Informal Economies: The Pebbles in Africa’s Shoes

Boubacar Amadou CISSE

The race to socio-economic development is underlined by countries’ abilities at putting themselves in better positions for economic prosperity. This ability has many key factors and the supervision of economic activities is one of them. However, informal economies are some of the barriers that may hinder the growth of a nation. As in many parts of the world, it is a challenge of its kind that Africa is facing.

Informal economy or parallel economy has a variety of definitions. It can be defined as household enterprises having a market share but yet to be registered, and also underground production or illicit activities by larger registered companies. Illicit economic activities undertaken by individuals can also be considered a form of an informal economy. All the mentioned forms have some factors in common; the most important one is that they hinder the growth and development of a nation.

A Known Challenge in Low-Income Countries

Parallel economies, in some form, exist in all countries around the world, however, there are more prevalent in low-income countries. According to some IMF studies in 2017, informal economies in Sub-Saharan African countries contribute between 25 to 65 per cent of GDP and account for 30 to 90 per cent of non-agricultural employment. This leaves challenges but also opportunities for policymakers.

On the positive aspect, the high rate of informal economies provides a large pool of jobs for many. This is relatively important for countries with more people at working age whereby job creation is not achieved at the same pace. On the other hand, employability in this sector accounts for lower productivities and the sector lacks proper regulations.

Informal economies are “sometimes” irrelevant to the country’s economic potential. The 2017 IMF Staff studies found that Nigeria and Tanzania have the highest rate of informal economic activities (above 50% of their GDPs) while Mauritius and the South African Republic have the lowest rate (between 20 to 30% of their GDPs). However, Nigeria is the first economic power in the whole of Africa while Tanzania also seats among the most promising countries on the continent. Population growth seems to correlate with informal economic practices; however, this is still a hypothesis and no study has proved that.

In African countries, as in other developing countries, the inherent socio-economic problems favour parallel economies. Due to political crises, governments fail to control and regulate many sectors or regions. This enhances the uprise of informal economies activities. Studies show that informal economies occur more in oil-producing countries and fragile states in Africa. In the worst case, parallel economies could lead to a parallel government, where the players make the rules.

Causes and Indicators

There are several indicators of parallel economies amongst which currency and labour participation can be cited. In the informal economy, cash is the preferred means of payment and there is a high degree of labour participation. Behind these indicators, lie several factors common to all developing states: institutional development, tax burden, unemployment, trade liberalization, population boom etc. In those countries, due to corruption and impunity, people tend to not refrain from undertaking informal activities. Furthermore, as a state strives to control and development infrastructure for its population as it grows, informal economic activities become popular.

Another important cause behind the parallel economy and many other administrative problems in Africa is the Structural Adjustment Program (SAP) proposed or maybe, imposed by the IMF and the World Bank in the 1980s. This program may be unknown to many but it is a complete scandalous initiative adopted by African countries 4 decades ago. In the aim of fostering development and lowering governments spending, the IMF and the World Bank had given billions of US dollar of the sovereign to more than 30 Sub-Saharan African countries. The conditions of the loan were tremendous in all sectors; early retirement was encouraged to reduce labour force and expenses as well, recruitment in government sectors was filtered and admission was exam-based; fewer civil servants were being recruited to fulfil the need of many. Many sectors were forced to be under the umbrella of the same ministry; this led to mismanagement of fund allocation of the different sectors of development, whereby the intended aim was the opposite. Another objective with the program was to develop the private sector; this was never met.

These have led to a complete stroke of governments services in running major economic sectors. Within a few years, all the countries that had adopted the SAP were overflown by its consequences. Today, the private sector is still poor and most of the other economic sectors strive to recover. This has enabled the informal economy to gain terrain in all sectors. The Structural Adjustment Program might have triggered many economic constraints and the underlined countries are still facing its consequences four decades after its implementation.

Conclusion

Parallel economic activities have crippled African countries economies in diverse ways. The race to socio-economic and technological development is known to all. Statistics predict that the African continent will be at the centre of the world’s future. However, with the arrays of crises and problems roaming on the continent, it is safe to say that Africa might not fully benefit from its crucial role and position leading to a better future for us all.