Supporting the informal economy

By
Joachim Ibeziako Ezeji

According to the UN Human Settlement Program, in 1800 only 2% of the global population lived in cities and by 1950 already 30% was urbanized. By 2000, 47% of the world’s population was estimated to live in cities, while projections for 2030 suggest this percentage may climb to 60%. Urbanization rates in developing countries outstrip those in industrialized countries, with Africa still predominantly rural (37.5% of urbanization in 2000) – showing the highest annual growth rates at almost 4.9%. In 1975, five mega-cities had populations in excess of 10 million inhabitants. By 2000, their ranks had swelled to 19, a large majority of them in developing countries. In addition, the world today has 370 cities with between 1 and 5 million inhabitants.

As the world becomes more urbanized and poverty becomes an increasingly urban phenomenon, it is also becoming increasingly clear that a key contributing factor to the incidence of poverty is a shortage of adequate employment in growing cities and towns. UN-HABITAT in 2005 conducted a detailed research study on the informal economies of six developing country cities, namely Bangkok, Delhi, Durban, Lima, Mexico city and Nairobi. The objective was to examine existing regulatory environment in each city and to identify innovative policies for improving the operational efficiency of the urban informal economy. The final report, Innovative policies for the urban informal economy; 2006, shows that complex and stringent regulatory requirements on the establishment and operation of micro-enterprises have contributed to the growth of the informal economy, notably in developing country cities.

Poorer self-employed operators at the bottom end of the urban informal economy are particularly affected by complex, costly or time consuming requirements. The above mentioned UN-HABITAT report proposes a menu of regulatory and incentive policy options focused on two broad objectives: (i) the formulation of an appropriate regulatory and policy framework to set up and operate business and (ii) complementary developmental policies required to maximize the benefits of streamlined regulation.

It is clear that appropriate regulation must combine with developmental interventions to maximize the economic benefits of regulatory reform. The proposed policy options can be summarized as follows; (i) Appropriate regulatory and policy framework:- Measures to ensure simpler registration, operation and reporting procedure; Greater policy coherence and harmonization at national and municipal levels; Differentiated regulatory and incentive measures specifically targeted on different segments of the informal economy; Proactive measures to provide advisory support to informal operators and businesses. (ii) Complementary development policies: Improved access to workspace, markets and urban infrastructure; Improved property rights and security tenure; better access to credit and finance; Enterprise development and capacity building; Reduced tax burden, including municipal fees; Policies to promote macro-economic stability and urban economic development.

The proposed policy framework was not meant to be a ‘’ one size-fit-all’’ strategy, as any practical policy must be context- specific and take into account the unique urban (and national) socio-economic dynamics. Since these policy proposals were based on a detailed analysis of the more promising reforms implemented in six developing country cities with a vibrant informal economy, they could inspire other cities into developing policies that best suit local needs.

Given the importance of the urban informal economy to low income groups, this policy framework is ultimately aimed at maximizing income and employment benefits for the urban poor. Therefore, generating jobs and adequate incomes for the urban poor who rely on the informal economy for their livelihoods is critical to the achievement of the poverty related Millennium Development Goals. Indeed, African governments should concentrate on ensuring that workers within the continuum are protected, and infrastructure and support services are in place to assist them.

Most studies do not offer detailed information on the size of the urban informal economy, their composition, organization, competitiveness and linkages to the formal economy. Even the local authorities who collect substantial revenue from the informal economy do not maintain records of the numbers and contribution of the sector to the urban economy. The most visible manifestation of informal economic activities is urban agriculture, street vending and informal trade. In almost each and every city in Africa, the streets, pavements and roadsides are awash with women and men trading in all sorts of commodities and goods, they have been involved in street vending for long periods of time.

Most of these service providers are in conflict with urban authorities, and there have been instances of street battles with the enforcement arm of local authorities. Their contribution to the local, national, and global economy remains invisible and under-valued. Operating in isolation from her home, the vegetable/ fruit gardener was not able to negotiate regular orders or fair prices. However, the informal activities have continued to increase as economic opportunities within the formal sector dwindle, in the midst of the neo-liberal reforms taking place in Africa. Urban development in Africa has to adopt a holistic approach which not only accommodates the informal economy but also provides for it in terms of planning and management of cities.

The lack of holistic approach has exposed informal workers to an unregulated environment, full of harassment, exploitation, intimidation and lack of protection of workers’ rights. Turning around the economies of African cities depends on how respective urban authorities handle the informal economy and its workers. These workers constitute a majority, and urban economic development, including the on-going poverty reduction programs must put them at the centre of development if growth and sustainable livelihoods are to be realized in African cities.