Client: World Bank

Most work in Africa today is in the informal sector. Indeed, flourishing informal sectors, where most new jobs are created, are the most important anti-poverty mechanisms in Africa today.

For that reason, no policies should be adopted that inhibit the capacity of the informal sector to create jobs, but large informal sectors should not be a matter of laissez faire. African economies would grow faster and more equitably if the most successful elements of the informal sector could be brought into the formal sector. Constraints on growth and productivity in the informal sector are severe, as are the human consequences for its employees due to lack of access to social protections. Most exporters are in the formal sectors, since international markets demand a level of professionalism and quality that the informal sector cannot meet due to difficulties in recruiting quality staff. Formalization would also diversify the tax base (perhaps allowing a reduction in overall rates) and the financing of social programs.

Bringing the informal sector progressively into the mainstream – through incentives rather than coercion -- would expand the size of internal and external markets, increase opportunities for entrepreneurship and employment, raise incomes in towns and rural areas, and boost consumer demand, Jacobs and Associates found in recent studies (2002) prepared for the World Bank on Senegal and Mauritania.

Rather than focusing on the informal sector as an “unfair competitor” to the formal sector, it is more useful to see the informal sector as an incubator to build skills and assets before an enterprise enters the formal sector, with its opportunities such as larger markets and costs such as higher production and labor costs. The informal sector has traditionally been an entry point into the formal sector.

Due to costly fiscal and regulatory barriers, however, transition to the formal sector is difficult for all except the most successful of informal enterprises. Jacobs and Associates recommends that governments create special “regulation and tax holidays” by creating a special legal status, such as “Enterprises in Transition”, accompanied by an attractive package of incentives and aids for such enterprises. An incentive-based program could include incentives such as: