The large informal sector in African economies communicates a demand-supply equation for entrepreneurs that promises profit through hidden opportunities in all facets of economic activity. From cross-border trade, the siphoning of oil pipelines, pushing knock-offs, road-side hawking, small arms trafficking, peddling second-hand vehicles from Europe and vending traditional medicine, Africa’s ‘shadow economies’ are extensive. While some engage in it merely to survive and others do so to further business, the informal sector can be understood as both legal and illegal production and consumption of goods and services that purposively circumvent State detection and regulation.

This CAI paper explores informal economies in Africa and the market opportunities they represent. Coupling this with socio-economic problems and structural logjams, new avenues towards development and growth are unearthed. By targeting the basic economic rationale of this sector, empowering those involved therein and assisting in formalising it, this paper shows how the informal sector represents a ‘self-help’ case that solves the most persistent economic issues in Africa.

Informal economies and Africa

If one hazards an eclectic and succinct definition of an economy, it might be said to be the structural conditions of aggregate economic activity within a state.⁽²⁾ As such, one studies production, distribution and consumption, which highlights choices made regarding the use of limited resources and unlimited desires.⁽³⁾ An informal economy, or ‘shadow economy’, is consequently defined as unregulated economic activity; not monitored, taxed or regulated by law.⁽⁴⁾

Sub-Saharan Africa, tentatively considered as an economic, analytical aggregation, has a particularly large instance of informal economic activity. The informal section accounts for 38.4% of gross domestic product (GDP), or US$ 242 billion,⁽⁵⁾ while employing 78% of the active population.⁽⁶⁾ By 2015, the production of the informal sector could reach US$ 597 billion if its share in the economy remains unchanged.⁽⁷⁾ Furthermore, the changing demographics of Africa, characterised by a burgeoning youth segment and urbanisation, will affect the informal sector as the number of economically active people seeking employment increases.⁽⁸⁾ A segment of the informal economy also overlaps with the ‘black economy’, where business is conducted unofficially, often because of its dubious legal slant.⁽⁹⁾

Traditionally, informal economic activity is explained by the simple need to survive, the consequent failure of the formal sector in some respect (i.e. weakness in the quality or quantity of public goods and services), to avoid taxation and the nature of the market and labour regulation.⁽¹⁰⁾ This represents a poignant problem for Africa: The lack of capacity.⁽¹¹⁾ The State’s deficient capacity to ensure equality and equity in terms of taxation, service providence and economic regulation are structural problems and inhibitors to growth, development and wealth generation.⁽¹²⁾ To elaborate, policy, administrative institutions and the law are tools that Government can use to optimise economic activity and leverage important industries. This is especially true for industrial policy, tax policy and ensuring bureaucracies serve the political collective. These State institutions may fail to serve the people, for example through politicking, cadre deployment and bad governance. In this case, the defective and dysfunctional structures of the State detract from its capacity to fulfil its normative, constitutional goal.⁽¹³⁾ The idea of an informal economy communicating State failure expounds the possible distrust of the Government’s ability to ensure a fair environment for business. This in turn bespeaks corruption and bad governance. Bad governance has then been isolated by analysts as a salient constrictor of growth and development.⁽¹⁴⁾ A shadow economy thus articulates through action what happens outside the sun of the State, serving as a diagnostic.⁽¹⁵⁾

Yet, what the informal economy also illustrates is where and how, in the economy-as-market, people have adapted to cater (read ‘supply’) to the demands of the populace.⁽¹⁶⁾ Within this demand-supply dynamic, one finds opportunities not only within the market but also in formalising the informal. Attendant to effectively organising a market, one reveals indirect opportunities linked to the supply side, as distribution problems remain a concern for Africa.⁽¹⁷⁾ This realisation can lead to a perspective that sees supply solutions within Africa’s socio-economic problems, bringing to the fore a set of strategic lenses with which to view Africa as a growth market for entrepreneurs. And it is entrepreneurship that is proffered to be one of Africa’s greatest hopes for economic success.⁽¹⁸⁾

New opportunities in old markets

All informal economic activity represents markets insofar as they supply human desires by utilising resources.⁽¹⁹⁾ Associated opportunities exist along a spectrum of activities, starting at harnessing consumer trends, organising the market, servicing the market and marketing the market, to the more controversial opportunities of bringing the black market into the light of the formal sector.

Consumer trends, within the ambit of this paper, are important in appreciating the clientele of the informal and black markets. Buying second-hand clothing, repairing vehicles or other machines off the books, buying food from unregistered stalls, using knock-off products and utilising ‘underground’ services, suggest that desires are not always backed by purchasing power for the brand-new good or service. Alternatively, veritable demand is present (desire and purchasing power) but for specific product types.⁽²⁰⁾ Despite being often termed the ‘bottom of the pyramid’,⁽²¹⁾ this demographic represents a market in that it still represents consumers. Their consumption patterns and trends are simply different. Unilever has been successful in understanding this. For example, Unilever recognised that daily amenities and household products bought by the middle and upper classes can be sold to the bottom tier by being packaged in smaller, affordable pieces.⁽²²⁾ Then, if one looks at consumer trends in informal cross-border trade, in South Africa for example, the most popular products are: clothing, accessories for apparel, entertainment media, electronic goods, households (linen and bedding), building material and home decor.⁽²³⁾ 67% of these informal buyers plan to take goods back to their respective countries for themselves and for family, while 72% intend to resell the goods once back home.⁽²⁴⁾ In this one case, a materialisation of informal entrepreneurs solves demand-supply problems in their respective countries. The two reasons most cited as inhibiting formal trade are structural problems: costly and tedious regulation along with bureaucratic interference and corruption.⁽²⁵⁾ 

Organising the market refers to giving the target market a structural coherence, integrating it with the formal economy and thus ‘formalising’ it. Difficulties may arise because one is often working against the rationale that has kept a certain sector of the market in the informal sector, which is also a problem in bringing proper black market activities into the formal sector. Part of formalising the informal and organising markets is seeing socio-economic problems as opportunities for business and innovation.

Medicine and education represent two cases in point. The shortage and lack of these two services not only represent opportunities in themselves but also communicate public-private partnerships because of their nature. Malaria, diarrhoea, sexually transmitted diseases and small infections can all be easily treated.⁽²⁶⁾ Yet, patent laws, high costs and trade barriers often prevent access to the solutions.⁽²⁷⁾ As a consequence, people resort to cheap medicine, often past the expiry date, from China and India.⁽²⁸⁾ The market solution thus relies on overcoming the economic and political barriers to realising these solutions and accessing effective generic drugs. Once the political will is mustered to overcome the political hurdles then the market will be opened for innovation and entrepreneurship. On a related note, human resources (i.e. human capital) also inhibit not only efficacy and efficiency but, by extension, growth and the desire to invest in Africa as well.⁽²⁹⁾ Finding the required skills for sectoral specific growth is often cited as a problem in Africa. Education (especially in skills training) thus represents a direct and an indirect opportunity. Firstly, by targeting the shortage of skilled labour, which ties in to the issue of human capital in Africa, one fills a public service gap, solving a socio-economic problem. Indirectly, by ameliorating the main socio-economic problem one opens up the opportunity, through employment of a more skilled and educated workforce, for an increasing segment of the population to be more economically able and active in the formal sector.⁽³⁰⁾ Again, the phenomenon itself (skills shortage) and the resulting growth in alternatives (rise in private schools) serve as a diagnostic of the State’s lacking will and capacity.⁽³¹⁾ Instead of fighting the trend or overstretching budgets to meet certain requirements, a Government might rather facilitate education and training by putting policies in place to make it easier for the private sector to assist in alleviating these serious socio-economic problems.⁽³²⁾

Servicing the market consists in assisting the informal market to be more efficient and effective, increasing opportunity, and thus allowing for a shift to the formal sector (by making an originally informal activity viable in the formal sector). A common sight in South Africa is the rundown pickup being overloaded with consumables outside Makro or Trade Centre (South Africa’s equivalents of Walmart), whence the trek is made amidst smoke, leaking oil, screeching gears and a stuttering engine back to rural areas where the goods are sold from small spaza shops, or even resold to be sold from small road side stands outside schools, train stations and taxi ranks.⁽³³⁾ None of this ‘officially’ happens apart from that first initial sale, yet each step represents economic activity. What this one case represents is essentially a gap in the supply chain, nonetheless solved by the informal market. This case also represents opportunities in formalising distribution networks. Business opportunities in organising supply chains and distribution also have the effect of allowing products to reach more people. In Africa, where infrastructure and access to markets are serious business inhibitors, harnessing the informal sector to increase exposure to products and services is one way of growing a business. Concomitantly, the chance exists to bring more activity into the formal sector as business activity increases in scope.⁽³⁴⁾

Marketing the market is achieved when one takes traditional products and services unique to a country or culture of any social collective and ‘brands’ them. This includes bringing the informal into the fold of the formal, also entailing a veritable product hunt. From traditional medicine, to food and services, Africa is full of exotic goods and services that can fulfil a niche market and indeed developed ones. Rice milk, coconut oil, coffee passed through the digestive system of small rodent (Kopi Luwack coffee), soya milk and acupuncture are all fashionable consumables or services that boost exports.⁽³⁵⁾ So what about African palm fruit oil, traditional balms and healing herbs - reed rat and ‘African spinach’? Africa is full of exotic products that can be packaged and branded for markets in both the developed and developing world, often simply because of their originating locality.⁽³⁶⁾

Bringing hard-case black market sectors into the formal sector is, on the other hand, not always possible, as they often entail criminal activities. Yet, even this reveals structural deficits on the part of the State. The illegal trade in small arms exists partly because of the Government’s inability to tackle insurgent, terrorist or criminal organisations, illustrating a shortage of will and capacity. It is hardly irrational for a citizen to buy a weapon on the black market if there is no State security structure upon which he can depend.

In Somalia in 2004, when there was neither Government nor governance, the country epitomised a ‘failed state’. Al-Shabab, an Islamic youth movement, filled a vacuum left by the State.⁽³⁷⁾ They provided social assistance, security, employment, education, order, justice and structure to communities.⁽³⁸⁾ However, soon they were not filling the vacuum but exploiting it: They became a law unto themselves with theological Islamic goals.⁽³⁹⁾ Every state has security requirements that are backed up by capacity, which needs to be supplied.⁽⁴⁰⁾ The products required though must be differentiated in terms of the market and the operational environment. This is why cheap and basic military products from China and Pakistan may be more apposite for Africa’s strategic needs and operational reality. The same is true of capital required for manufacturing purposes. Equipment must fit the production systems of Africa, not the high-tech and expensive industry of Europe.⁽⁴¹⁾ Leapfrogging using existing technologies is possible but they must then be adapted to the African market and its capacity. That is economic innovation.⁽⁴²⁾

On an equally controversial note is the reality of poaching. Not only are animals poached to feed people (Africa is a hungry continent) but to supply black markets in Asia.⁽⁴³⁾ As politically incorrect as it may sound, legalising the sale of certain of these products makes economic and conservational sense: An entire market is brought under the scrutiny of the State, it is commercialised and privatised so the incentive is there to keep it sustainably profitable. The scimitar-horned oryx, addax and dama gazelle were saved from extinction and now exist in healthy numbers purely because private concerns commercialised them.⁽⁴⁴⁾ If one gives something a commercial value, there is an incentive to preserve the proverbial goose that lays the golden eggs.⁽⁴⁵⁾ While part of the solution undoubtedly lies in educating the demand segment of this market, one is faced with the difficulty of changing a culture. When a workable and viable market solution exists to ameliorate an environmental problem, it becomes a cost-benefit analysis with ethical implications.

There are, however, costs to formality.⁽⁴⁶⁾ Taxation, administrative costs and bureaucracy are all costs that deter otherwise successful entrepreneurs from moving into the formal sector. Fulfilling or living up to idiosyncratic labour regulations is another hindrance.⁽⁴⁷⁾ The urgency of the matter is recognised in trade, as trade facilitation and eliminating non-tariff barriers are cited as two of the most salient issues to be addressed.⁽⁴⁸⁾

Conclusion: Freeing markets, from enforcement to empowerment

The informal sector can alleviate socio-economic tensions, create self-employment and reduce poverty. If this is the initial view one takes, then a fresh economic perspective has already been achieved.⁽⁴⁹⁾ Yet, the binary thinking of ‘formal versus informal’ is not helping an issue compounded by structural problems.⁽⁵⁰⁾ While the ideal would be to empower the informal sector and facilitate its entry into the formal sector, the emphasis has been on increasing regulation and attempts at enforcement, which only empowers an already swollen, inefficient and corrupt bureaucratic class.⁽⁵¹⁾ Evidence has shown that decreasing the regulatory laws, increasing efficacy and improving the business environment shrink the informal sector.⁽⁵²⁾ The legitimacy of a State can rest on its ability to ensure not only well-being but increasing wealth-generating capacity in a world wherein the power-modality is ‘competitiveness’, accentuated by globalisation. Succinctly, an issue is the State’s ability to create opportunity.⁽⁵³⁾ It is exactly the lack of opportunity within the formal economy that drives people into the shadow economy.⁽⁵⁴⁾ It is also the lack of opportunity that fuels the radical, yet euphemistically termed ‘Economic Freedom’ campaign of the African National Congress Youth League in South Africa.⁽⁵⁵⁾ The message for Africa and for business people is succinct: By empowering and not simply enforcing, markets can be freed and therein find the holistic wealth generating capacity Africa deserves.⁽⁵⁶⁾

Written by André Dumon ⁽¹⁾

NOTES:

(1) Contact André Dumon through Consultancy Africa Intelligence's Industry and Business Unit ( industry.business@consultancyafrica.com).
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(3) Ibid.
(4) Becker, K., ‘The Informal economy’, Swedish International Development Cooperation Agency, Department for Infrastructure and Economic Co-operation, 2004.
(5) World Economic Outlook Database, International Monetary Fund, 2012, http://www.imf.org.
(6) Buehn, A., Montenegro, C. and Scheider, F., ‘Shadow economies all over the world’, The World Bank, Development Research Group, Policy Research Working Paper 5356, 2010, http://www-wds.worldbank.org; ‘Size and significance of the informal economy’, Women in Informal Employment: Globalising and Organising, 2012, http://wiego.org.
(7) Ibid.
(8) Buehn, A., Montenegro, C. and Scheider, F., ‘Shadow economies all over the world’, The World Bank, Development Research Group, Policy Research Working Paper 5356, 2010, http://www-wds.worldbank.org; ‘Le secteur informel en Afrique’, Africa-onweb, 2012, http://www.africa-onweb.com.  
(9) ‘Black economy’, Financial Times, Lexicon, 2012, http://lexicon.ft.com.
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(24) Ibid.
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