YES to the Informal Economy

18.12.2004

Youth UnemploymentThis year’s Youth Employment Summit, YES, was held from October 4 – 7 in Veracruz, Mexico. For some time YES has created a veritable platform to draw global attention to the high rate of youth unemployment. According to YES, “there are about a billion youth on the planet, eight hundred and fifty million in developing countries and one of the greatest challenges facing the world is to generate productive work opportunities for young people, ages 15-30″ YES believes that “a targeted and timely intervention for youth employment is urgently required to resolve a rapidly building global crisis.”

One of the direct consequences of youth unemployment is increase in incidences of poverty. The United Nations Secretary General’s High Level Policy Network for Youth Employment recommended four Es: Employability, Employment Creation, Equity (Equal Opportunity) and Entrepreneurship to which YES Framework for Action added another E – Environmental Sustainability and later another E – Empowerment. The UN Millennium Development Goals seeks cooperation with developing countries to develop and implement strategies for decent and productive work for youth (Goal 8: Target 16). Nigeria’s National Economic Empowerment and Development Strategy (NEEDS) may be one such strategy.

To ensure that their words are turned into action, YES has established country networks, including in Nigeria. I strongly believe that one of the greatest challenges of YES Nigeria in tackling youth unemployment is to engage the government in processes that will formalize the informal economy. The informal economy comprises economic activities that are not structured and so not recorded in government books and other means of formal business development. In his speech to the Special Meeting of the Bankers’ Committee in July 2004, the Governor of the Central Bank of Nigeria, Prof. Charles Soludo noted that our large informal economy is one of the reasons why more than N400 billion as currency is outside the banking system. It is widely believed that the size of the informal sector is about 70% of the formal sector. The informal economy is made up of street-side cottage industries and workshops that manufacture just about everything, buses and taxis that account for most of our public transportation, vendors that supply most of our daily needs from foodstuff to GSM recharge cards. It includes subsistence farmers in our rural areas. It also includes ‘small-scale’ entrepreneurs whose main assets are turning ideas into enterprise and industry. Hundreds of thousands of Nigerians, if not millions, operate in this informal economy – on the streets, from their homes, in farmlands, in unregistered shops, offices and factories. These people, in turn, have employees, relatives and friends that depend on them for their daily means of survival and sustenance. Therein lies the matrix of poverty in Nigeria because high levels of informality are associated with lower incomes. There is a high concentration of Nigeria’s youth in this economy.

Integrating them starts by recognising that the informal economy encompasses the industrial sector as well as services, retail, information technology, research and development, among many others. In the state of Andhra Pradesh in India, the retail sector is estimated to be worth above US$15 billion and expected to add 2 million jobs in the state over 7 years while in Tamil Nadu, another state in India, the annual IT export is about US$1.4 billion. Nearly all of the businesses in the informal economy are small businesses. Various countries have adopted ways of unleashing the potentials of the informal economy. In the United States of America, the flagship of the free-market economy, an agency called the Small Business Administration (SBA) was created to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns”. Its programmes include financial and federal contract procurement assistance, management assistance, specialized advice and assistance on international trade, among others. Through its Equal Opportunity Loan (EOL) Programme established in 1964 to attack poverty, it relaxed credit and collateral requirements for applicants living below the poverty line so as to encourage new businesses that had been unable to attract financial backing but were nevertheless sound commercial initiatives. By its 50 years of existence in 2003, 20 million small businesses had received direct or indirect help from SBA. In a ten-year period (FY 1991 – 2000) helped almost 435,000 small businesses get more than $94.6 billion in loans while it backed more than $12.3 billion in loans to small businesses in 2002 alone. The agency rightly prides itself as the government’s most cost-effective instrument for economic development because it believes that small businesses are where innovations take place and are swifter, more flexible and often more daring than big businesses. The results are there for all to see: by 2003 small businesses provided about 75% of the net new jobs added to the economy, represented 99.7% of all employers and 97% of all US exporters, employed 50.1% of the private workforce and accounted for 52% of private sector output in 1999. SBA has made it possible for businesses that ordinarily outside the formal economy to come in and work for the economy. It is worth a try in Nigeria.

Most of the formal sources for capital are the financial institutions and government intervention schemes. By residing in the informal economy, businesses do not have access to these sources. They are left with their kin lending sources in the informal sector that provide very short-term capital at very high interest rates and stringent conditions. Also, new businesses require seed capital or start-up capital. A lot of ideas that can build businesses in all spheres of the economy, which will in turn create wealth and jobs, remain ‘dead’ for lack of funds. There is an urgent need for easier access to such capital by government and financial institutions. In addition, the government can provide loan guarantees for such firms that opt to formalize and enter the formal sector. In return, government will monitor them and boost internally generated revenue through appropriate taxation.

Goods and services from the informal economy usually lack access to real markets and so are locked out from real profit-driven growth. Some of these markets are in exports and the public sector. Government’s efforts to promote non-oil exports can receive a big bang by bringing in vital segments of the informal sector. Such products can be assisted to conform to international quality standards. Integrating the informal economy creates an information set on potential and possible markets. Also, the government can set aside public- sector procurement of certain goods and services for small and growing businesses – entrants into the formal sector, as incentives for growth and development. Big corporations that provide large-scale government procurement requirements can also be required to encourage smaller businesses to meet their own needs. There is also a need to can also organise events that will seek to create awareness and networking between small and big businesses on potential areas of business interplay.

Operators of the informal economy need skills and knowledge to grow. Unlike their counterparts in the formal sector, the informal sector lack access to these formal business skills and knowledge. Most businesses and entrepreneurs in the informal economy cannot write a simple business plan. Oftentimes, when they want to dabble into the formal world to obtain capital or markets and are required to present business plans or proposals, they simply opt out. Clearly, a number of institutions abound that provide these skills and knowledge. How can you expect a man or woman that requires money for his or her business to spend the little (“if any) to acquire skills or knowledge to run such business?

As an incentive to formalize, the members of the informal economy should be offered free training for impartation of new skills and knowledge on entrepreneurship through existing non-governmental institutions that provide such services like Lagos Business School, Fate Foundation and LEAP Africa. The government can sponsor them by paying directly to the institutions and not the beneficiaries.

Fortunately, Nigeria’s Hafsat Abiola is a member of the Organising Committee of the Youth Employment Summit and is very much at home with issues of youth employment. At a close range, I could almost touch this passion burning in her. In conjunction with YES Nigeria, I believe that she will bring her leverage to bear on government and other NGOs to confront this growing problem of youth unemployment. The increasing wave of mobility of our youth is driven, in part, by economic despair due to rising levels of unemployment and despondency. Immigration programmes such as the US visa lottery have captured the psyche of many a Nigerian youth and a visit to the foreign missions of western countries show productive young Nigerians going to great lengths to secure visas out of Nigeria. Others simply make themselves available for trafficking. It is therefore a crucial challenge for NEEDS and YES Nigeria to stem the tide. Definitely, this will not be easy but we can start by formalizing the informal economy and we should start now.

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