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The informal economy is saving Africa? Really?

Posted by Lindy on May 28, 2010

The informal sector is economic activity that is neither taxed nor monitored by a government, and is not included in that government’s Gross National Product (GNP), as opposed to a formal economy.

So how come it could save Africa? It is estimated that the informal economy is equivalent to 40% of the GDP of most African countries. That is a bit like taking the GDP of the USA but forgetting to count California, Texas, New York, Florida and Illinois! It seriously under-values how much money is being made.

The trouble with working off the books like this is that when it comes time to distribute official resources for development, like digging a well or building a school or paving a road the government can overlook those in the informal sector because they do not exist in the formal records. .  It’s easy to get trapped in a sort of official limbo.  You don’t get help you need because you’re not really there. But they do not choose to chase those on the informal economy to pay taxes because they perform a vital function in society and so must be tolerated and encouraged insofar as possible.  The answer in most countries is for governments to ignore the informal economy altogether.  Of course they admit it exists, but they plead a long list of difficulties when it comes time to count, tax, regulate or otherwise officially acknowledge it.  It’s simply cheaper and easier to let it go and try to tap some of the benefits indirectly.

The reason this is the best hope for Africa is that informal economies everywhere survive and thrive against the odds.  Lack of capital, education and in many cases the absence of basic services and utilities do not deter people from taking risks, even prevent them making a profit on small ventures at the bottom of the economic pyramid.  Every country in Africa depends on its informal economy to supply the needs and fill the gaps of the official one.

The link to the full article


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