Chart of the Week: The Potential for Growth and Africa’s Informal Economy

IMF Blog, August 8, 2017

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By 2035, sub-Saharan Africa will have added more working-age people to their workforce than the rest of the world’s regions combined.
In the region, up to 90 percent of jobs outside agriculture are in the informal sector.
From 2010 to 2014, sub-Saharan Africa’s informal economy accounted for 38 percent of GDP to the region.
Within sub-Saharan Africa, informal economies vary widely:
- 20 to 25 percent of GDP in Mauritius, South Africa, and Namibia.
- 50 to 65 percent of GDP in Tanzania and Nigeria.
Informality persists even in advanced economies, so the shift from informal to formal will take many years.

The informal sector includes:
- Unregistered household enterprises (for example, street vendors or domestic workers).
- Off-the-books activities by registered firms (for example, the taxi driver who offers a discount if the meter is not turned on).
Motivations:
- Survey data show the primary motivation for starting an informal business is to fulfil an aspiration for the future.
- A third of new entrepreneurs in sub-Saharan Africa report choosing this path out of necessity—most would prefer a job in the formal sector, but don’t have that option.

Opportunities:
- Acts as a social safety net by providing employment and income to many who might otherwise be unemployed.
- Household survey data suggest that people working in the informal sector consume more goods and services than those in the agricultural sector in many countries.
Constraints:
- Low productivity: on average, the productivity of informal firms in sub-Saharan Africa is only one-fifth to one-quarter that of formal firms.
- These productivity differences likely reflect a combination of lower skill levels among workers and lower levels of physical capital.
- In countries with large informal sectors, the rate of economic growth is reduced.

Adopt a balanced approach that:
- Increases the productivity of the informal sector.
- Supports the expansion of formal businesses.
Specific policy levers highlighted:
- Improve access to finance.
- Make it easier for small firms to enter the market.
- Increase access to electricity.
Rationale: These measures could go a long way in formalizing the informal sector and creating the types of jobs most desirable among sub-Saharan Africa’s expanding workforce.

Source: Chart of the Week: The Potential for Growth and Africa’s Informal Economy (IMF blog, August 8, 2017).