rural development

The importance of the informal economy in rural regeneration

Posted on

This article first appeared in my weekly column with the Business Daily on June 5, 2016

The informal economy has emerged as a key theme for me this year as a development economist. The informal economy can be broadly defined as economic activity that is not subject to government regulation, taxation or observation. The reality is that although there is a general acknowledgement of the informal economy, there has yet to be a targeted and coordinated analysis of the informal economy in Kenya and I suspect much of Africa. This is not due to the fact that different organisations and businesses in society do not intersect with the informal economy in the both professional and private lives, what seems to lack is a specific effort to delineate between the formal and informal economy in analytical work. Therefore, for example, a company may assess an aspect of agriculture pertinent to their work but will not, while doing the analysis, delineate between formal and informal agricultural activity. And this is no surprise as the informal economy is messy and complex. But lack of focused attention on the informal economy translates into a reality where numerous insights on the informal economy are embedded in general research and data generated for different sectors.


This lack of clarity has therefore limited the extent to which policy interventions can be designed to meet the needs of players in the informal economy who are invariably the poorer and more vulnerable members of society. In my view it is time for a greater attempt be gather data and information on the informal economy and its various sub sectors in order to better understand the features and characteristics of this economy.

This delineation is particularly crucial to unlock the potential of rural Kenya and Africa in general.  In a paper published last year, the International Institute for Environment and Development (IIED) makes the point that in Africa, the informal economy generates up to 90 per cent of employment opportunities in some countries and contributes up to 38 per cent of GDP in others. The IIED piece that specifically looks at the rural informal economy argues that the rural informal economy (economic activities performed by rural populations linked to informal trading and markets) is critical to rural livelihoods. For example, most farmers across Africa rely on informal networks to access their markets and communities diversify their income beyond farming (non-farm work) mostly in the informal sector which accounts for 40–45 per cent of the average rural household income in the region. Further, as non-farm work is associated with higher income and wealth, informal activities may offer ‘a pathway out of poverty’ in rural Africa according to some analysts.


But the informal economy is still viewed as a pariah because it is labelled as inefficient, unregulated, and as IIED aptly states, the informal economy is equated with illegality and thus faces strong pressure to formalise. My view is that addressing the informal economy should not be based on the assumption that formalisation is the best way forward. The reality is that entry into the formal economy is expensive and that goods and services provided in the formal economy tend to be pricier. The informal economy is a key means through which lower income groups, especially in rural areas where there is limited access to goods and services offered by formal institutions, get access to goods and services, and at a more affordable price. Of course there is warranted concern with the lack of regulation of goods and services in the informal economy and the extent to which customers in this economy are exposed to danger, but the response of government and other stakeholders should not necessarily be a push for formalisation.

Since there is a pronounced the lack of presence of formal organisations and businesses in rural Kenya and Africa in general, the informal economy is an even more important player in terms of determining the welfare of rural residents. It would therefore be prudent for actors active in rural Kenya and Africa map the features and characteristics of this economy. The first step should be the use of such data and information to design interventions that increase the productivity, efficiency and safety of activities in the rural informal economy. This may increase the income generating capacity of economic activity in rural areas and translate to great income and access to goods and services for rural populations and regenerate rural areas.

 Anzetse Were is a development economist;