informal economy

Why Kenyans and Africans do not to feel economic growth

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This article first appeared in my weekly column with the Business Daily on April 28, 2019

As a development economist, I am often asked why Kenyans and Africans often do not feel the effects of the economic growth of their countries. Last year Kenya’s economy grew at about 6 percent, East Africa’s at 6.1 percent, and Africa’s at 3.2 percent. Yet, many are of the view that incomes continue to be strained and financial stress more accentuated. So where does all the growth go? There are several factors behind the disconnect between economic growth and feelings of economic welfare in Africa.

The first is that, in some countries, while the economy is growing, GDP per capita growth is in negative figures. GDP per capita basically divides the country’s GDP by its total population. Some argue that it’s a useful gauge to determine how prosperous a country feels to each of its citizens. To be clear there are problems with using GDP per capita alone to determine economic well being as it does not account for purchasing power parity or inequality, but it does give a general sense of whether the economy is growing such that each citizen has more when the total GDP is divided evenly. And here Africa has a mixed picture; while most countries are registering increases in GDP per capita, some are not. Some Africa countries have negative GDP per capita growth which means GDP growth is not keeping pace and in some cases, citizens are economically worse off than the years before.

Image result for Africa jobs

(source: https://face2faceafrica.com/article/african-youth-set-benefit-afdbs-25-million-jobs-initiative)

But this is not the case in most of Africa, and certainly not East Africa. GDP per capita has been growing in most of Africa and East African economies are top performers according to some estimates. Kenya has certainly been registering positive GDP per capita growth. So the question is why, even in cases where the economy is growing well, and GDP per capita is increasing, do most Kenyans and Africans not feel these effects? The simple answer is income inequality but in Africa, it is useful to unpack this through the lens of informality.

In Kenya, 83 percent of employed Kenyans are in the informal sector, which contributes about 35 percent to the country’s GDP (highest estimate I have found). Data problems aside, the bottom line is that when 83 percent of employed labour contributes 35 percent to GDP, it means that 17 percent of employed labour contributes to and enjoys over 65 percent of GDP. Thus, profits, income growth and growth in economic prosperity are skewed towards formal labour. And while there is still significant income inequality in the formal sector, the formal sector is far better at being an anchor of economic welfare than the informal sector in terms of wages paid, wage growth, job security, and job quality.

This imbalance is why many do not feel the effects of economic growth. The returns of the hard work and effort of millions of Kenyans and Africans in the informal sector are paltry and keep most at a subsistence level of living. The irony is that despite being the biggest employer in the economy, African governments continue to neglect this sector. The economic welfare of Kenyans and Africans would improve if the informal sector was provided with the concerted support it requires to become a powerful engine of economic growth everyone can feel.

Anzetse Were is a development economist

TV Interview: State of the Kenyan Economy

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On April 5, 2019, I spoke to Rachelle Akuffo of CGTN America about the current state of Kenya’s economy.

Why Africa’s GDP is Understated

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This article first appeared in my weekly column with the Business Daily on July 29, 2018

Last week Ghana announced that it is recalculating its Gross Domestic Product (GDP) based on measurements from 2013 instead of 2006 to more accurately reflect recent activity in the petroleum, communication technology and construction sectors. The rebasing will likely add 30 to 40  percent to the size of Ghana’s economy. The rebasing of Ghana’s GDP is a reflection of how the size of African economies are often understated. This understatement is informed by three factors.

Firstly, the actual number and size of businesses actively operating in Africa and contributing to GDP is unknown. Most African governments do not have the operational muscle to conduct research and analysis on the number of functioning business in the economy, their size, profits, or turnover. This is partly informed by the fact that the private sector in Africa is dominated by informal businesses, most of whom are Micro and Small Enterprise (MSE) primarily engaging in subsistence business activity. The combination of millions of MSEs operating in informality coupled with the lack of data gathering and statistical capacity in African governments to collect business activity data translates to notable inaccuracies in terms of the actual number and size of operational businesses on the continent.

A trader serves customers at the Makola Market in Accra, Ghana.

(source: https://www.businessdailyafrica.com/analysis/ideas/Why-most-African-countries-understate-the-size-of-GDPs/4259414-4687360-apix2iz/index.html)

Secondly, private sector in African tends to understate business size and profit earnings in order to minimise tax liabilities.  Again, African government capacity is limited as African taxmen do not have the ability to ensure all companies are posting accurate tax returns. Most companies on the continent have two books of accounts they keep: the official audited reports that are submitted to investors, tax authorities and government bodies, and the internal books that reflect what is actually going on in the business. Given limited tax surveillance muscle, it relatively easy to dodge tax penalties and, most African taxmen are happy taxes are being voluntarily submitted and thus often do not bother to ensure if profits and tax liabilities are being accurately reported. The effect is again, an understating of how much money businesses are making on the continent.

Finally, there are incentives for African governments themselves to understate GDP size. Dimitri Sanga, ECA Director for West Africa echoes my view that some African countries purposefully avoid rebasing GDP upwards to reflect current realities in order to avoid graduating from low income to middle income countries. Low income status comes with certain perks such as cheap loans, generous aid packages and charitable trade agreements.

Image result for GDP

(source: http://cpparesearch.org/nu-en-pl/domestic-gross-domestic-product/)

In short, evidence seems to indicate that there is more money being made in Africa than is being reported and thus GDPs in Africa are probably higher than what is officially captured. And while some countries will rebase GDP upwards in order to access larger loans and shift debt-to-GDP ratios into favourable terrain, it is up to African governments to determine whether rebasing or deliberately understating GDP is in their national interest.

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

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.

Image result for informal market kenya

(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.

Image result for informal market kenya

(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

 

 

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.

Image result for National treasury Kenya

(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.

Image result for informal economy Kenya

(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.

Image result for Kenya economy

(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.

Image result for Kenya counties

(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