In every part of the world, there are poster images for the informal sector; from teenagers hawking pirated DVDs on Nigerian streets to sweatshops hidden within Indian homes. These give the impression that the informal sector is disorganised and removed from civilised society. Even our language betrays this view: the underground or shadow economy, and most especially, the black market. These negative connotations present the informal sector as a defective part of the economy.
As unemployment rises and government scrambles for solutions, Nigerians have an important alternative – the informal sector. Even with its flaws, the sector has an important supporting role to play in the economy; though one that comes with notable risks.
A Tale of Two Sectors
No matter your area of business in Nigeria, you are likely to overlap with the informal economy. UAC Foods is a prime example. The producers of Gala are a large company listed on the Nigerian Stock Exchange yet include the informal sector in its distribution channel, either through hawkers in traffic or roadside kiosks. Meanwhile, before the days of mobile and internet banking, cellphone users became accustomed to buying recharge cards on the street. This method was convenient for customers and at the time, efficient for the large telecommunication companies. The convenience of the informal sector for consumers and formal businesses cannot be understated. Given Nigeria's poor infrastructure, informal market activities ease the cost of doing business.
However, this formal-informal overlap comes with risks, especially when it comes to consumables. Unsurprisingly, health and safety are not a high priority in the informal sector, and it is genuinely difficult to monitor processes. For casual workers in this economy, their income streams are unpredictable because of the level of uncertainty and volatility in the sector. And this poses a problem for formal entrepreneurs who rely on informal workers such as traders and artisans. For example, the owner of a furniture making company may use different carpenters for different jobs, creating quality assurance issues. Without an official contract, people have little incentive to be reliable.
The volatility is worsened by government policy which is often harmful to the sector. Nigeria's response to the informal sector has either been to ignore its existence or try to suffocate it with supposedly common-sense initiatives. Take the CBN's cashless policy. While it has its merits, it runs the risk of making business harder for informal economy agents. It is worthwhile to consider financial solutions that will also accommodate the informal sector.
Waste Not, Want Not
These challenges with the informal economy emphasise the need for policy to support this area. Often, the informal economy performs basic functions that the government cannot or will not deliver on. For example, local authorities are usually unable to cope with the massive amounts of waste produced in their communities. As a result, of the recyclable materials in cities like Lagos, only 13% are salvaged. However, like the Zabaleen in Egypt's informal landfill system, Nigeria's waste pickers provide second-best solution to our refuse problem.
The Olusosun Landfill dump in Lagos that employs over 1,000 people provides strong evidence for how this can work. Despite its informality, strong social ties have created structured jobs such as contract scalers who move around and weigh how much material is scavenged from the dump. This enterprise currently thrives without formal structures – workers use wooden carts to transport the waste they collect. Everyone involved has a role to play, making the landfill area self-sufficient. In fact, scrap dealers can earn twice the Nigerian minimum wage by gathering useful waste and selling to intermediaries who deal with large refuse corporations.
The Visible Hand
It is then in the state's best interest to establish systems that make it easier for such informal structures to thrive and taxation is not the only way to do this. In fact, taxes are a blunt instrument in a social setting where poverty reducing efforts are not strong enough. Instead of working against them, state officials can put in more collaborative efforts to making informal activities work. For example, the pure water enterprise was conceived by informal economy entrepreneurs who exploited the gap created by an inadequate national water system. This product caters to households that are unable to dig boreholes on their property and use filtering technology to get water running into their homes and businesses.
Admittedly, policymakers have attempted to coordinate the informal activities of pure water businesses by putting NAFDAC in charge of regulating production standards. By standardising health laws here, one of the risks associated with including the informal sector is reduced. This approach can be extended to other industries within the informal sector but should obviously be contextualised to cope with each industry's constraints.
In times of economic struggle, the informal economy offers an exit option for those unable to find formal jobs. Highly unequal societies like Nigeria will continue to host vibrant ideas for informal entrepreneurship. Little is currently known about the informal economy and to prevent enacting policies that disrupt it, this must be fixed. Complete formalisation is an ambitious goal – and even a misguided one. Strengthening the link between the formal and informal economy and facilitating a quicker transition between the two would better serve Nigeria's large population. It could also unlock further revenue-generating potential for the government. But taxes and levies are only justified by reciprocal support from the government.