Informal Sector and Economic Development of Nigeria


July 10 (THEWILL) – The term “informal economy” covers a wide range of circumstances and events across the country. In contrast, work in the informal economy (IE) is often based on small or undefined workplaces, unsafe and unhealthy working conditions, unregulated and low skill and productivity levels, low or irregular income , long working hours and lack of access to information, markets, finance, training and technology.

Informal activities are those that take place outside the legal framework and government regulations. The informal economy can be viewed either as the nature of business operations or as the nature of relationships with its employees. Consequently, millions of Nigerians, especially those residing in the economic hub of the country, Lagos State, live, work and trade in the informal sector and also employ the most vulnerable residents. In terms of employment and production, the informal sector in Nigeria is more important than the formal sector in terms of employment and job creation, according to contextual observations.

In some cases, the informal economy is referred to as the “underground economy” if it is involved in illegal and criminal activities such as online scams, black markets, criminality, manufacturing and smuggling of illegal items or money laundering. One thing is certain about the informal economy: informality provides crucial economic opportunities for the poor and disadvantaged.

According to the International Monetary Fund (IMF), the informal economy employs around 5.5 million people in Lagos State alone, about three-quarters of the state’s 7.5 million workforce, and in the whole country, with nearly 200 million people, more than 80% of the population works in the informal sector (IMF). Given the labor intensity, there is little doubt that the majority of businesses and entrepreneurs are in the informal sector. Unlike the formal economy, the operations of the informal economy are not included in the gross domestic product (GDP) of the country.

As a result, the calculation of the GDP figure is a significant underestimate of the country’s GDP when the massive informal economy is excluded. Meanwhile, the country’s informal sector continues to thrive in various situations and, based on demographic and economic data, could be the largest in Africa. Pleasantly, across the country, it is easy to notice street vendors, craftsmen, vendors, nano and micro-enterprises, commercial buses, tricycles and motorcycles (Okada cyclists), domestic workers, traders from the market, among others, all operating informally. Generally speaking, you can easily see informality all over the country.

In the country, the informal economy has grown dramatically over the past two decades, with root causes including elements related to the economic context of the country; reduced levels of market regulation; weak political frameworks; and socio-demographic factors such as population growth, urbanization, rising unemployment, worsening inequalities between rich and poor; and low education, including poverty. The main driver of the informal economy, on the other hand, is that these businesses do not need to register with the relevant government authorities.

When citizens cannot find employment in traditional wage employment, the subsistence requirement forces them to seek labor elsewhere. The alternative lies mainly in the informal sector of the economy, where there is no minimum wage and where workers are unlikely to pay taxes, have no holidays or labor rights and work often in dangerous conditions. Most of the time, it is difficult for them to obtain microcredits because they lack economic stability and concrete links between employers and employees.

In the midst of all this, it only provides a survival base for the most vulnerable and often overlooked Nigerians. The majority of the elite consider the extended and vast informal economy to be at the bottom rung of the economic system, when in fact they are the main drivers of the economic system because they are too vast, important and relevant to be ignored.

For example, it is not clear whether the country has reliable data on the activities of the National Union of Road Transport Workers (NURTW) in the country or the volume of transactions in the Ladipo auto parts market in Oshodi, in Lagos State, and the popular IT Village of Ikeja, Lagos State, Balogun Market and Alaba International Market, to name a few. This sector of the economy is particularly important in Nigeria, but it is not subject to comprehensive government controls.

Meanwhile, employment in the industry is attractive due to the ease with which operations are carried out due to the absence of a bureaucratic regulatory framework and little or no formal educational qualification requirements. There are multiple perspectives on the informal economy. Some associate it with unfair competition, low productivity, human rights abuses and environmental degradation, while others associate it with entrepreneurship, flexibility and resilience.

Overall, the informal economy persists, but appropriate regulations and policies are needed to improve the sector and introduce formalization. The decision of these enterprises to formalize depends on the advantages that derive from formalization compared to the risks of remaining in the informal economy. If the first prevails over the second, only then does formalization appear as a viable option for operators.

Clearly, there is a need for the government to embark on a series of measures, interventions and support to encourage the formalization of these enterprises to sustain economic growth and development. As mentioned earlier, this informal sector is too large and important to ignore. A concerted effort to identify and protect them is crucial for sustainability and economic development, as huge potential tax revenues are lost each year due to this informal activity.

In recent times, the consequences of the novel coronavirus (COVID19) pandemic, inflationary pressures, insufficient electricity, high cost of fuel have had a considerable negative impact on these informal businesses. In this context, particular attention should be paid to the informal economy, and policy solutions should be put in place to encourage and induce formalization. In addition, the International Monetary Fund (IMF) urges national statistical agencies to collect information on the informal economy to help in policy formulation and to collect reliable data for economic planning.

Therefore, the government may wish to have mass registration and identification and also achieve this through social interventions and palliative care. These suggestions, if considered effectively, could in turn reduce the extent of informality in the country.

•Dr Olubiyi is an expert in entrepreneurship and business management.