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Can Africa's Informal Sector Spur Growth?

By Mary Njeri Kinyanjui

Many believe that informal economies in urban Africa are inferior and inhibit economic development. However, such thinking has failed to embrace a key aspect of these informal economies: solidarity entrepreneurialism—a business principle that incorporates traditional African norms and values of individual initiative and group agency. Increased international recognition of solidarity entrepreneurialism is thus needed to realize the potential of the informal sector in encouraging social and economic growth across the continent.

According to the Kenya Institute for Public Policy Research and Analysis (KIPPRA), the proportion of informal employment in Kenya increased from 70 percent in 2000 to 83 percent in 2012. In 2012, around 10 million people were employed in the informal sector. Across informal economies in African cities, including Nairobi, Lagos, and Dar es Salaam, traders and artisans are common professions. They are often stigmatized as unskilled or illiterate groups of individuals, who do not keep records of their goods. International business discourse also identifies such individuals as survivalists and non-inventors with little entrepreneurial culture, working in informal urban markets.

Nonetheless, business exchanges in these informal urban markets are an integral part of social and economic development in Africa. These markets have retained and continue to retain traditional African norms and values of community and individual agency, which date back to African indigenous market concepts. More importantly, traders and artisans in these informal urban markets exhibit a distinct entrepreneurial behavior that is referred to as “solidarity entrepreneurialism.”

Solidarity entrepreneurialism is comprised of two key components: individual initiative and group agency. Individual initiative refers to a trader or artisan’s willpower, loyalty, capacity, and commitment to engage in business. The second component of solidarity entrepreneurialism is group agency, whereby traders and artisans embrace a community spirit. They collaborate with family and friends of the same ethnic group on business exchanges, even if they are competitors. They also share business risks and transaction costs of space, security, transportation, and inventory. Successful traders and artisans use their surplus to improve their families and communities’ wellbeing. They invest in children’s education, rural land, farm animals, local churches, schools, and health facilities. Therefore, one’s economic achievement is based on one’s investment portfolio in terms of land and animals, rather than one’s stock or bank balance.

In East Africa, particularly in Kenya, the formation of chama—a Kiswahili word for social group—has helped to enhance group agency and solidarity entrepreneurialism. Individuals collectively and cooperatively form a chama to pool and invest savings for welfare activities, such as paying medical bills or celebrating the birth of a child, as well as for investments, such as buying property, rural land, or plots in the city. The contributions are saved and then given to members on a rotational basis as lump sum loans at low-interest rates. Such business exchanges occur in a free and open market, which discourages hoarding, unfair trading, overpricing, and undercutting.

It is important to understand the dynamics of solidarity entrepreneurialism, particularly chama, at a local level in urban Africa. Here are two stories of Kenyans who have successfully utilized solidarity entrepreneurialism, and chama especially, in informal economies to improve their social and economic wellbeing.

In the 1990s, John, a trader of clothing and accessories, bought his products from wholesalers across Nairobi. However, with the onset of economic liberalization, many of these wholesalers went under, and new suppliers were too expensive. He decided that the only way to sustain his business was to go to China to source his products. With a group of friends, John formed a chama, which was comprised of 10 men, and traveled to China. Together, they made monthly contributions of 10,000 Kenyan shillings (or $108 in today’s dollars). The accumulated wealth was given out as loans, with an interest rate of 10 percent, for hotels and travel expenses in China. Through this initial chama, they have created a revolving fund that facilitates Kenyan traders’ visits to China when demands arise.

In 2011, Jane was invited by a friend to rent a stall to sell clothes in ECT Mall on Taveta Road in Nairobi. She had about $2700 in savings. She spent $325 of her savings to make a down payment and to start her business. After her first earned profit of $485, she was able to renew stock from wholesalers in Kamukunji and also save some money to contribute to her chama. After saving money for five months, she obtained a loan from her chama, which enabled her to buy more stock. And after one year, the traders in her chama made a unanimous decision to use their pooled savings and earnings from loans to buy land in Kitengela. Jane thus moved her clothing business to the plot of land in Kitengela and is now able to maintain her stall with ease because rent, water, and security costs are shared among the traders.

These stories illustrate only two individuals who have successfully embraced solidarity entrepreneurialism in informal economies across urban Africa. However, in order to fully embrace and appreciate the success of the informal sector, attitudinal and policy obstacles need to be overcome. For many decades, academics, development practitioners, and urban planners, both in Africa and internationally, have been socialized to view the informal economy as an inferior sector. State and city policies have also played a role in marginalizing the informal sector, which has led to the development of an inferiority complex among traders and artisans. Therefore, not only do professionals need to change their perspectives about the informal economy, but traders and artisans also need to learn to accept their role as stakeholders in stimulating businesses. All in all, although solidarity entrepreneurialism in the informal sector has the potential to spur economic growth in Africa, there are still a number of challenges that have yet to be addressed.

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Mary Njeri Kinyanjui is a researcher at the Institute for Development Studies, University of Nairobi, Kenya. Her research interests include trade justice, the role of women in economic informality, urbanization, and the role of grassroots and indigenous institutions in development management practices.

[Photo courtesy of Flickr]

 

 

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