Informal sector plays a pivotal role in the economy; however, they are often excluded from formal market access.
This sector faces cyclical challenges, an undocumented job means, no job security, or income security, banks deem such uncertain cash flows as high risk and therefore exclude them from various essential services to take a loan to expand a small business.
There is a need to also recognize the significance of the informal sector in the development process and with particular reference to the economy in terms of income generation and human development to re-orientate more emphasis on the informal sector.
The formal sector activities appear not to have resulted in any significant changes over the decades regardless of the development strategy or strategies that have been tried out. It is also worth to note that the informal sector in most cases bears the impact of any negative fallouts from badly formulated and/or badly implemented macroeconomic policies designed primarily for the formal sector.
The sector is considered crucial to understanding the relationship between trade, growth and employment generation in the economy. In order for the government to achieve its aims or to achieve successful implementation and gain economic benefits from the informal sector, it must support the surviving activities, especially those which have potential for economic growth to enable the micro-enterprise to accumulate capital through substantial productivity gains. However, the problem we have to critically consider and pay serious attention to is non-compliance in the informal sector due to the nature of their activities.
Non-compliance with business and labour laws in the informal sector is one major problem and needs the progressive application of labour laws and standards, beginning with the most viable enterprises. However, the fundamental requirement should be to ensure compliance with basic human rights concerning freedom of association, freedom from forced labour and child labour and freedom from discrimination.
Workers’ protection as a goal of the informal sector to link with taxation and social security is very crucial. The development of practical guides and innovative measures, instead of legal protection and law enforcement, is the preferred line of action to improve working and employment conditions through enhanced occupational safety and health and social security coverage.
The employment issues in the informal sector should also look outside the sector to promote employment-intensive infrastructure policies in urban areas. Firstly, job-creation response to rising urban poverty levels, declining employment opportunities in the modern private and public sectors and the astonishing expansion of the informal sector.
Action on the informal sector requires knowledge of the scope and structure of the informal sector, and therefore requires systematic data collection and analysis.
The national statistics systems are designed in such a way that they could not adequately capture or describe the economic or employment structure of the informal sector. The statistical agency must be designed in a way that it can have accurate knowledge.
For example, mixed household and the enterprise surveys methodology proved to have many advantages over labour force surveys and establishment surveys, as labour force surveys cannot provide information on productivity or income generation, while establishment surveys tend to capture only the visible enterprises.
Secondly, due to the substantial seasonal variations in the level of activities, data collection should be spread over a reasonably long period, which the statistical agency is probably not designed to do so.
Thirdly, intensive dissemination of information about the survey through informal sector organizations could reduce the survey’s non-response rates among informal sector operators and workers.
Fourthly, hope for future assistance is a factor which motivated many informal sector operators to answer survey questions; fifthly, lack of proper follow-up action smashes the expectations raised: as a consequence, non-response rates are likely to increase in future surveys and lastly, survey results should be used as a basis for the design and implementation of support action programs and technical cooperation projects.
The principal approach for small enterprise development focuses on unleashing the obscured potential of the informal sector to provide income and create jobs.
Inherent deficiencies in capital, management skills and technology, unequal access to factor and product markets, as well as restrictive regulatory frameworks, are the major impediments involved.
In order to overcome these constraints, especially unequal access to credit, many micro-entrepreneurs voluntarily choose to enter into various kinds of arrangements, for example credit arrangements which are not suitable for them.
This is often the case in particular, with women, who choose to operate out of their homes. This dependency enhances the vulnerability of those in the sector, as the contracting relationships are in many cases not governed by any regulations.
Support strategies can aim at improving access to credit, technology, training and marketing in order to strengthen the productive capacity of micro entrepreneurs, small producers and artisans.
At the grass-roots level, the major strategy in this regard can create group-based self-reliance schemes at the national level by strengthening of national programs and institutions to target support services more effectively to the informal sector and building and strengthening alliances and networks among small producers’ and micro-entrepreneurs’ organizations at the national level.
Informal sector reforms and institutional framework
Strategies for building an institutional framework of targeted support consist in strengthening the effectiveness of national programs targeted at micro-enterprises and informal sector units. This modality involves action at the national level and the design of general policies and strategies for the development of the target sector or industry.
As regards access to credit and finance, action at the macro-level aims at linking informal group-based mutual credit schemes to the commercial banking system.
The effectiveness of such programs strongly depends on their targeting mechanism, that is, how the target group is defined and selected, and, in the end, actually reached by the programs.
Given that the informal sector is highly heterogeneous, selective targeting is even more critical and difficult in informal sector programs than in other targeted programs.
The sustainability of the economic benefits resulting from targeted programs will partly be determined by the effectiveness of the network of support institutions assisting the target industry and, equally importantly, by the successful implementation of specific complementary national policies aimed at creating an improved environment to stimulate the growth and expansion of micro-enterprises.
In order to assess the effectiveness of the network of support institutions, the criterion is whether their technical capacity and performance improved as a result of the technical assistance provided to them within the framework of the strategies adopted. Existing information from evaluations of institutional capacity-building projects is, however, inadequate and does not provide sufficiently solid evidence of the final outcome of rendered assistance.
Most importantly, institutional support strategies must look at setting up and developing networks and alliances among informal sectors, and among governmental and non-governmental institutions concerned with the informal sector. Attention must be paid to the evolution and expansion of grass-roots organizations and their increasing need for consolidation and the increasing demand for technical assistance to develop strategies and methodologies.
The primary functions of such networks are often the exchange and dissemination of information, the consolidation of experience, the harmonization of concepts, strategies and methodologies, and coordinating activities.
The creation and strengthening of informal sector organizations is a strategy that consists in creating and supporting group-based self-reliance schemes among informal sector producers, traders and others economically active in the informal sector.
This approach includes the gradual mobilization of participants’ own financial, technical and human resources to encourage autonomy, stimulating participants’ desire for improvement and to reaffirm their social identity, building and strengthening organizations of small producers and micro-entrepreneurs and institutional recognition and representation of participants at higher levels.
The informal sector reforms are one of the difficult areas in the economy to deal with and many governments have neglected this area, leaving the government’s limited revenue to support its budget.
Therefore, loss of tax revenue limits the scope of the country to provide services and infrastructures depending on borrowing and aid, if high proportion of business activity operates outside the scope of regulation, it will be extremely difficult for the government to shape macro-economic outcomes through any policy.
As such reforms are desperately needed. The results of the government ignoring the informal sectors are to adopt indiscriminate taxation, which usually affects vulnerable people and usually makes the architect of such policy unpopular.
By Dr. Edward Kwadwo Yeboah, Kumasi
*The Writer is an Economic Development Consultant
