Third World Business Sense:
The case of the informal Sector

Contents

1. Introduction
2. Manifestation
3. Making the best use of the informal sector
4. Negative effects of a large informal economy
5. Gradual integration into the formal sector

Introduction
Economic activities in a sector which appears to be outside the government's sphere of influence constitutes what has now become known as the informal sector.
This does not necessarily imply criminal activities (although that sector is also informal), as this paper will not deal with such.
We shall discuss legitimate economic activities embarked upon by the citizenry to secure a means of livelihood.

This naturally has its implications when it comes to taxation, government policy and computation of a country's gross domestic product.
The size obviously varies from country to country, and could form a very large proportion of economic activities in many third world economies.

Those who trade, or engage in business activities in the third world cannot afford to ignore this sector.

Manifestations
This sector is manifested in some of the following ways:-
1. Roadside trading and street hawking,
2. Market stall trading
3. Sweatshops and home based factories.
4. Subsistence level agriculture and farming
5. Activities of artisans, like masons, carpenters, auto mechanics etc,
6. Local contractors for all kinds of goods, such as food items, sands laterite, gravel and other materials for the local construction industry.
7. Private production of electricity for factories, buildings and small operations.
8. Commercial transporters.
9. Foreign currency hawkers, etc.

Taxation is at best, indirect or negotiated:- Charging a little more than the economic rent for market spaces, requirement of a “Tax Clearance certificate” for transactions such as land, property or vehicle registrations and payment of Value added tax (VAT)s for importation of goods, custom duties, charges for billboards and signboards etc.
Therefore, it will not be accurate to say that no sector of the informal economy pays some form of tax to at least one tier of Nigerian Government, except for illegal activities such as smuggling.
The revenue may however not be adequate.

When estimating GDP, we may overlook or wrongly classify some activities.
This may be misleading for several reasons:-

1. Some durable goods, which may be regarded as consumption items in more developed economies may actually generate employment activity in the third world. Eg
1. Used vehilces imported for reselling.
2. Used vehicles imported for the transportation business.
   Even motorcycles bought are frequently used for transporting goods and persons.
   Although inefficient, the economic activity generated is usually ignored.
3. Electricity generating sets used for powering commercial buildings.
   Some commercial buildings generate electricity and retailed to tenants who pay for them as maintenance charges, or in hotels and public offices.
   Nigeria, for example, is estimated to consume 19,210 thousand Megawatts of electricity whereas the public production rarely exceeds 5,000Mw.
   The more than 12,000Mw balance is not reported as part of the Gross Domestic product (GDP).


2. Some importation is carried out with the importer sourcing the foreign money privately. While the importation is documented, the source of the foreign exchange, usually regarded as foreign investment, may actually be the export proceeds from the informal sector.

The life wire of the informal sector is apprenticeship. One can understand apprenticeship for plumbing, masonry, carpentry, auto mechanic work, and several types of trade. Some surprisingly will still undergo apprenticeship for such businesses as clothing, auto parts, foodstuff and chemical products retailing.
It appears the citizenry makes up for low educational life expectancy with apprenticeship.




An analysis of data on informal sector, with literacy levels of some African and South American countries show that literacy levels vary somewhat inversely with the size of the informal sector.



While we may not regard the analysis as infallible, it is not expected for a person in the third world with more than, say 15 years of formal education to opt for a career in the informal sector.

How then do we handle this informal economy?
1. Make the best use of the activities in the sector.
2. Ensure a gradual integration into the formal sector

Making the best use of the informal sector.
Typical requirements of businesses in the informal sector are portable products and services suitable for operation in a mobile environment such as:-

• Items of a capital nature.
• retail spacing.
• Services like ATM and debit cards.
• Vacations





1. Capital Items
   For many in the third world, normal consumption items are quite expensive. Items like motorbikes, or used cars may be capital items for the transportation business by many of the unemployed youth and some adults. Smaller and portable generating sets are required to set up road side typing or photocopying centers. Many will seek out opportunities in virtually any product including mobile phones. Many portable items are hawked to motorists during traffic jams in some major cities.
   Farming, in some places is so primitive as farmers cannot even afford to yoke cattle for ridging, let alone use tractors or modern agricultural machinery.


2. Retail Spacing.
   This is needed to complement the sale of those portable items. In many instances, the local governments permit their stay at road side stalls, once an annual charge is paid. Markets and “shopping complexes” are built by governments in competition with the private sector.


3. Services
   Transactions in this sector is strictly on cash basis. Checks are rarely accepted, except of course, payments by corporate bodies. Most of the payees go to the banks to cash whatever amount is paid. Many are now patronizing the banks as a result of the risks involved in carrying around or keeping at home, huge amounts of cash. Introduction of ATM cards by Nigerian banks appear to have been a huge success among the teeming operators of the informal sector.
   Some less educated traders are now learning to use these cards.


4. Vacations
   This does not always follow the concept of what many see as vacations. Most will go on “vacations” mainly for shopping. They visit the markets and seek bargain sales and deals for resale at home. Many tour operators don't factor opportunities for such in their destinations, when dealing with customers from the third world.





Negative effects of a large informal economy
1. Perpetuating poverty. The informal economy grows as more apprentices are taught unorthodox ways of carrying out businesses. This has a negative impact on development.


2. Negative impact on the environment. Waste products in processing outfits are not subject to local regulations with regard to disposal constituting health and environmental hazards


3. Very low wage rate as a result of limited opportunities elsewhere. Contracts are usually verbal, with limited ability to ensure enforcement. Government wage policies are rarely applied.


4. Limited multiplier effect. Most operations are individualistic. There is so much reluctance to carry out large scale production. Imputs are usually bought from retailers and as a consequence do not support their industrial production.


5. Disregard for standards. Where processing of a product or production is carried out, standards are rarely enforced, thereby making the products unsuitable for exports.


6. Disregard for safety such as: operating under unhealthy environment, overloading passenger buses and trucks, and motorbikes.


7. Propensity for fraudulent activities. Difficulties are encountered in law enforcement . Agreements and contracts in this sector may be difficult to enforce as a result of their informal nature and lack of expert legal advice.


8. Non consideration when considering GDP The real value of the domestic currency may not be known, as a result of under reporting of economic activities. Importation of goods in Nigeria always contains the option of getting forex at alternative or undisclosed sources, with Form M, not valid for foreign exchange. Most popular forex use is for cars.

Gradual integration into the formal sector
Governments can follow a more progressive path towards development by seeking for ways to upgrade this sector.

1. Governments can ensure through bigger tax paying businesses that the customers in the informal sector take insurance policies to cover most of the identified aspects of such businesses like fire, theft burglary, goods in transit etc. as a condition for outsourcing contracts.
   This should be in exchange for some tax concessions for the bigger companies. They must also insist on, in addition to insurance policies, audited accounts as a condition for credit sales.


2. All payments for goods to be purchased from the formal sector, should be done through direct bank deposit or certified checks. This will encourage their interactions with the banks.

   Providing micro finance for the informal sector is a wasteful exercise. It is like embarking on an isolated project. Bigger establishments should assist the informal ones by gradually demanding formal reforms in exchange for credit. For example, a bank guarantee for continued patronage for goods and services.
   The banks will commission an external auditor to assess the business, who in turn insists on registration and good organization and a permanent office. This should form a systematic integration, organized by the bigger formal concerns.



3. Bigger businesses can also positively influence growth in this sector, by giving assistance and incentives for example, cobblers and shoe shine boys employed in the finishing sections of shoe manufacturing, encouraging tailors with bigger jobs for Law enforcement agencies, uniforms etc. Many of the industries of the formal sector are also present in the informal sector of the economy in crude forms.


4. There are already processes in place to formalize an establishment. These only need to be enforced to actualize. Many banks follow the micro finance route as a pretext for charging higher interest rates. They only accept LPOs from “Blue Chip” companies. Why dont they formalize or “blue chip” an informal organization by making its operations formal? Ask for audited accounts, assist in getting and organizing its operations, and making it undergo training (apprenticeship) on formalization, the same way apprenticeships have been carried out in learning the trade?


5. You can formalize artisan's work: compel them to make sales records and clients available (if not a full financial statement) as an evidence of ability to carry out bigger contracts profitably. The formalized ones will use the informal ones as flexible labor source. They will now realize that they also can establish a formal organization.


6. Give support to rural farmers by giving contracts for food and agricultural produces, and encouraging them to produce financial and operating statements.
   This should spark their interests in going beyond subsistence level production.


7. Advantages of formalization should be emphasized through public campaigns. Citizens cannot continue to keep cash under their pillows in a modern age such as this. Many are now learning to use ATM and debit cards. The process therefore is on. So far, the interest of Nigerian government has been limited to the charging and collection of VAT.


8. Regular work shops and training for small businesses on the level of the Small Business Administration of the United States should be employed.


9. Capital leasing arrangements should be tailored towards this sector. This is preferable to the increasingly popular micro finance arrangements carried out by in some countries of the third world which usually result in extortionate charges. This capital leasing should be targeted towards specific industries in the informal sector, for example agricultural equipment leasing.
   A single Capital leasing or micro finance company cannot successfully cope with the different activities of the informal sector. There should be specialization.

Conclusion
The growth of the informal sector may be an indication of a serious deficiency in governance. This sector cannot be legislated away. It should be seen as a way to monitor the effectiveness of social programs like education.

It should be obvious that sound Government policy towards education for example, will pay off on the long run,by increasing formal sector activity in many areas now dominated by the informal sector, thereby increasing the tax revenue base.

References:-


1. Size of the Informal Economy in 110 Countries around the World F. Scneider, July, 2002
   
   
2. UNESCO Institute for Statistics:
   Global Rankings for 2008


3. www.cia.gov.