Harnessing the Potentials of the Informal Sector for Sustainable Development – Lessons from Nigeria

The informal sector plays a very important role in the development of the economies of nation. In Africa, the majority of the informal sector organisations are involved in small businesses and social services that are vital to economic development. Apart from laying the foundation for promoting the evolution of large firms that ultimately dominate the formal sector, it also provides employment opportunities in both rural and urban settings. Indeed, against the strong economic storm that pervades the economic landscape of most African Countries, the informal sector stood its ground. Evidence abound indicating that the informal sector has been providing refuge for the army of workers laid off from and for many still employed in the formal sector by providing employment and avenue for earning additional income thereby ameliorating their declining standard of living. This paper is an assessment of the role and performance of this sector. After reviewing some concrete issues with specific reference to Nigeria, the paper offers some recommendations for policy makers and the future. INTRODUCTION The importance of the informal sector can be situated within the context of the remark of the former Head of State of Nigeria, Ibrahim Babangida in 1991, at the height of the SAP crises. He posited thus “...the Nigeria economy has defied all known economic prescriptions , yet it has not collapsed. The reason for the non collapse of the economy is not fetched. It is the sustaining power and ‘ability’ of the neglected informal sector. Indeed, the commercial landscape of Africa is littered with mosaics of these unregulated enterprises which slowly but firmly support the economy of member countries with the dexterity and flexibility of an octopus. It is a sector whose activitism has crystallized into an indispensable partner which is increasingly referred to as the underground Economy (Daodu, 2001). With specific reference to Nigeria, the various economic reforms embarked upon since the 1980's by various government have yielded no positive result, especially in the area of balance of payment deficits, high and increasing unemployment rate, galloping inflation, high debt overhang, high poverty rate and general slump in the standard of living. Against those backdrops one can posit that the formal sector has failed in its attempt at steering the economy of the nation forward. Indeed, against the strong economic storm that pervades the economic landscape of most African Countries, the informal sector stood its ground. Evidence abound indicating that the informal sector has been providing refuge for the army of workers laid off from and for many still employed in the formal sector by providing employment and avenue for earning additional income thereby ameliorating their declining standard of living. CONCEPTUAL FRAMEWORK Definition of Informal Sector Enterprises Many authors and researchers contextualise the informal sector within the framework of small scale ventures. And there has been no one definition that holds the allegiance of all stake-holders; economists, operators, government and donors. However, the lack of a universally agreed-upon definition does not imply that the term is indefinable or that it is a simple concept that admits of no further definition and therefore must be accepted without enquiry. The term informal simply means free of conventional forms or restrictions. While sector, connotes a distinct part of an economy. Given the foregoing, the informal sector can be defined as follows: The Dictionary of Modern Economics (1987) defined informal sector as the large volume of self employed in developing countries who are engaged in small scale labor -intensive work. These people are often regarded as unemployed or underemployed. Ajakaiye and Akerele (1995) postulated that an entity may operate some form of government laws but still be an informal enterprise. They simply put it as a production unit that is operating without official regulations to govern its behaviour in the input and output market as well as units production process is unambiguously an informal production unit. Ajakaiye and Akerele therefore, posited that two possibilities may exist for an enterprise operating under certain official regulations. The first is for the level of binding official regulations not to compel the installation of a set of rules to govern its behaviours in all markets as well as in its production process. Such enterprises are informal regardless of whether or not it autonomously imposes regulations on its operations. Example of this class of regulations is enterprises operating with simple licenses, permits, registered business names and registered premises. Similarly, UNECA/AAPAM (1990) consider informal sector to mean small scale income-generating activities that are not registered under law, do not comply with legislated standards of quality, minimum pay and safety, and more often than not, do not pay taxes. Amins (1987) definition of the informal sector is akin to that of the ILO. By his definition, the informal sector includes enterprises that have in common, one major and dominant attribute – the absence of official status. In other words, enterprises and individuals in the informal sector operate outside the incentive or social security offered by the State and its institutions. To the World Bank, the ‘informal’ sector is almost the “illegal” sector and contains most micro-enterprises which escape government regulations and pay taxes. However, it would appear, from existing literature that the most frequently adopted definition comes from the ILO (1976) which defines informal sector enterprises as those that employ a handful of workers, who earn low income, utilize rudimentary or subsistence technology and operate outside the boundaries of 5 government regulations governing business in general. The informal sector in Africa has its roots in traditional arts and crafts and rural production, a phenomenon that goes back to the colonial period. Broadly, informal sector activities traversed the following: Hawking, street vending, retail trading of all sorts, repairs and maintenance works of all types, carpentry, small scale artisan, personality and beauty care activities, fashion design, etc. One can say without prejudice that the informal sector is dominated by a large number of small scale production and service activities that are sole proprietors, partnerships, co-operatives, and even private limited liability companies. Sustainable Development (SD) The term sustainable development was brought into common usage by the World Commission on Environment and Development (The Bruntland Commission) in 1987. Sustainable Development calls for development that “meets the need of present generation without compromising the needs of future generations. (Finance and Development, December, 1983, page 7). The tripod objectives of Sustainable Development: (i) Economic objectives (Growth; Equity and Efficiency); (ii) Social objectives (Empowerment; Participation; Social Mobility; Social Cohesion; Cultural Identity; Institutional Development); (iii) Ecological objectives (Ecosystem Integrity; Carrying Capacity; Biodiversity; Global Issues). Sustainable Development could be regarded as a process of change in which the exploitation of resources, the direction of investment, the orientation of 6 technological Development, and institutional change are all in harmony and enhance both current and future potential to meet human needs and aspirations. Sustainability stresses the importance of participation as a means to sustain the development process and to ensure a more equitable distribution of benefits created by development initiatives. Its main focus is the utilization of national resources (physical and human) to: (i) Meet the countrys need; (ii) achieve sustainable livehood system in a given community; (iii) eliminates poverty; (iv) maintain the physical and human environment for the present as well as succeeding generations of members of the community, and above all (v) Achieve global inclusion by ensuring the mobilization of the participation of all members of the community in the development process as well as equitable distribution of benefits produced. CHARACTERISTICS OF THE INFORMAL SECTOR Policy and regulatory constraints have restrictive effect on the production potentials of micro and small scale enterprises (MSE’s). Thus MSE’s have remained largely informal which, though allowing them to escape such burdensome regulations as taxation, labour legislation, entry and exit restrictions, curtails their access to finance, steady input resources and markets information and technology. Internal constraints are also a factor, since entrepreneurs, managers and workers often lack the key skills necessary to modernise (page18 World Bank Discussion 7 Papers 271, 1985). The informal sector operations are more likely to be owned and managed by a single person; major decisions can be made directly and promptly. They have a more intimate feel for the changing needs of their customers in serving local markets. They concentrate in relatively labour intensive businesses, create more employment opportunities, and effect a more equitable income distribution, while also supporting increases in productivity (Stanley and Morse 1965; Steel and Takayi 1983 Spela Webstar 1981). They help the entrepreneurial base flourish among diverse ethnic groups and regions and among relatively low income people in rural areas because they are typically found throughout the country. (Abate 1980, Sandsara 1989, World Bank 1991. According to Dr. (Mrs.) Shekera Khan Journals of Pakistan Administrative Staff College Vol.xxii Jan-June 1985 No.1; In Pakistan the characteristics include: (i) ease of entry; (ii) reliance on indigenous resources; (iii) family ownership of enterprises; (iv) small scale of operations and adapted technology; (v) skills are acquired outside the formal sector education system and (vi) unregulated and competitive markets; and (vii) Largely having little access to government services. According to the Research Report No.1 1988 by Development Policy Center pg.23, the informal sector possesses certain characteristics which set it apart from the formal sector. It is important to have a clear understanding of those distinguishing 8 characteristics in order to formulate policies and programmes to guide the growth and development of the sector. Some of these characteristics are size; age; ownership; registration status; investment and income; major consumer of products and services; sources of finance; location of enterprises; gender educational attainment and job history.