How the Informal Economy Helps Drive Sustainable Development

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How the Informal Economy Helps Drive Sustainable Development

Abuja, Nigeria: Growing up, my mother was a school teacher. Eventually, she went to work with the School Board. Amidst all this, she was a serial entrepreneur. At different times during my childhood, my mum ran a restaurant, call centre, grocery store, poultry and in the not too distant past, a cooking utensils supply business. These businesses all helped her to earn money on the side to help with the family. They also had something else in common, something my mother would never think about; they were not registered.

My Mother was one of the millions of Nigerians operating in the informal economy. There is no precise definition for “informal economy”. It generally refers to businesses or commercial activities by individuals and organisations which are not fully registered, monitored and taxed by the government or its agencies.

So, informal workers and businesses can include street traders, subsistence farmers, small manufacturers, service providers (e.g. freelance photographers and hairdressers, private taxi drivers, carpenters), etc.

The ironic thing about definitions, especially with regards to terms such as “poverty” and “vegetarian” is that people who are involved in it, albeit unwillingly or unconsciously don’t usually care about the definition. The same as “informal economy”. These small-scale, unregistered traders and business people do not think of themselves in terms of “economy”. At least not in Nigeria. Running an unregistered business is usually not about being a part of the economy, that’s too broad a scope for the humble people at the helm. It’s not about avoiding government control, rather, it’s about that all too familiar need; survival.

How the Informal Economy Contributes to Sustainable Development

How informal businesses contribute to sustainable development

The informal economy is the way of life in Nigeria. According to a study by Phillips Consulting in 2014, 80 percent of participants approved of the informal economy.  The unemployment rate is currently at 19 percent and growing. What this means is that people have to find ways to survive. Short of committing a crime, the alternative is entrepreneurship of any level. Students and young graduates are setting up small businesses. These range from serving as make-up artists to selling call-cards under umbrellas on street corners. Most of them are involved in informal businesses because they’ve failed to secure jobs in the formal sectors (activities from businesses that are included in the economic calculations of gross national product and gross domestic product of a country). These small businesses are seen as stepping stones and placeholders pending when they’re able to secure a place in the formal job market. The effect is that everywhere you turn, there is a business starting or blooming. These businesses require low capital and even fewer skills. In Nigeria, you can acquire goods and services of any kind informally. From cars to food, there isn’t anything that isn’t supplied by informal businesses.

There are generally two theories about the relationship between the formal and informal economies. The first is that they are distinct and have no interaction. The second theory is that the two interact and feed off each other. My firm belief is that supporters of the first theory never studied the Nigerian economy before formulating that theory. Here, there is a symbiotic relationship between the two. It might even be argued that the formal sector in Nigeria is dependent on the informal sector for survival. The formal businesses including banks often utilize the services of the small businesses. For instance, cleaners and drivers are often hired with no formal agreements or benefits. Where the establishment does not directly deal with the informal economy, then its staff do. They eat in roadside restaurants, take taxis to work and recharge their cellphones from roadside vendors. 

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How the Informal Economy Contributes to Sustainable Development - Eco Warrior Princess

One of the reasons that so many businesses operate informally is because there are no obvious advantages to being registered. As a matter of fact, the opposite might just be the case. The sole argument to be made in favour of registration is that it will enable growth of your business and access to bigger markets. But looking at my mum’s business, or the vendor whom I purchase my fruits from, they are not expecting to exports their good to the United States anytime soon. So, they keep operating their businesses while paying the occasional levies imposed by the local authorities.

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Economists and finance experts generally believe that it is in the best interest of a country’s economy to transition businesses in the informal economy to the formal economy as soon as possible. This is to enable the government to efficiently structure taxation and services. However, in my opinion, this might not be the best for developing nations like Nigeria. The purpose of taxes is to help the Government take care of its people, implement fundamental human services and improve their standards of living so that the country may thrive. This is what these informal businesses are already doing; improving the lives of their owners. When the fruit seller receives money from a customer, he or she does not tear it up; he or she uses it to pay for the children’s tuition in private schools. The schools are formal and registered; therefore, the government can tax them. One of the most attractive features of informal businesses is the low barrier to entry. Insisting on registration will take away this advantage. Even though this may increase revenue for the government, it will reduce the number of entrepreneurs and place a greater burden on the government to invest in job creation and other programs that aim to reduce the unemployment rate.

The way forward would be to create a conducive environment for businesses of all kinds; formal or informal. This will accelerate business innovation, the growth of all kinds of businesses and increase opportunities for everyone. As businesses grow, only then can their owners look beyond survival and see the need for registration. Until then, I will buy my fruits from the street corner, and no, I will not ask for any receipts.

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