governments seem to view themselves primarily as expenditure units, not development units. Rather than obsessing over what allocations have or have not been made to them, county governments have to enter a mind-set where every penny is targeted at ensuring they drive economic development in their counties.

Secondly, county governments ought to listen to concerns of the private sector in their counties. Kenya’s private sector is dominated by informal businesses as 90 percent of Kenyans are employed in this sector and rely on it for their income. Yet the informal sector does not truly feature in county development documents, this needs to change. County governments, perhaps with the support of the Ministry of Trade ought to create a robust informal sector strategy that works to address structural weaknesses that compromise the sector’s robustness. These could include piloting formalisation schemes, improving technical and business management skills, and creating financial structures that provide patient capital to informal businesses. The aim should be to stabilise informal businesses so that they continue to perform even during difficult political times.

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(source: https://i1.wp.com/kenyanlife.info/wp-content/uploads/2016/11/Counties-in-kenya.png)

Finally, county fiscal policy must be deliberately development oriented. Dockets such as agriculture, health and devolved education functions ought to feature prominently in county government allocations. By investing in food security through agriculture and human capital through education and health, counties can play a powerful role in building a population that is healthy and educated, and thus better able to identify and exploit economic opportunities that build income.

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

Is the mall economy in Kenya viable?

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This article first appeared in my weekly column with the Business Daily on September 3, 2017

Over the past few years the hype of the emerging African middle class has made headlines across the world. The Harvard Business Review (HBR) makes the point that consumer spending power in Africa has risen from USD 470 billion in 2000 to over USD 1.1 trillion in 2016. In Kenya we have seen investors angling for a piece of that pie evidenced in the rise the mall economy. Kenya has about 53 malls of which about 30 are in Nairobi; another 19 are under construction. This mall obsession begs the question as to whether the aggressive growth of mall space is sustainable. HBR states that some multinational companies (many of whom sell products in malls) are finding that their business in the region is underperforming. In a survey of 20 senior executives working in Africa, 6 said they struggled to hit revenue targets. So, what’s going on?

(source: https://upload.wikimedia.org/wikipedia/en/8/86/Sarit_Centre.jpg)

There are two sides to this story. On one hand, yes it’s true that growing incomes have increased spending power and some of that will be directed to spending in malls. Some consumers prefer the setting and security of malls as they can let children wander freely, buy items that probably cannot be found elsewhere (think golf equipment or high quality makeup) and enjoy the variety of products on sale in a mall space. Also as Johnson Nderi from ABC Capital points out, supermarkets in malls do well because of the convenience, variety and relative affordability of goods offered there. There is also the Kenyan customer who enjoys the exclusivity of the mall experience and feels that money spent in a mall is money well spent because the experience simply cannot be found anywhere else. Ergo, demand for shopping malls will continue to exist.

On the other hand, according to the Deloitte’s 2015 African Powers of Retailing report, approximately 90 percent of retail transactions in Africa occur through informal channels. Why is purchase in the informal economy so strong and how does this impact malls? There are several factors that inform purchase in the informal economy; the first is quality and variety. For example, most Kenyans prefer getting fresh food items from informal open air markets, not supermarkets in malls because there is a feeling the produce bought in open air markets are fresher and thus are of better quality. Most Kenyans buy clothes from informal second hand clothes vendors because the variety and quality of products on offer there often cannot be matched by shops in malls at that price point.

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(source: dailytimes.ng/wp-content/uploads/2016/08/DSC_09283-500×332.jpg)

This leads to the second issue which is pricing; malls have underestimated how sensitive Kenyans are to value for money. Kenyans don’t see why they should pay for expensive mall rent added to the purchase price of goods bought in malls. Why are we paying for the rent of stores in shopping malls? Kenyans are also ingenious in getting value for money. For example, Kenyans prefer to search online for furniture or go to a furniture shop in a mall and then go to an informal carpentry outfit to get a replica made at a fraction of the cost. Why pay the full mall price when there are alternatives? This purchase psychology eats into the appeal of shopping in malls.

Unpacking the spending habits of the African middle class and the psychology that determines that spending is complex. Sadly an oversimplification of this complex mind may be leading to some poor investment decisions.

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

How Kenya can reach Vision 2030 GDP goals

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This article first appeared in my weekly column with the Business Daily on July 2, 2017

Kenya’s annual GDP growth rate has been ticking along steadily at between 4 to 7 percent over the past five years. At no point has it hit the Vision 2030 target of 10 percent. Why not? Was Vision 2030 a pipe dream littered with deliberately illusory goals and targets? Why has the 10 percent target not been reached, and how can this be changed? There are three factors that can unlock the country’s economic growth at a fundamental level in both the long and short term.

The first is the long term issue of agriculture. The agriculture sector is a conundrum; on one hand Kenya’s agricultural sector is very efficient and profitable. Kenya is one of the leading exporters of black tea in the world, and the country’s floriculture and horticulture sector are important economic players in the sector. On the other hand, the country continues to struggle with food security as the maize price dynamic has illustrated. The ILO makes the point that the agricultural sector employs 61 percent of Kenya’s workforce, yet only contributes 30 percent to GDP.Related image

(source: https://agra.org/news/wp-content/uploads/2016/03/1-15062015071154.jpg)

This conundrum can be rectified through a multi-pronged approach that links productive sectors to less productive ones, more effective deployment of agricultural subsidies to farmers (particularly small holder farmers), and the revival of technical skills transfers to farmers at county and ward levels. Doing so will allow the labour locked in the sector to enter profitable activity either in agriculture or other sectors.

The second factor is the interest rate cap which is an overarching, hopefully short-term, constraint to meeting the 10 percent target. Earlier this year the World Bank made the point that Kenya faces a marked slowdown in credit growth to the private sector. At 4.3 percent, this remains well below the ten-year average of 19 percent and is weighing on private investment and household consumption.

Part of this massive slowdown can be attributed to the interest rate cap which has compromised two fundamental levers that support economic growth: access to credit and monetary policy. The interest rate cap has engendered a contraction in liquidity to SMEs in particular, essentially slowing down the country’s economic engine. Due to the cap, SMEs are unable to get the liquidity they need in order to expand and generate more jobs as well as income. The second lever compromised by the interest rate cap is monetary policy, reducing its ability to buffer Kenyans from economic volatility. With inflation standing at 11.7 percent in May, the cap has made it almost impossible for the CBK to step in with remedial measures such as raising interest rates as the consequences of doing so are unclear. Thus, in the short term, the interest rate should be reversed so that monetary policy can play the role it ought to, and robust credit access is restored to Kenyans.

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The third factor is the informal economy which is not only important for economic growth but also engendering equitable growth. 90 percent of employed Kenyans earn a living in the informal sector, yet it continues to be neglected. Too much of the country’s labour is locked in micro-businesses with low levels of productivity, too inadequately skilled and resourced to drive the country’s equitable growth. Thus financial, skills and technological resources ought to be directed to the sector to catalyse the ability of informal businesses to graduate into authentic profitability, sustainable job creation and robust income growth.

Anzetse Were is a development economist; anzestew@gmail.com

 

 

How to rev up informal industry in Kenya

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This article first appeared in my weekly column with the Business Daily on May 28, 2017

The creation of high quality employment for Kenyans is a development priority for the country. Unfortunately, an increasing number of Kenyans are finding employment in the informal economy and there is growing informality in job creation. In 2015, 83 percent of employed Kenyans sat in the informal economy, in 2016 that jumped to about 90 percent.

According to the World Bank, labour productivity in Kenya is significantly higher in the formal than in the informal sector. Labour productivity, as measured by sales per worker, is higher in formal firms and thus unsurprisingly, more productive firms pay higher wages. This means the informal sector does not truly generate wealth for the 90 percent of Kenyans employed there. Additionally, in the formal manufacturing sector, job security is relatively high, with more than half of employees holding a permanent job. Contrast this with the informal sector where jobs tend to be seasonal with no benefits, poor working conditions, little social protection and low wages.

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(source: http://www.mediamaxnetwork.co.ke/wp-content/uploads/2015/07/Jua-Kali-artisans-at-work.jpg)

However it is important to note that within the informal sector, the manufacturing sector is the most productive. According to the World Bank, informal manufacturers register more sales per worker than both informal agriculture and services; the furniture industry performs particularly well. In terms of firm growth, again, informal manufacturing leads where 31 percent of manufacturing firms experienced expansion in the past 3 years, compared with 24 percent of services firms.

Thus given that informal manufacturing is both the most productive and the sector expanding the fastest, why aren’t these features correlated with income and firm growth, and the creation of more jobs? This conundrum can be understood by unpacking three structural factors that work against the sector: capital, skills and business environment.

In terms of capital, internal funds serve as a source of financing for working capital for 86.8 percent of informal firms. Mainstream financiers, MFIs included, are reluctant to lend to the informal sector. Secondly, informal manufacturers tend to be inadequately skilled in terms of technical skills (i.e. carpentry, welding, use of technology etc), as well as financial and business management skills. Thirdly, informal firms work in a very difficult business environment. They have limited access to land and are targets for bribery and corruption; 60 percent of informal firms report harassment by government officials. The business environment is particularly onerous for informal manufacturers who work in very congested and dilapidated shacks with no protective gear, no water and sanitation systems, unreliable electricity and lighting, and no security provisions.

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(source: http://www.businessdailyafrica.com/image/view/-/1048826/medRes/211419/-/lf43yuz/-/Bd-SMEJuaKali.jpg)

All these factors explain why many firms remain informal and never scale and formalise and thus are stuck in a rut of low productivity and profitability. That said, informal manufacturing is a bright spot in the informal economy and thus can be the starting point for interventions aimed at increasing profitability and productivity. By addressing the three factors of capital, skills and business environment, informal manufacturers which are already star performers in the informal economy, can be an avenue for creating better managed business that generate wealth and employment for the country.

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