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June 08, 2007

The Upside of Informal Economies

Another day, another deep dive, another stunning education on the issues facing modern day Africa. Yesterday’s meeting in Nairobi differed from the previous day’s meeting in makeup and subject matter, but the eye-opening, revelatory nature of the discussion was just the same.

“We just don’t get a chance to get together with people from all these different backgrounds within Africa,” said one deep dive participant, referring to the deep dive that included representatives of major African universities like Makerere and the National University of Rwanda, government offices like the Kenyan Ministry of Information and Communication the Ugandan National Planning Authority, financing companies like JPMorgan Chase, K-Rep Development Agency (microfinance) and the African Venture Capital Association, major multinational corporations like The Coca-Cola Company, and a host of non-governmental organizations and non-profit groups. “So it’s amazing when we all start talking and realize we’re thinking the same things.”

And one of the things that everyone in the room is thinking about is the role informal economies of African countries can and should play in the economic development of the continent. An informal economy is loosely defined as business that takes place outside of government regulation, taxation, and other formalized rules of law.

This phenomenon is not unique to Africa, of course. In the states we call it “off the books” business or “under the table.” But in Africa the informal economy is bigger. Much bigger. Some of our deep dive participants estimated that somewhere between 40 percent and 90 percent of employment is through informal channels, depending on which country you are talking about. And these businesses constitute more than half of the GDP in many countries.

The existence of informal economies is not inherently a bad thing. In fact, many in the room saw these businesses as emblematic of Africa’s burgeoning entrepreneurial spirit. And it serves as a means to put food on the table for millions of Africans.

The problem is that these businesses have trouble growing, employing more people, and creating more wealth, because they have to continue to operate under the radar of regulatory bodies. They also have no access to financing, or the basic business training and skills that could help them improve the business.

“Imagine if these people had access to more information, so they can learn how to make their businesses bigger,” said Kelvin Balogun, a business strategy director at The Coca-Cola Company. “If it were possible for these people to interact, through some kind of platform, it could move them to a higher level of empowerment.”

Kelvin did an incredible job of articulating the nature of these informal economies, the challenges facing them, and some possible methods to enable them to grow, and perhaps make the jump into the formal economy. I implore you to listen to his words, not mine.

Kelvin believes the young and creative minds that make up these informal economies are the key to Africa’s economic growth, and it’s hard to argue with him. He shared examples of sophisticated electronics manufacturers, used car parts franchises, and other businesses that operated completely off the books. And though he poses a lot of questions in the above video, he has more answers than you might think.

For example, and at the risk of burying the lead, there was a strong sentiment in the room about the role of non-governmental organizations (NGOs) in Africa. Many felt that NGOs and other aid organizations are doing more harm than good, in that they do not empower business owners or encourage entrepreneurship. In fact, they undermine these important goals more often than not. This is a subject that we will want to explore at much greater length throughout this GIO.

I tell you this because Kelvin had an amazing idea for how to use aid organizations more effectively in Africa. He suggested that if a large charity of foundation created a pool of funds that targeted informal businesses, offered financing to them, business skills training, and even funding to help them grow and transition into the formal economy, the money would be better spent than on handouts. They might even make a return on their investment by mistake.

That’s just one of the really compelling ideas that came out of this dive. Over the course of the next two weeks, we’ll try to space them out. So be sure to come back and see what else we learned in Nairobi. Or better yet, sign up for the RSS feed.

June 8, 2007 | Permalink


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I'm really enjoying reading this blog. The last one got me thinking about Microlending. What were the thoughts to come out of the dives on that subject?

Posted by: michelle | Jun 8, 2007 5:09:18 AM

I think Kelvin's idea about pooling aid funds to target programs that will help the informal business grow is right on the money. The "jua kali" (swahili for 'hot sun' ... referring to the tendency for the informal business to operate in the open under the sun, as opposed to an indoor storefront)economy in Nairobi has been in operation for a long time and has yet to grow to the potential it can have.
The increasing pervasiveness of mobile phones is helping the economy and the population in general become more adequately connected and it is encouraging to hear that the mobile service providers are enhancing their services to include the ability to transact business via cell phones (the M-Pesa example). I was in Nairobi last month and got to experience first hand the capabilities of the Safaricom mobile phone services. Very cool! I think this is one area to focus on.

Posted by: Tony | Jul 25, 2007 8:46:21 PM

I think Kelvin is onthe right track with his idea.

Posted by: Fred | Jan 29, 2008 7:49:48 AM

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