In 1972 the International Labour Organisation (ILO) put forward a premise that the informal sector is, “the non-structured sector that has emerged in the urban centres as a result of the modern sector’s inability to absorb new entrants. With African population set to grow by close to 70% or by close to 450 million people between 2015 and 2035. Of late, there is new “lingo” among the technocrats and a famous phrase now is the “demographic dividend.”
A demographic dividend is quite ludicrous in my view especially since the World Bank’s latest estimates show that on our current trajectory, only about 100 million of the 450 million will be able to find stable jobs. Maybe it’s time we wholly embraced the informal sector we were constantly warned and admonished against by our presumably accomplished primary school teacher.
The informal economy contributes between 25 and 65 percent of Africa’s GDP and accounts for between 30 and 90 percent of total nonagricultural employment. A song sung from the 80s by the Bretton Woods institutions was finding ways to tax this “informal economy”. Why have we failed so appallingly over the years?
According to the latest World Bank Global competitive index report, Africa will see an additional 450 million people added to the population by 2035. I’m no optimist but looking ahead, I would put emphasis on the informal sector to provide jobs. There is a new debate on the horizon though: can the formal and the informal sectors co-exist? Can one be a conduit for the other?
Research from the IMF shows that the size of the informal economy is large in sub-Saharan Africa, especially in oil-exporting and fragile states, averaging 38% of GDP during 2010–14.
This poses countless questions and one would expect the receipts from oil exporters to elevate these economies’ fiscal space and ultimately foster more investment in education and other sectors. Have oil receipts fostered more income inequality, as the case in Nigeria and Angola, and seen the less privileged turn to the informal economy? Another school of thought would easily counter that with an argument that oil producers have seen relatively more unrest given the exploits of the Niger Delta Avengers and the civil war in South Sudan.
But why has the informal sector remained strong? Without a doubt, development economist Michael Lipton’s argument made the most sense. He argued that many African leaders pursued development policies that had at their heart an urban bias, as the city was where the power base generally lay. Such leaders devoted the vast majority of resources toward urban development, to the determinant of rural areas. This is obviously evident in Lagos whose GDP stands at a whopping 131 Billion.
Many still argue that the future of the African continent is in “formalising” the informal sector. Ideally, this would mean policies to increase tax revenues from relatively small household enterprises. Much of the emphasis here would be on fostering productivity gains as opposed to revenue authorities coming up with tax regimes to capture the informal sector.
Before we address the informal sector and tax compliance, let me state that I am a firm believer that we should address the large “formal” players. MTN in Rwanda had to settle tax disputes north of $11 million out of court with the revenue authority as recently as 2015. Shouldn’t we address the million dollar evaders before the welder who aspires to see his child through high school?
We need to embrace the informal sector on the continent. Although the inclusion the informal sector in the tax base is vital to more revenue mobilisation for Africa, we need do this gradually and morph the informal economy into a semi-formal economy and ultimately a formal economy. This will be a journey, not a destination.