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The Competitiveness Challenge of the Formal Sector in Francophone Africa: Understanding the Role of the Informal Sector and the Business Environment
Abstract
In francophone Africa, a clear stagnation of the size of the modern sector is observed over time, contrasting with a huge expansion of the informal sector. While some authors point to competition from the informal sector as the main explanation for this contrast, a growing body of literature emphasizes the role of the business environment. This study uses a unique set of data to show that a poor business environment is affecting both formal and informal enterprises, although not to the same extent. While it is true that in areas where formal and informal firms are in competition, the latter have been able to substantially outpace the former, products offered by both categories of firms are often strongly differentiated. Our results do not show any negative correlation between exposure to informal competition and formal firms’ productivity level, which, by contrast, is found to be strongly correlated with the business environment.
... Additionally, frustrated teenagers who have already left the job market in favor of education are not included, and the young unemployment rate could decrease without a commensurate increase in employment. What is more, the majority of Sub-Saharan African women are employed in remote regions notwithstanding the expanding urbanization (Mbaye and Gueye, 2018). Women are the main producers of food security in rural communities since they work predominantly in the food service industry. ...
Since gaining independence in the 1960s, education has dramatically increased in African nations. Immediate emphasis was placed on human resource development to advance and modernize many economic areas. As a result, education was seen as a development instrument since it produced a larger number of skilled workforces, which helped to build a critical mass of experts and specialists for economic development. In this study, we explored the association between the labor force and socioeconomic forces in Sub-Saharan Africa from the period 2000 to 2020. A vector error correction model was exercised to observe the long-run and short-term cointegration between the labor force and explanatory factors such as literacy rate, economic growth, government expenditure, and progression to the secondary school level. What's more, we discerned the causality among the variables to conclude if there is a unidirectional or bidirectional relationship. The findings demonstrated that in the short run socioeconomic forces do not have any considerable impact on the labor force. Nonetheless, the long-run results revealed that economic growth and progression to the secondary education level have a positive impact on the labor force. Whilst, the Sub-Saharan African government's expenditure presented a negative impact on the labor force. Last but not least, the literacy rate exhibited an insignificant impact which suggests how inconsequential the literacy rate is to determine the labor force in Africa. Further, the findings will assist managers, scholars, and lawmakers in identifying the appropriate types of measures required in their fields of expertise or countries of interest in order to capitalize on the labor force and upgrade the current policies and reforms concerning the workforce, employment, and job market.
... The informal economy represents a large and growing portion of socio-economic activities (Charmes 2016;Muchie et al. 2016;Mbaye and Gueye 2018), including much of the work done by women worldwide. It accounts for an estimated 61% of global employment in the world; 90% in developing countries, 67% in emerging countries, and 18% in developed countries (Berik 2018), representing roughly 30% of GDP across a range of countries (Durán Heras 2012; Narayan 2017). ...
Chapter 5 (Demand, services and social aspects of mitigation),
explores how mitigation interacts with meeting human needs and access to services. It explores, inter alia: sustainable production and consumption; patterns of development and indicators of wellbeing; the role of culture, social norms, practices and behaviour changes; the sharing economy and circular economy; and policies facilitating behavioural and lifestyle change.
This chapter is part of the Working Group III contribution to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC). Electronic copies of this chapter are available from the IPCC website www.ipcc.ch; and https://www.ipcc.ch/report/ar6/wg3/downloads/report/IPCC_AR6_WGIII_Chapter05.pdf
... Senegal has a high level of human capital resources in comparison to its regional competitors (GEM, 2015). However, the majority of Senegalese entrepreneurs acknowledge that finding well-qualified personnel and focused owners/managers with a relevant set of business skills is a significant challenge (Mbaye, et al., 2018;Lukas and Cathelijne, 2017). The combining of these three types of capital, such as financial, human, and social, is critical for micro and small businesses to attain long-term viability and performance Atmadja and Sharma, 2016;Fatoki, 2012). ...
... Lack of credit for female entrepreneurs in Indonesia is a top concern as it is in other countries [18]. A clear stagnation of the size of the modern sector in francophone Africa is observed over time [28] Countries plagued by corruption are hampering business activity, at least in the formal sector, which has an effect on economic growth and development, especially among developing and transition countries [29]. ...
This study seeks to contribute to the empirical understanding to the transformation of informal business towards formal business in Nepal on the basis of cross-sectional data. This paper examines the preferences socioeconomic and other social capital related to informal business. Various indicators were identified to understand and analyze readiness of various informal sectors from literature review of different theories. People with high level of education less prefer informal sector however, prime working age labor force were involved massively in informal sector. More than two-third respondents argued that situation is not manageable which means the informal economy is not transitional to formal economy. Majority of respondents believes that there are some administrative problems that could hinder the entrepreneurial potential and their creativity to flourish.
This paper explores how key economic, demographic, social, and political variables influence labor employment in Western and Central Africa (WCA). Our analysis is based on the use of time series data, which spans from 1991 to 2020. These data were analyzed using simple ordinary least squares estimation. It was observed that economic variables accounted for about 76.81% of the total variation in labor force participation. The demographic indicators were observed to account for 96.31% of the total variation in labor force participation. For the social indicators, the variables account for 88.46% of the total variation in total unemployment. For the political indicators, the variables jointly explain 89.75% of the overall variation in total unemployment. The research concludes that the problem of labor employment within the WCA region can be solved by addressing economic vagaries, demographic explosion, and social and political change.
This study aimed to empirically examine the mediating effect of competitive advantages between entrepreneurial competencies and socioeconomic performance as well as the direct effect of entrepreneurial competencies and access to financial, social and human capitals on the socioeconomic performance of informal micro and small enterprises (MSEs) in Senegal through the lens of a resource-based view (RBV) theory. Utilizing a cross-sectional design, data for the study were randomly gathered from 356 micro and small entrepreneurs operating in the informal sector. The outcomes of the study indicated that opportunity-recognition competency, relationship competency, commitment competency, financial capital and competitive advantages all have a significant and positive impact towards the socioeconomic performance of Senegal’s informal economy. On the contrary, organizing competency, conceptual competency and social capital displayed a positive but insignificant effect on the socioeconomic performance, whereas strategy competency and human capital have both a negative and insignificant effect on the socioeconomic performance of Senegal’s informal economic sector. The results highlight the importance of entrepreneurial competencies and access to capital towards improving the socioeconomic performance of informal MSEs across developing countries. The paper ended by presenting the discussion and implication of the study.
Purpose
Sustainable development goals and the climate change agenda are becoming widely promoted topics of research for the 21st century. The role of cities is increasingly recognised as central to investigating these topics. Yet, the field of informal sector entrepreneurship which so many urban entrepreneurs in developing countries depend upon is seldom considered. To redress this imbalance, this study aims to develop a decision model in accordance with institutional theory (IT) and resource dependency theory (RDT) for city managers to deploy. The model identifies and prioritises optimal strategies to address the three areas of sustainability requirements environment society and economy within the study context of Bangladesh.
Design/methodology/approach
This study used a mixed methods research design. In the qualitative part, the authors identified the three areas of sustainability requirements (i.e. environment, society and economy) and their corresponding strategies involving the informal sector that operates within the urban environment. In the quantitative part, the authors applied fuzzy quality function deployment (QFD) integrated with the 0-1 non-linear optimisation technique to identify optimal strategies.
Findings
The findings show that strategies such as legitimate frameworks, waste management, allocation of urban public space and training programs contribute in important ways to the three areas of sustainability requirements.
Practical implications
The proposed decision model will assist policy-makers and city managers to prioritise sustainability requirements and implement optimal strategies to address those requirements.
Originality/value
Through the integration of IT and RDT, the decision model developed in this study is unique in its application to urban-based informal entrepreneurship in the context of developing countries. The effective application of the fuzzy QFD approach and the optimisation model in the context of urban-based informal entrepreneurship also offers unique contributions to the field of study.
This article is about policies designed for the small informal businesses in Africa, focusing on women-led enterprises, in order to assist them grow and eventually formalize. Following a thorough discussion on various modalities of support to such businesses, we underscore, the role of skills development in the areas of vocational training and “soft skills” development as an important way of empowering small and female entrepreneurs. We also discuss various financing mechanisms beyond standard microfinance schemes to improve uptake and boost investment and innovation among this category of firms.
The informal sector accounts for a major share of African economies’ GDP, employment--and firms. Most national surveys of the sector focus on informal employment rather than the structure of informal businesses, with sample designs oriented to small scale individual or household firms. We use firm-level data collected on 900 formal and informal businesses in the capitals of Benin, Burkina Faso and Senegal. Data from these surveys, complemented by semi-structured interviews of major stakeholders in the three cities as well as data from national accounts, document huge enforcement problems, leading to the emergence of large informal actors coexisting with smaller informal businesses. While there is a significant difference in productivity between formal and informal firms, the productivity gap is much smaller for large informal firms than for small informal firms, suggesting that large informal firms have the pre-requisites to formalize but choose not to do so.
Contrary to the expectations of much of the early development literature, the informal sector has not only persisted but actually grown in many developing countries, particularly in Africa where it dominates the economy both in terms of output and employment. This growth has occurred in conjunction with increasing globalization and opening up of economies, which has provoked a debate about the impact of these processes on the informal sector. In this debate it is often argued that the poor, usually women, lose out in a globalized world as multinationals seek to exploit low labour costs in developing countries. The empirical evidence suggests that there are in fact both winners and losers in a globalized economy. Given the importance of informalization in African economies, this paper sets out to summarise the nature of the informal sector in Africa and how globalization affects its development. Based on the issues discussed in the paper, a number of policy recommendations are proposed. The ultimate aim of any African government must be job creation and poverty alleviation, and the policy response for this objective has to address both the removal of the barriers that constrain the participation of enterprises and workers in the formal economy, as well as extending assistance to those in the informal sector. However, this poses a particular challenge for policymakers, namely the trade-off between the ability of the sector to generate jobs and the level of benefits and protection provided for informal workers.
Despite 40 percent of households relying on household enterprises (non-farm enterprises operated by a single individual or with the help of family members) as an income source, household enterprises are usually ignored in low-income Sub-Saharan-African development strategies. Yet analysis of eight countries shows that although the fast growing economies generated new private non-farm wage jobs at high rates, household enterprises generated most new jobs outside agriculture. Owing to the small size of the non-farm wage job sector, this trend is expected to continue for the foreseeable future. This analysis of enterprises and their owners shows that although it is a heterogeneous sector within countries, there are many similarities across countries, indicating that cross-country learning is possible. For labor force participants who want to use their skills and energy to create a non-farm income source for themselves and their families, household enterprises offer a good opportunity even if they remain small. The paper finds that given household human capital and location, household enterprise earnings have the same marginal effect on consumption as private wage and salary employment. The authors argue that household enterprises should be seen as part of an integrated job and development strategy.
In this paper, we seek to understand the effects of international competitiveness on export performance in Senegal at the industry level over 1974-1998. To this end, we have calculated two indices of competitiveness in manufacturing, namely: relative unit labor costs (RULC) and relative producer prices (RELPR). For these indices, we compare the Senegalese experience to those of developing and transition countries in four other regions: Africa, Asia, South America, and Eastern/Central Europe. Our econometric results reveal that both indicators have a significant effect on sectoral exports, with RULC having a greater and more robust effect than RELPR. Our indicators show that Senegalese international competitiveness has substantially deteriorated over time, with respect to all the comparison regions. The 1994 devaluation of the CFA franc temporarily restored competitiveness, but the situation rapidly deteriorated again within a few years. There are several reasons for the deterioration prior to 1994: the exchange rate, relative wages in dollar terms and relative productivity all contributed. Senegalese relative wages, measured in dollars, rose on average 1.9 percent annually between 1974 and 1993, while Senegalese productivity fell on average 3.7 percent annually during the same period. The consequences have been disastrous for Senegalese competitiveness. Raising productivity growth relative to wages would appear to be the best and most sustainable way of improving Senegalese international competitiveness which would contribute to the raising of the national living standards.
The growth of young, technology-based firms has received considerable attention in the literature given their importance for the generation and creation of economic wealth. Taking a strategic management perspective, we link the entrepreneurial strategy deployed by young, technology-based firms with firm growth. In line with recent research, we consider both revenue and employment growth as they reflect different underlying value creation processes. Using a unique European dataset of research-based spin-offs, we find that firms emphasizing a product and hybrid strategy are positively associated with growth in revenues. The latter strategy also has a positive influence on the creation of additional employment. Contrary to expectation, however, we find that firms pursuing a technology strategy do not grow fast in employment. Our study sheds new light on the relationship between entrepreneurial strategy and firm growth in revenues and employment.
This paper investigates the determinants of survival and growth among small and very small enterprises in Africa and Latin America. Location is found to be an important factor. Firms located in urban and commercial areas are more likely to survive during a given year than those located in rural areas or those being operated out of home. Urban and commercial location is also associated with faster growth, as measured by the number of employees hired in a given year. Studies are also cited to show that human capital matters, especially when it is in the form of vocational training or prior business experience. Copyright 2002 by Kluwer Academic Publishers
Using firm level data on 70,000 enterprises in 107 countries, this paper finds important effects of access to finance, business regulations, corruption, and to a lesser extent, infrastructure bottlenecks in explaining patterns of job creation at the firm level. The paper focuses on how the impact of the investment climate varies across sizes of firms. The differences across size categories come from two sources. First, objective conditions of the business environment do vary systematically by firm types. Micro and small firms have less access to formal finance, pay more in bribes than do larger firms, and face greater interruptions in infrastructure services. Larger firms spend significantly more time dealing with officials and red tape. Second, even controlling for these differences in objective conditions, there is evidence of significant non-linearities in their impact on employment growth. The results suggest strong composition effects: A weak business environment shifts downward the size distribution of firms. In the case of finance and business regulations this occurs by reducing the employment growth of all firms, particularly micro and small firms. On the other hand, corruption and poor access to infrastructure reduce employment growth by affecting the growth of medium size and large firms. With significant differences between firms with less than 10 employees and SMEs, these results indicate significant reforms are needed to spur micro firms to grow into the ranks of the SMEs.
In this chapter, the relationship between the formal and informal sectors in francophone Africa is investigated, considering both trade with and outsourcing to the informal sector, and competition from it. Using survey data collected in francophone West Africa, important cases of backward and forward linkages between both sectors are documented. The chapter also highlights areas where fierce competition from the informal sector is observed. Finally, a descriptive statistic relational analysis and econometric regression are used to shed light on the profile of formal firms that are more likely to interact with informal ones, either by way of trade or outsourcing or through competition.
Despite some favourable conditions and a number of policy reforms, Senegal's participation in the global economy remains tenuous. This paper uses a Ricardian framework to study Senegal's international competitiveness in manufacturing. Wages, productivity and unit labour costs in Senegal are compared to those of other developing countries. Senegal's labour productivity has grown much more slowly than in successful emerging economies. The 1994 devaluation of the CFA franc has dramatically improved Senegal's international competitiveness but further improvements in competitiveness depend on productivity growth given the constraint of the fixed exchange rate. We find a significant effect of relative unit labour costs on exports, particularly of manufactured goods. Sustained export-led growth, however, requires additional structural reforms.
In this chapter the emergence of the concept of the ‘informal sector’ and its subsequent modifications is reviewed against
the background of the overall economic development in Sub-Sahara Africa.
In many developing countries, a significant part of economic activity takes place in the informal sector. Earlier work has examined the determinants of the size of the informal sector, focusing separately on factors such as tax and regulation burden, financial market development, and the quality of the legal system. We revisit this issue by using an integrated data set which contains information on all these aspects. Building on a simple analytical framework, we test the channels affecting the degree of informality. We find that the quality of the legal framework is crucially important in determining the size of the informal sector, whereas the significance of taxes, regulations, and financial constraints is reduced in the context of a well functioning legal system, consistent with the presented model. Additionally, firm size is negatively correlated with the propensity to go informal; finance constraints tend to induce informality among smaller firms but not among large firms, whereas legal obstacles induce informality among larger firms.
Why do firms choose to locate in the informal sector? Researchers often argue that the high cost of regulation prevents informal firms from becoming formal and productive. Our results point to a more nuanced story. Using data from surveys of microenterprises in South Africa, Namibia, Botswana, Kenya, Uganda, Tanzania, and Rwanda, we find that the labor productivity of informal firms is virtually indistinguishable from that of formal firms in East Africa, but very different in Southern Africa. We provide a theoretical model to explain this result, based on the key assumption that firms may evade taxes subject to a cost (or concealment cost) that is increasing and convex in the firm’s employment size. Consequently, the productivity distributions reflect the differences in concealment costs and the opportunity cost of formality. Greater enforcement of laws and better provision of services such as finance and electricity to formally registered firms in Southern Africa means that firms are more likely to register; those that do not are likely to be operating as “survivalist” firms. But in East Africa, weak enforcement of tax payment and no significant difference in access to services between formal and informal firms means that these variables do not explain the allocation of firms across the informal-formal divide. We conclude that in countries with weak business environments, informal firms are just as likely as formal firms to increase their productivity as they grow. Thus, interventions to increase productivity and lower the cost of formality may be helpful. But in countries with strong business environments such as those in Southern Africa, owners of informal firms are likely to be better off entering the labor market as wage labor. In the latter case, investment in education or vocational training is probably more important.
The informality discourse is large and vibrant, and is expanding rapidly. But there is a certain conceptual incoherence to the literature. New definitions of informality compete with old definitions leading to a plethora of alternative conceptualisations. While some individual studies may apply a tight definition consistently, the literature as a whole is in a mess. This article proposes that informality and formality should be seen in direct relation to economic activity in the presence of specified regulation(s). Relative to the regulation(s), four conceptual categories that can help frame the analysis are: (A) regulation applicable and compliant, (B) regulation applicable and non-compliant, (C) regulation non-applicable after adjustment of activity, and (D) regulation non-applicable to the activity. Rather than use the generic labels 'informal' and 'formal', it would be preferable if the analysis focused on these four categories (or even more disaggregated as appropriate). A central determining factor in the impacts of regulation on economic activity across these four categories is the nature and intensity of enforcement. While lack of enforcement is well-documented, an understanding of its determinants - why and to what extent a government would not enforce a regulation that it has itself passed, and why non-enforcement varies from one context to another, is relatively neglected in the literature. Thus, specificity on regulation and on enforcement is the key to achieving conceptual clarity in the analytical literature and in the policy discourse on informality.
Despite some favourable conditions and a number of policy reforms, Senegal's participation in the global economy remains tenuous. This paper uses a Ricardian framework to study Senegal's international competitiveness in manufacturing. Wages, productivity and unit labour costs in Senegal are compared to those of other developing countries. Senegal's labour productivity has grown much more slowly than in successful emerging economies. The 1994 devaluation of the CFA franc has dramatically improved Senegal's international competitiveness but further improvements in competitiveness depend on productivity growth given the constraint of the fixed exchange rate. We find a significant effect of relative unit labour costs on exports, particularly of manufactured goods. Sustained export-led growth, however, requires additional structural reforms. Copyright 2002, Oxford University Press.
Our survey of private manufacturing firms finds the size of hidden "unofficial" activity to be much larger in Russia and Ukraine than in Poland, Slovakia and Romania. A comparison of cross-country averages shows that managers in Russia and Ukraine face higher effective tax rates, worse official corruption, greater incidence of mafia protection, and have less faith in the court system. Our firm-level regressions for the three Eastern European countries find that official corruption is significantly associated with hiding output.
We investigate the relationship between export market shares and relative unit labour costs using a long panel of 12 manufacturing industries across 14 OECD countries. We ask how sensitive are export market shares to changes in relative costs and what determines this sensitivity? Both costs and embodied technology are important, but neither can fully explain changing export positions. We explore whether residual country-specific trends might be linked to "deep" structural features of economies. Sensitivity to labour costs is lower in high tech industries and core ERM countries. Industry elasticities have increased, especially in industries subject to increasing product market competition.
This paper presents the view that the informal economy arises when excessive taxes and regulations are imposed by governments that lack the capability to enforce compliance.The determinants and effects of the informal sector are studied in an endogenous growth model whose production technology depends essentially on congestable public services. The model concludes that changes, both in policy parameters and the quality of government institutions, that promote an increase in the relative size of the informal economy will also generate a reduction in the rate of economic growth.The paper then uses data from Latin American countries in the early 1990s to test some of the implications of the model and to provide estimates for the size of the informal sector throughout these countries. The empirical approach consists of identifying the size of the informal sector to a latent variable for which multiple causes and multiple indicators exist. The size of the informal sector is found to depend positively on proxies for tax burden and labor-market restrictions, and negatively on a proxy for the quality of government institutions. Furthermore, the empirical results suggest that an increase in the size of the informal sector negatively affects growth by, first, reducing the availability of public services for everyone in the economy, and, second, increasing the number of activities that use some of the existing public service less efficiently or not at all.
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