Archives for category: Economic informality

The African Statistical Journal has an interesting paper by John C. Anyanwu on the driving factors of male employment in African countries. The journal -published by the African Development Bank- is available for free here (pdf). Some interesting facts:

 Fact 1 – There is a substantial variation in male and female employment ratios across African countries. The difference is particularly evident if we compare oil-exporting and North African countries with smaller Sub Saharan African economies. The latter tend to have higher employment ratios for both the male and female population.

 

Source: Anyanwu (2013)

Source: Anyanwu (2013)

Fact 2 – In some African countries, male employment decreased between 1991 and 2010

The author argues that the decline has been particularly intense in some countries such as Niger, Be­nin, Rwanda, Lesotho, Burundi and our beloved Kenya.

Source: Anyanwu (2013)

Source: Anyanwu (2013)

One of these days I’ll have to sit down and try to understand some of these dynamics. For example, Rwanda -the “super star” of the Doing Business Reports – has done so bad in terms of employment, while Zimbabwe – land of the highly criticized indigenisation law – is one of the best performers? I guess there is a number of historical and contextual factors to take into consideration. If you have quick thoughts or further questions please share them in the comment section.

Fact 3 – The data from 1991 and 2009 show an U-shaped correlation between male employment ratio and GDP per capita

 

Source: Anyanwu (2013)

Source: Anyanwu (2013)

 

The paper uses employment data from the ILO and the World Bank –which are probably the most reliable sources currently available – but we should be always highly suspicious when it comes to employment stats in African countries. Informality is too widespread, and employment happens far too often outside the radar of government institutions and statistical agencies. Not long ago, Shanta Devarajan called it the African Statistical Tragedy. Should we therefore discard the arguments in the paper?

Although the stats might not be extremely accurate, I think that the trends could be right, especially if we consider how economic growth is happening in most parts of Africa. As I said in my last post, growth is happening without a structural transformation of the economies towards labour-intensive sectors. In particular, the manufacturing sector, which absorbs large part of the labour force in most emerging economies, is not expanding in most parts of Africa. But more research is definitely needed in this field.

The full paper is here.

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Paul Kinuthia (on the right) – Photo Credit: Business Daily

Paul Kinuthia started a small cosmetics business in the Kariobangi Light Industries (in Nairobi) 20 years ago with a start-up capital of 3000 KSh (less than 40 USD). He sold it to L’Oreal last week for over KSh 3 billion (about USD 35 million). Here’s the story on Forbes and on Business Daily.

Of course extreme success stories like Paul Kinuthia’s do not happen on a daily basis in Kariobangi. But, as I’ve said before, there is large diversity and growth potential in places like Kariobangi, although we like to call them “informal economy” or “survival clusters”. An excerpt from the Forbes article:

Kinuthia has a remarkable story. In 1995, he started off manufacturing shampoos and conditioners from a makeshift apartment in Nairobi with start-up capital of Ksh 3,000 ($40). He made these products manually using plastic drums and a huge mixing stick and heating oils, delivering his products by handcart to local salons and hairdressers. In the beginning, commercial banks refused to fund his venture while mainstream salons, beauty parlours and large retail outlets refused to stock his product because it was too native.

As the demand for his products grew, Kinuthia moved the business into bigger premises in downtown Nairobi and expanded his product range to include hair gels and pomades. While the bigger, sophisticated salons and supermarkets snubbed his products, they were very popular with street side local hairdressers because of their availability and significantly lower prices in comparison to the products on the shelves of the big retail outlets. As the products became more popular with local hairdressers, Kinuthia ploughed back his profits into moving into an even bigger place, financing growth, increasing his production capacity and extending his product range. In 1996, he incorporated a limited liability company and went on to produce body lotions and hair treatments. The new company set up better operational strategies, laying emphasis on quality and improving its packaging. By the late 90s, the company’s products were commercially available across Kenya’s mainstream retail and wholesale chains and were already commanding a sizable market share. By 2001, the company was already exporting its products to neighbouring TanzaniaUganda and Rwanda.

But despite the huge success of his business, Paul Kinuthia maintained one common characteristic of Kariobangi entrepreneurs – he doesn’t like questions from strangers. When Forbes called him for an interview, his secretary kindly relplied “Mr Kinuthia is not available”. I know the feeling very well.

More here

The state of Lagos in Nigeria decided to embrace de Soto’s “Legalist” idea of development and to start a process of mass formalization of the informal sector. I don’t know if Hernando de Soto will go there in person, but his Peru-based think tank – the Institute of Liberty and Democracy- is involved in the project. From an article in This Day Live:

The Lagos State Government has begun a comprehensive reform process, which it designed to formalise about 90 per cent assets currently locked in the state’s informal sector.

the state government had trained more than 100 enumerators in collaboration with the Institute for Liberty and Democracy (ILD), Peru to assist in data collation and information gathering under the state’s informal sector reform initiative.

.. Raji [Ministry of Commerce and Industry] said the state government was interested in having comprehensive information about the sector, and know why most people choose to operate informally, and, then work out modalities that will help in formulation policies that will encourage their migration to the formal sector.

Giving more recognition to informal operators is undoubtedly a good thing, but I wonder how far this can go. The Legalist school argues that formalizing property rights in the informal sector would trigger a virtuous cycle: business formalization turns “dead capital” (i.e. capital without property rights) into real collateral. Real collateral allows access to formal finance and new markets. Increased access to formal finance encourages business investments. Increased investments … I bet you can guess the rest of the story.

I used to like de Soto’s ideas, and to some extent I still do: as simple as they are, they point to the right direction – informal economies have a large development potential. But I turned more critical when I realized that his simple arguments have transformed into an over-simplification of reality. The equation “business registration=formalization” neglects that most activities in the informal economy are sustained by an infrastructure of (non-formal) regulatory, financial and welfare institutions beyond the reach of official governance. The central question raised in Lagos, “to know why most people choose to operate informally, and, then … encourage their migration to the formal sector” misses the point. The question should be reversed: we should try to understand how informal firms and their institutions work in practice, and to determine how formal institutions can “scale-down” and become appropriate for their needs – definitely not the other way around.

The “Africa rising” narrative in Kenya is always linked to the ICT sector, in particular mobile technologies, mobile apps, and internet-based applications. I wonder what will happen to this optimism after learning that Mocality, one of the big investors in this field, decided to shut down:

“Mocality has achieved some incredible things over the last four years, and has touched the lives of many people in Africa, but alas, all good things must come to an end.”

Few ICT enthusiasts in Kenya saw this announcement coming. Mocality, the online business directory owned by Naspers, a South Africa-based media company, will close down operations in Kenya and Nigeria on February 28th. In 4 years Mocality managed to register over 100.000 businesses in Kenya. The plan was to expand throughout Africa and create the largest business directory in the continent –none of this will happen.

Is this a hit to ICT-led afro-optimism?

To some extent, I believe it is. Or at least, it has brought some realism back to the discussion on ICT in Africa. In this blog I always argued that the expansion of the ICT sector is a great opportunity, but it has to go hand by hand with expansion in the industrial sector, manufacturing in particular, or it’ll be a hype, or even a bubble, with little effects on job creation and sustained economic growth. But if you look at the media coverage on the topic, hype has been all over the place. Look at Wired UK a year ago:

Want to become an internet billionaire? Move to Africa”:

If you want to become extremely wealthy over the next five years, and you have a basic grasp of technology, here’s a no-brainer: move to Africa.

Wired is not the Journal of Development Economics, and the exaggeration is probably intentional (I hope so anyway), but it signals the hype surrounding the ICT sector in the continent.

Perhaps Mocality made its move in the Kenyan market a little too early. Perhaps the problem is much deeper and the Kenyan market is simply not ripe for this kind of business. Mocality did not explain the reasons behind their decisions to close down, but rumors are that  the operating costs were too high and the returns on the investment were not satisfactory. We can’t forget that the Kenyan economy is still largely informal and being online or not doesn’t make much of a difference for most enterprises.

But Kenya is also a fast-growing and fast-evolving economy, and the optimists among us might argue that Mocality is leaving the market just a little too early. Mocality CEO Neil Schwartzman had a very different opinion, however, stating that:

“reaching profitability was not a reasonable near-term prospect.”

Ouch

Let me point out two errors in the title of this post. First, the plural of chama in Swahili is ‘vyama’, not ‘chamas’ like English speakers say. Second, the term self-help group is a “development-friendly” way of describing a chama, but in fact chama means ‘association’, ‘club’ or ‘party’ which can be involved in all kinds of activities. In the past I enjoyed using exotic terms like ‘indigenous’ (or ‘endogenous’) institutions in my papers but I realized that, whether I like it or not, they tend to indicate some sort of backwardness.  So, I started calling them “social networks”, like sociologists do, but I’m still not convinced.

Vyama are widespread all over Kenya and deeply embedded in the local culture, probably because they allow members to face problems and opportunities as part of a group rather than individually. This is quite a difference from the individualistic environments where I grew up (hint, it’s in Europe), where I may count on my immediate family members and friends in some occasions, but in general people rely on markets and formal institutions for almost everything. Vyama instead seem to work for the exact opposite reason: because they are flexible and informal and because they are built on social ties instead of formal structures. I should point out that vyama do get some sort of government recognition, as they usually register as Community-based Organizations (CBOs) at the Ministry of Gender, Children and Social Development but this doesn’t make them a legal entity. In very rare occasions, vyama are registered at the Attorney General’s office as private enterprises, partnerships or societies, but this happens only if the chama makes profit or large-scale investments.

What do vyama do?

Because of their flexible and informal nature, vyama are extremely difficult to categorize in simple groupings. Though, since this is a blog and I can over-simplify things, I would divide them in four main categories: (i) financial, (ii) investment (iii) welfare (iv) regulation.

Financial vyama are by far the most common. You’ll find them in the literature under the name of ROSCA, ASCA, merry-go-round or saving club. Members meet regularly and put money in a common “pot”. The sum is then given to one of the members on a rotating basis (a la ROSCA) or is given as a loan with interest (a la ASCA). A growing type of chama are the so-called “investment clubs”, which are vehicles for investments usually in land, the stock market, or in new businesses ventures. Welfare clubs are also extremely common in Kenya; they usually operate as informal safety nets and help members in case of emergencies, funerals or other type of financial shocks.  Finally the “regulatory vyama” are associations that operate in specific locations (i.e. a neighborhood, a market, etc.) and set a number of internal rules.

Now, the readings:

Probably one of the most comprehensive accounts of chama groups written in Kenya is the recent book by Mary Njeri Kinyanjui called “Vyama: Institutions of Hope” (disclosure: I work with Mary at the University of Nairobi). The book looks at the role of vyama in learning and education, investment, redistribution, social protection and socio-economic development. She also wrote a paper in 2010 (freely available here) which I strongly recommend.

If you are interested specifically in the financial role of chama groups at the household level, then you should read the papers by Susan Johnson (from 2004 and 2012, both PDFs), which show the complex landscape of formal and informal financial providers in Kenya. The organization called FSD-Kenya has collected a wealth of data on this issue as well. For more info check out the nationally-representative Finaccess surveys conducted in 2006 and 2009. The 2012 survey should come out over the next months (disclosure 2: I am also collaborating with FSD, but on a different project).

Finally, if you want more info on investment chama groups, there is an interesting manual written by the “Kenyan Association of Investment Groups – The Chama People” (KAIG) which gives suggestions about registration of chamas, internal regulations, type of investments and lots of other things. I noticed just now that KAIG recently changed policy and you need to register in order to download the “Chama handbook”. That’s quite annoying, but if you are a University student you can register for free here.

If you missed the recent news, 1.5 million counterfeit mobile phones were switched off in Kenya over the last few days. Basically, if your phone doesn’t have an IMEI code (you can check that by typing *#06# on your mobile), it will be turned off by the mobile operators. According to the Communication Commission of Kenya, Safaricom turned off 680.000 phones, Orange 75.000 Airtel 740.000, Yu 45.000; other operators have not yet released their data.

This “great switch off”, however, sounds like business for some informal sector operator:

 

Alert: this ad is probably just a joke!

HT: Easy FM

For a long time Africa has suffered from a terrible representation in the media, but we must admit that things have changed quite a lot recently. Except for the campaigns of some visibility-hungry organizations (see  “Kony 2012” or “A day without shoes”, among others), the number of articles that refer to “Africa” as the “next big thing” has reached an historical high:  “Africa the next investment frontier”, “Africa the next consumer market”  “Africa the next big food trend” “Africa and the upcoming fashion industry”. I’ve always enjoyed reading about innovation and positive change rather than the usual pity-news. But a recent tweet by Linda Polgreen, mentioned in Africa is a Country, unveils an interesting new side of the story:

What is more insulting than the idea of “positive news” from Africa? As if the continent was a dull witted child in need of encouragement.

Is this “positive-news-hype” part of the same paternalistic approach towards the continent? Is it time for Binyavanga Wainaina to write a new “How to write about Africa” making fun of this extreme afro-optimism?

The obvious answer is that we need a balanced coverage. But we also need to realize that the negative portrayals of the past are very “sticky” and they represent a serious obstacle to change. “Rebranding”, if done in the proper way, does not mean inventing a fake reality -it means emphasizing the processes of change that are actually happening.

As the Roving Bandit wrote last week, ignorance about the country-specific contexts in Sub Saharan Africa had negative consequences in terms of foreign direct investments:

due to lack of knowledge about the countries in the continent, investment decisions are often not guided by country-specific conditions but rather based on inferences from the environment of neighbouring countries. Thus, to some extent, foreign investors evaluate African countries as if the countries in the continent constitute “one big country.”

… after controlling for the main determinants of foreign investment; including openness to trade, infrastructure, and average returns to capital, sub-Saharan African countries still have FDI/GDP ratios 1.3% lower than comparable countries

Moreover, in my experience in the Kariobangi Industrial cluster in Nairobi, the issue of “rebranding” the area comes up nearly every week. I wrote a few weeks ago about how development research could be bad news for businesses. Since I wrote that post, I realized that entrepreneurs in the area are trying VERY hard to change the image of the cluster. For example, more than a hundred entrepreneurs joined forces and bought land in a nearby neighborhood. Their dream is to start a new industrial park and get the rid of the “jua kali” reputation (i.e. being informal). I’ll write more about it in future posts. In another interview, the owner of a shoes-manufacturing business told me that the quality of its boots are so high “that people don’t even realize we are from Kariobangi”. I laughed when another entrepreneur told me that the problem is with the word “bangi”, which means marijuana is Swahili, “people think we are all stoners”.

So, to conclude, I believe that rebranding is very important when sticky old reputations represent an obstacle to change. If it means only hiding the bad news, then I’m all against it.

The past month has probably been the most exciting (and busy!) of the entire fieldwork. After spending a lot of time meeting entrepreneurs and introducing ourselves in Kariobangi, we realized that we achieved the greatest of our goals: entrepreneurs started to trust us and our project – doors started to gradually open up for the collection of (what looks like) really good data.  Ah, the greatest joy for a researcher!

We were not that confident a few months back; we realized that in a context of informality and semi-formality like Kariobangi, entrepreneurs aren’t always willing to share private info with us. Sloppy data collection will easily get us trapped in the infamous GIGO rule  “garbage in, garbage out”: no matter what fancy econometric techniques we use, if the data is inaccurate, our work has no chance but being garbage. That’s when we decided not to rush in filling up questionnaires and to make several pre-visits to get to know the entrepreneurs and their business. It was worth investing the time.

We also realized that within our sample, semi-formal businesses complying with some (but not all) government regulations are more afraid to share information than the very informal businesses, which comply with no legal requirements. Last week, an entrepreneur of a semi-formal business made this point quite clearly:

 It can be riskier to comply with some regulations than not  complying at all. Informal self-employment is generally tolerated by the authorities. They say it alleviates poverty and it helps people to make an income. But as soon as you try to expand your business and to become a little more ‘formal’, problems start coming. Having a ‘Semi-formal’ business – as you call it – can be risky. The moment you try to expand is the moment you start being worried about people asking questions

My supervisor calls them “institutions of hope” but most academics use fancier acronyms like ROSCAs and ASCAs, or terms like merry-go-round, saving clubs, business associations or insurance networks. Kenyans just use the word “chama” to define “groups” or “associations” that people voluntarily create to pull resources, help each other or find common “rules of the game” in areas where there is little legal enforcement.

Yesterday, during one of the awesome Kariobangi lunchtime conversations (that’s when the best observations always come out!), my table companions and I realized that it would be impossible to understand the dynamics of local markets without considering chamas. They are an “infrastructure” of regulation and financial support that shapes the way businesses function. Though, there are huge differences within the local market in Kariobangi/Korogocho: my impression is that the more businesses operate informally, the more they depend on chamas, the more business are formalized, the lower is their reliance on these social networks–we’ll see what the data says.

The best statements that came out during lunch:

  1. The informal economy would not exist without chamas.
  2. If the government effectively outlawed chamas, the informal economy would disappear (let’s hope that no politician is listening to us!).
  3. Chamas are more relevant today than they used to be for our parents.
  4. Everybody uses chamas, also the rich people.

I heard this complaint several times during fieldwork: people ask me to be different from “the others” (i.e. other researchers) and to advertise the Kariobangi industrial cluster in a positive way. I never thought about it too much, but today I had a conversation during fieldwork that clarified the issue.

Basically, some entrepreneurs feel that researchers focus only on the challenges constraining growth in the local economy. Some talk about rampant poverty and its effects, others  about lack of human capital, non-compliance with government regulations, tax evasion, low product standards, low productivity, corruption, criminality, evil ethnic networks and what have you. On the other hand, entrepreneurs get cheered for their resilience and capacity to survive despite everything. So they become the highly romanticized ‘survival cluster’ which is loved in the field of development studies but rarely attracts new businesses to work or invest in the area.

If the study is successful (according to the researchers’ standards) the situation gets worse. The effect is that the number of MA and PhD students in the cluster increases exponentially,  so entrepreneurs get to fill out a million other questionnaires and the cluster becomes a “hot topic” in development studies; and that’s usually bad news. Potential clients, investors or business partners are not only neglected in the process. They may even gradually shun away from the cluster: who wants to do business with someone known for poverty and low quality of their products?

This might be an unknown collateral damage of development studies: over the long term, being a “hot topic” is a form of negative branding for the cluster. The problem is even worse for an area like Kariobangi that it is considered relatively advanced in the local economy, but tends to be depicted in terms of informality and marginality in most academic studies.  This is definitely bad marketing for local businesses.