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Business and Economics in Developing Countries (BEDC) 2(2) (2024) 72-78
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DOI:
10.26480/bedc.02.2024.72.78
Cite The Article:
Augustine Okon Jacob and Okon Joseph Umoh(2024).
Understanding the Grey Economy in Nigeria: Implications For
Growth, Governance, and Social Equity.
Business and Economics in Developing Countries (BEDC), 2(2): 72-
78
E-ISSN: 2990-9449 (Online)
CODEN: BEDCAS
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ARTICLE
Business and Economics in Developing Countries
(BEDC)
DOI: http://doi.org/10.26480/bedc.02.2024.72.78
UNDERSTANDING THE GREY ECONOMY IN NIGERIA: IMPLICATIONS FOR
GROWTH, GOVERNANCE, AND SOCIAL EQUITY
Augustine Okon Jacob*a,b and Okon Joseph Umohb
aDepartment of Business Administration, School of Management Science, Heritage Polytechnic, Ikot Udota, Nigeria.
bDepartment of Economics, Faculty of Social Science, University of Uyo, Uyo, Nigeria.
*Corresponding author: drjacob.ao@gmail.com
This is an open access journal distributed under the Creative Commons Attribution License CC BY 4.0, which permits unrestricted use, distribution, and
reproduction in any medium, provided the original work is properly cited
ARTICLE DETAILS ABSTRACT
Article History:
Received 23 September 2024
Revised 18 October 2024
Accepted 25 November 2024
Available online 27 November 2024
This study explores the grey economy in Nigeria, characterized by unregistered businesses, informal labor
markets, and cash-based transactions, which significantly shape the nation's socio-economic landscape. It
examines the scope, characteristics, and impact of the grey economy on Nigeria's development, highlighting
its dual role in providing livelihoods and contributing to economic activity, especially in rural areas. However,
the study also addresses critical challenges, including high unemployment rates, bureaucratic barriers to
formalization, limited access to finance, and weak regulatory enforcement, which hinder the transition of
informal enterprises to the formal sector. The implications of the grey economy extend to fiscal concerns,
such as revenue losses due to tax evasion, and labor issues, including the lack of protections for informal
workers. Moreover, the grey economy perpetuates social inequalities, leaving many excluded from state-
provided benefits. The research emphasizes the need for coordinated policy action, including simplifying the
formalization process, expanding access to finance, and implementing awareness and training programs. By
adopting a comprehensive approach, Nigeria can enhance economic resilience, improve governance, and
promote social equity, ultimately fostering sustainable national development. This study contributes valuable
insights for policymakers and stakeholders aiming to navigate the complexities of the grey economy and its
implications for Nigeria's future.
KEYWORDS
Economic development, Grey economy, Informal sector, Policy challenges, Social equity
1. INTRODUCTION
The grey economy, often referred to as the informal or shadow economy,
encompasses economic activities that occur outside the formal regulatory
frameworks established by governments. This includes a wide range of
activities, from small-scale street vending and unregistered businesses to
illegal enterprises (Nenovski, 2012). Characterized by its unregulated
nature, the grey economy operates without the oversight typically
required for formal business operations, which can lead to significant
implications for economic measurement, taxation, and overall governance.
Understanding the grey economy is essential for policymakers and
researchers, particularly in developing countries like Nigeria, where a
considerable portion of the population engages in informal work (Kifordu
et al., 2020).
In Nigeria, the significance of the grey economy cannot be overstated. As
one of Africa’s largest economies, Nigeria faces numerous challenges,
including high unemployment rates, poverty, and a growing population. A
large segment of its labor force operates within the grey economy, which
provides crucial livelihoods for millions (Jacob & Umoh, 2017). This
informal sector often serves as a buffer against economic shocks, offering
income opportunities where formal employment is scarce. However, the
reliance on informal work also presents challenges, such as a lack of job
security, limited access to social services, and reduced opportunities for
professional growth (Colombo et al., 2018). The grey economy
complicates economic policy formulation and implementation, as
activities within this sector often go unrecorded and unregulated, making
it difficult to gauge the true scale and impact of informal employment on
Nigeria’s economy (Jacob and Umoh, 2018).
Understanding the grey economy is particularly relevant in Nigeria's
context due to its implications for economic structure and development.
As informal employment continues to grow, it challenges traditional
notions of labor and economic contribution, necessitating a reassessment
of how economic productivity is measured (Adeniyi et al., 2015). The grey
economy influences various aspects of economic activity, including
taxation, regulatory compliance, and social welfare. Informal businesses
often evade taxation, resulting in reduced government revenue and
hindering the provision of essential public services. Furthermore, the lack
of formal recognition of informal workers limits their access to social
protections, healthcare, and retirement benefits, thereby perpetuating
cycles of poverty and economic vulnerability (Vasilev, 2015).
This study aims to examine the grey economy's scope, characteristics, and
impact on Nigeria's development. It analyzes informal economic activities
to provide insights into their size, significance, contributions to
employment, and economic resilience. The research explores the
interaction between the grey economy and formal economic structures,
highlighting implications for national development strategies. By
emphasizing the need for policymakers to incorporate the grey economy
into planning and regulatory efforts, the study seeks to ensure informal
workers and businesses are integrated into the broader economic
framework. Ultimately, it aims to offer actionable recommendations for
fostering a more inclusive and equitable economic environment in Nigeria.
Business and Economics in Developing Countries (BEDC) 2(2) (2024) 72-78
Cite The Article:
Augustine Okon Jacob and Okon Joseph Umoh(2024).
Understanding the Grey Economy in Nigeria: Implications For
Growth, Governance, and Social Equity.
Business and Economics in Developing Countries (BEDC), 2(2): 72-78.
2. CHARACTERISTICS OF THE GREY ECONOMY IN NIGERIA
2.1 Unregistered businesses
Unregistered businesses are a vital component of Nigeria's grey economy,
significantly contributing to the country’s economic landscape. These
businesses typically operate without formal licenses or registration with
government authorities, which excludes them from the benefits and
protections available to formal enterprises (Suleiman et al., 2016).
Examples of unregistered businesses abound across various sectors and
include small-scale enterprises such as local food vendors, hair salons,
roadside mechanics, and craft makers.
Street vendors, in particular, are a ubiquitous presence in Nigerian cities,
selling a variety of goods, from fruits and vegetables to clothing and
electronics. These informal operations often emerge from a need for
income and the inability to access traditional employment opportunities,
providing vital services to their communities while addressing local
demand (Onodugo et al., 2016). However, due to their unregistered status,
these businesses lack access to financing, which can hinder their growth
and sustainability. Without formal recognition, they cannot access loans
or financial services that could help them scale operations or improve
product offerings.
Unregistered businesses also often face challenges related to regulation
and enforcement. For instance, while they contribute to the local economy,
their informal nature means they often do not adhere to health and safety
standards, leading to potential risks for consumers (Jacob & Umoh, 2021).
Moreover, these businesses can create a perception of unfair competition
for formal businesses that adhere to regulatory standards and pay taxes.
The challenge lies in finding a balance that encourages the growth of these
unregistered entities while ensuring they contribute to the broader
economic framework.
2.2 Informal labor market
The informal labor market in Nigeria is a critical aspect of the grey
economy, characterized by a diverse range of workers and employment
types. This sector includes a wide array of individuals such as artisans,
domestic workers, and participants in the gig economy, many of whom
work without formal contracts, benefits, or protections typically
associated with formal employment (Ikeije, 2020).
Artisans represent a significant portion of the informal labor market.
These skilled workers, including tailors, electricians, plumbers, and
carpenters, often operate independently or in small workshops. While
they contribute to the local economy by providing essential services, many
face challenges related to job security, fair compensation, and access to
training or professional development (Alacovska, 2018). As a result, their
work is often precarious, with income fluctuating based on demand and
market conditions. Domestic workers, including housemaids, nannies, and
caregivers, also form a considerable segment of the informal labor market.
Many of these workers are women and face challenges such as
exploitation, low wages, and lack of social protections. They often work
long hours in demanding conditions, with little recourse to legal
protections against abuse or unfair treatment. The absence of formal
employment contracts means they have no access to benefits such as
health insurance or retirement savings, which exacerbates their
vulnerability (Wiesböck et al., 2023).
The gig economy has emerged as a significant feature of the informal labor
market, driven by advancements in technology and the increasing demand
for flexible work arrangements. Participants in this sector, such as ride-
hailing drivers and freelance digital workers, often operate outside formal
labor regulations (Huang et al., 2017). While gig work can provide
opportunities for income generation, it also leaves workers exposed to
income instability and the absence of workplace protections. The rise of
the gig economy has further complicated the landscape of informal labor,
as these workers frequently juggle multiple jobs and face uncertainties
regarding pay, job security, and benefits.
2.3 Tax evasion
Tax evasion is a pervasive issue among small businesses in Nigeria,
significantly impacting the country's revenue generation and economic
development. Many small business owners opt to avoid formal tax
compliance due to various reasons, including perceived high tax rates,
complex tax regulations, and a general mistrust of government institutions
(Omodero, 2019). This avoidance behavior creates significant challenges
for tax authorities attempting to enforce compliance and collect revenue
effectively. For many small business owners, particularly those operating
in the informal sector, immediate survival often takes precedence over tax
obligations. The perception that formal tax compliance will strain their
already limited financial resources leads them to prioritize day-to-day
operational costs over tax payments. This mindset perpetuates a cycle of
informality, where businesses operate outside the legal framework and
evade tax responsibilities (Jacob et al., 2020). As a result, the government
suffers substantial revenue losses, which could have been used for public
goods and services such as infrastructure, healthcare, and education.
Moreover, a lack of awareness regarding tax responsibilities among
informal operators exacerbates the issue of tax evasion. Many small
business owners are unfamiliar with tax laws and obligations, leading to
unintentional non-compliance (Shittu, 2023). This lack of understanding
creates a significant barrier to formalization, as potential formal
enterprises may be deterred by the complexity of the tax system or the
fear of punitive measures from tax authorities. The challenges of enforcing
tax compliance in the grey economy are further compounded by limited
resources and capacity within tax authorities. Insufficient staff and
funding for tax enforcement agencies often hinder their ability to monitor
informal business effectively (Bruno, 2018). Consequently, many small
businesses operate without fear of scrutiny or repercussion, allowing tax
evasion to persist and thrive.
2.4 Under-the-Table Transactions
Under-the-table transactions are a prevalent feature of Nigeria's grey
economy, particularly in cash-based systems where financial exchanges
occur outside the formal financial sector. These transactions, often
characterized by their informal and unregulated nature, are common
across various sectors, including trade, construction, and services (Effiong
et al., 2019). The role of cash in under-the-table transactions is significant,
as many informal operators prefer cash payments to avoid leaving a paper
trail that could attract regulatory scrutiny. These cash-based transactions
facilitate immediate financial exchanges, allowing businesses to evade
taxation and regulatory compliance. While they provide flexibility for both
buyers and sellers, they also undermine the government's ability to
monitor economic activity and collect taxes, which limits public
investment in essential services and infrastructure (Blaufus and
Hoffmann, 2019).
The prevalence of under-the-table transactions raises questions about the
implications for economic development and governance. While informal
transactions can create liquidity in local economies and support small
businesses, they also contribute to a lack of transparency in financial
flows. This opacity can perpetuate corruption and hinder efforts to
formalize the economy, as businesses operating in the grey market may
resist regulatory reforms that threaten their ability to operate without
oversight (Krah and Mertens, 2020). Under-the-table transactions can
lead to inequality in the marketplace, as informal operators may engage in
practices that disadvantage formal businesses. For instance, unregistered
vendors may offer lower prices due to their ability to evade taxes, creating
an uneven playing field for businesses that comply with regulations (Jiang
et al., 2016). This can stifle competition and discourage formal enterprises
from investing in their operations, ultimately limiting the overall growth
potential of the economy.
3. FACTORS CONTRIBUTING TO THE GROWTH OF THE GREY
ECONOMY IN NIGERIA
3.1 High Unemployment Rates
High unemployment rates are a significant issue in Nigeria, leading to an
increasing reliance on informal economic activities. The unemployment
rate in Nigeria has fluctuated over the years, often reaching alarming
levels, particularly among the youth. In response to the lack of formal job
opportunities, many individuals turn to the informal economy as a means
of survival. This trend is particularly evident in urban areas, where the
informal sector offers a variety of jobs that do not require formal
education or training (Erude et al., 2023). The link between
unemployment and informal economic activities is evident in several
ways. Firstly, the absence of adequate formal job opportunities compels
many Nigerians to seek alternative sources of income. This situation
creates a thriving informal economy that encompasses small-scale
businesses, street vendors, artisans, and freelance workers. While these
activities provide immediate relief from unemployment, they often lack
stability and security (Jacob, 2022). Workers in the informal sector
typically do not enjoy the benefits associated with formal employment,
such as health insurance, retirement plans, or job security. This precarious
nature of informal work perpetuates a cycle of economic vulnerability and
instability for many households.
Moreover, high unemployment rates can lead to a reduction in consumer
Business and Economics in Developing Countries (BEDC) 2(2) (2024) 72-78
Cite The Article:
Augustine Okon Jacob and Okon Joseph Umoh(2024).
Understanding the Grey Economy in Nigeria: Implications For
Growth, Governance, and Social Equity.
Business and Economics in Developing Countries (BEDC), 2(2):
72-78
spending and overall economic activity. When individuals are unable to
secure stable employment, their purchasing power diminishes, affecting
local businesses and the economy at large. Consequently, the reliance on
informal economic activities can create a feedback loop, where high
unemployment fosters a larger informal sector, which in turn contributes
to economic stagnation. While the informal economy can be a vital source
of income and livelihood for many, it is important to recognize that it does
not provide a sustainable solution to the challenges posed by high
unemployment rates (Bosch and Esteban-Pretel, 2014). To address this
issue, comprehensive policy interventions are necessary, focusing on
creating formal job opportunities and enhancing the skills of the
workforce to meet the demands of the labor market.
3.2 Bureaucratic barriers to formalization
Bureaucratic barriers to formalization represent a significant challenge for
small businesses in Nigeria. Many entrepreneurs face complexities and
costs associated with obtaining licenses, permits, and business
registrations. These barriers can deter individuals from transitioning their
operations from the informal to the formal sector, thus perpetuating the
cycle of informality (Adeolu, 2017). The process of formalization often
involves navigating a convoluted web of regulations and requirements.
Entrepreneurs may encounter difficulties in understanding the legal
framework, which can lead to frustration and a reluctance to pursue
formal registration. The costs associated with compliance, including
registration fees and the expenses related to acquiring necessary permits,
can be prohibitive for small business owners operating on tight budgets
(Jacob, 2024). As a result, many choose to remain informal, which
ultimately limits their access to resources, markets, and support systems.
The complexities of the bureaucratic system also exacerbate the problem
of corruption. In some instances, entrepreneurs may encounter demands
for unofficial payments or bribes to expedite the formalization process,
further dissuading them from seeking legitimate registration. This
environment of corruption undermines trust in government institutions
and hinders efforts to promote formalization within the economy (Ghura
et al., 2019). To address these bureaucratic barriers, it is essential for
policymakers to simplify the process of formalization and reduce the
associated costs. Streamlining registration procedures and creating a
supportive environment for small businesses can encourage
entrepreneurs to transition into the formal sector, thereby enhancing their
access to resources and opportunities.
3.3 Lack of access to finance
Limited access to finance is a significant barrier that forces many
individuals to operate informally in Nigeria. The financial landscape in
Nigeria presents numerous challenges, particularly for small businesses
and entrepreneurs seeking to access formal financial institutions. The lack
of collateral, high-interest rates, and stringent lending requirements often
prevent individuals from obtaining loans or credit necessary for business
growth and development (Gumel and Bardai, 2021). For many
entrepreneurs operating in the informal economy, the absence of access
to formal financing options leads them to rely on personal savings,
informal loans from family and friends, or microfinance institutions. While
these alternatives can provide some level of financial support, they often
fall short of meeting the needs of growing businesses. Informal lenders
may charge exorbitant interest rates, further perpetuating cycles of debt
and financial instability.
The lack of access to finance not only limits the growth potential of
individual businesses but also affects the overall economy. Without the
ability to invest in their operations, entrepreneurs in the informal sector
struggle to improve their product offerings, expand their markets, or hire
additional workers. This situation contributes to a stagnation of economic
growth, as the informal sector remains trapped in a cycle of low
productivity and limited innovation (Ayyagari et al., 2016). To address the
issue of limited access to finance, it is essential for policymakers and
financial institutions to develop tailored financial products that cater to
the needs of small businesses. Initiatives such as microcredit programs,
financial literacy training, and partnerships between formal banks and
informal entrepreneurs can facilitate access to much-needed resources
and foster a more inclusive financial landscape.
3.4 Weak regulatory enforcement
Weak regulatory enforcement poses significant challenges in Nigeria,
particularly in relation to labor, safety, and tax regulations. Despite the
existence of laws and regulations designed to protect workers and
promote fair economic practices, inadequate enforcement often leaves
informal workers vulnerable and unprotected (Ibrahim et al., 2022). In the
labor sector, many informal workers lack basic rights and protections.
Labor laws intended to ensure fair wages, safe working conditions, and job
security are often not applied to those in the informal economy. This
regulatory gap exposes workers to exploitation and abuse, as employers
may take advantage of the absence of oversight. Without mechanisms to
report grievances or seek recourse, informal workers remain in
precarious positions, unable to advocate for their rights. The challenges of
regulatory enforcement extend to safety regulations as well. Many small
businesses operating informally may neglect safety standards due to the
lack of oversight. This situation poses risks not only to workers but also to
consumers who may unknowingly engage with businesses that do not
adhere to safety protocols. The potential for accidents and injuries raises
significant public health concerns, further complicating the relationship
between informal businesses and the broader economy.
In terms of tax regulations, weak enforcement contributes to widespread
tax evasion among informal operators. Without stringent measures in
place to monitor compliance, many small business owners feel they can
operate without paying taxes, undermining the government's ability to
generate revenue for public goods and services (Baksi and Bose, 2016).
This situation perpetuates a cycle of informality, where businesses
operate outside the formal economy, further straining public resources. To
improve regulatory enforcement, it is crucial for the Nigerian government
to strengthen its institutions and create a culture of compliance.
Enhancing training and capacity-building initiatives for regulatory
agencies can improve their ability to enforce existing laws effectively.
Fostering collaboration between government authorities and informal
operators can promote a better understanding of regulations and
encourage voluntary compliance, ultimately leading to a more equitable
and sustainable economic environment.
4. IMPACTS OF THE GREY ECONOMY IN NIGERIA
4.1 Contribution to economic growth
The grey economy plays a complex yet significant role in Nigeria's overall
economic growth. Informal economic activities, particularly in rural areas,
contribute positively to livelihoods and stimulate economic activity. In
regions where formal employment opportunities are scarce, the informal
sector often serves as a vital lifeline for individuals and families. For many,
engaging in informal work—such as agriculture, trading, and crafts—
provides a source of income that is essential for day-to-day survival. These
small-scale enterprises can adapt quickly to local market demands and
provide goods and services that may not be available through formal
channels. Consequently, informal businesses often fill gaps in the market,
leading to increased consumer choice and improved access to basic
necessities (Jacob and Umoh, 2022).
Moreover, the informal economy serves as an incubator for
entrepreneurship, allowing individuals to develop their skills, establish
networks, and create new ventures with minimal barriers to entry. This
entrepreneurial spirit can foster innovation and adaptability, contributing
to economic resilience, especially in rural areas where formal
infrastructure and resources may be limited (Zhu et al., 2019). However,
while informal activities contribute to economic growth and stability, they
often operate on the margins, limiting their potential to drive substantial
economic transformation. To maximize the positive impacts of the grey
economy, it is crucial for policymakers to create an enabling environment
that supports the growth of informal enterprises. Initiatives that promote
financial literacy, access to credit, and business training can empower
informal workers, helping them transition into the formal economy and
enhancing their contributions to national development.
4.2 Fiscal implications
Despite the positive contributions of the grey economy to livelihoods and
economic activity, it also presents significant fiscal implications for the
Nigerian government. One of the most pressing issues is the revenue loss
due to tax evasion. A substantial portion of informal businesses operates
outside the tax system, depriving the government of essential revenue that
could be used for public services and infrastructure development. Tax
evasion is prevalent in the grey economy, as informal workers often view
tax payments as an additional burden. Many small business owners lack
awareness of their tax obligations or the potential benefits of compliance,
leading them to operate without formal registration. This situation not
only results in a loss of revenue for the government but also creates an
uneven playing field, where informal businesses compete with formal
enterprises that adhere to regulatory and tax obligations (Gokalp et al.,
2017).
The implications of this revenue loss are far-reaching. Insufficient funds
Business and Economics in Developing Countries (BEDC) 2(2) (2024) 72-78
Cite The Article:
Augustine Okon Jacob and Okon Joseph Umoh(2024).
Understanding the Grey Economy in Nigeria: Implications For
Growth, Governance, and Social Equity.
Business and Economics in Developing Countries (BEDC), 2(2):
72-78
limit the government's ability to invest in critical sectors such as
education, healthcare, and infrastructure. Consequently, the informal
economy can contribute to a cycle of underdevelopment, where lack of
investment leads to poorer public services, which in turn affects both
formal and informal workers (Gadenne, 2016). To address these fiscal
challenges, the government must consider strategies to integrate informal
businesses into the tax system, such as simplifying tax compliance
processes, providing incentives for registration, and enhancing tax
education.
4.3 Labor issues
The informal economy poses significant labor issues, particularly
regarding the lack of protection afforded to informal workers. Many
individuals engaged in informal work lack access to essential benefits such
as health insurance, social security, and minimum wages. This absence of
protections leaves workers vulnerable to exploitation and financial
instability (Osiki, 2018). Without formal labor protections, informal
workers often face precarious working conditions. For instance, they may
work long hours without overtime pay, lack safety measures in hazardous
environments, and have no recourse for workplace grievances. The lack of
minimum wage legislation in the informal sector often results in workers
receiving inadequate compensation, making it difficult for them to escape
poverty.
Moreover, the absence of social security benefits, such as retirement plans
and unemployment insurance, places informal workers at a significant
disadvantage. In times of economic hardship or personal crises, these
individuals lack the safety net that formal workers typically enjoy. This
situation exacerbates socio-economic disparities, as informal workers
struggle to maintain stable livelihoods while their formal counterparts
benefit from established protections and benefits (Oyeyinka, 2017). To
improve labor conditions in the informal sector, it is essential for the
Nigerian government to develop inclusive policies that extend protections
to informal workers. Initiatives that promote the recognition of informal
labor rights, enhance access to healthcare, and provide training for skill
development can help empower informal workers, improving their
working conditions and overall quality of life.
4.4 Social inequality
The grey economy also has profound implications for social inequality in
Nigeria. Informal workers often remain excluded from state-provided
benefits, further entrenching social disparities. As formal workers enjoy
access to a range of public services, including healthcare, education, and
social safety nets, those in the informal sector face significant barriers to
accessing similar resources.
This exclusion exacerbates existing inequalities, as informal workers often
come from marginalized communities with limited access to education
and training. The lack of opportunities for upward mobility within the
informal economy can perpetuate cycles of poverty, affecting future
generations (Yelwa et al., 2017). Children of informal workers may not
have the same educational opportunities as their peers, hindering their
ability to break free from the cycle of informality and poverty.
Moreover, the social safety net in Nigeria is often inadequate to support
those who are most in need, leaving informal workers vulnerable during
economic downturns or personal crises. The absence of state-provided
benefits contributes to a sense of insecurity and instability, as individuals
must rely solely on their informal earnings to survive (Nzeadibe and Mbah,
2015). Addressing social inequality requires a comprehensive approach
that recognizes the contributions of informal workers while providing
them with access to essential services and benefits. Policymakers must
prioritize inclusivity by developing programs that target the needs of
informal workers, ensuring that they can access healthcare, education, and
social support systems that promote equity and social justice.
5. POLICY IMPLICATIONS AND CHALLENGES
5.1 Government strategies for formalization
The Nigerian government has recognized the importance of formalizing
the grey economy, which encompasses a significant portion of the
country’s economic activities. Various strategies have been initiated to
facilitate the transition of informal businesses into the formal sector.
These strategies are vital for enhancing tax revenues, improving labor
conditions, and fostering overall economic growth.
One of the key policies aimed at formalization is the National Policy on
Micro, Small and Medium Enterprises (MSMEs), which seeks to support
and integrate informal businesses into the formal economy. This policy
includes provisions for simplifying the registration process, providing
financial incentives, and offering training programs to equip informal
business owners with the necessary skills for compliance with regulatory
frameworks (Onyeje et al., 2020). The Ease of Doing Business Reforms,
initiated in recent years, aims to reduce bureaucratic hurdles that impede
business registration and operation. These reforms streamline processes,
reduce the time required for business registration, and make it easier for
entrepreneurs to access the formal economy.
The government has implemented initiatives such as the Youth
Entrepreneurship Support (YES) Program, which aims to empower young
entrepreneurs by providing them with access to finance, mentorship, and
training. By targeting youth, the program seeks to foster a new generation
of entrepreneurs who can contribute to the formal economy (Ogamba,
2018). Another critical strategy involves collaboration with international
organizations and development partners to provide technical assistance
and funding for formalization initiatives. Programs supported by entities
like the World Bank and the International Labour Organization (ILO) focus
on capacity building for regulatory authorities and the promotion of
informal workers’ rights, enhancing the chances of successful integration
into the formal sector (Schmid and Pathak, 2017). Despite these initiatives,
the effectiveness of government strategies has been mixed, often requiring
further refinement and adaptation to the local context.
5.2 Challenges in implementation
Implementing reforms aimed at formalizing the grey economy faces
numerous challenges that can undermine their effectiveness. One of the
most significant obstacles is corruption within regulatory institutions,
which can lead to a lack of trust among informal business owners. When
entrepreneurs perceive that bribes or informal payments are necessary to
navigate the formalization process, they may opt to remain in the informal
sector to avoid these additional costs (Olujobi, 2021). Another critical
challenge is poor awareness of the benefits of formalization among
informal business owners. Many entrepreneurs lack adequate information
about the processes involved in registration and the potential advantages
of operating legally, such as access to financing, legal protections, and new
market opportunities. As a result, some may view formalization as an
unnecessary burden rather than a pathway to growth.
Resistance from stakeholders, including existing formal businesses, is also
a barrier to implementation. Established firms may perceive informal
competitors as threats to their market share and may lobby against
reforms that facilitate informal businesses’ transition to the formal sector.
This resistance can manifest in political pressure and influence, stalling or
weakening formalization initiatives (Olanrewaju et al., 2020). The
complexity of regulatory frameworks can deter informal entrepreneurs
from formalizing their businesses. For many, the perceived bureaucratic
red tape associated with registration, taxation, and compliance with labor
laws may seem insurmountable. Consequently, informal business owners
may continue to operate outside the formal economy, opting for the
simplicity and flexibility of informal arrangements (Igwe et al., 2020). The
lack of adequate infrastructure in certain regions poses a challenge. Many
informal businesses, especially in rural areas, may have limited access to
essential services, including banking, legal assistance, and business
support networks. This lack of infrastructure can hinder their ability to
engage with formal processes and institutions.
5.3 Regional differences
The prevalence of the grey economy in Nigeria is not uniform; significant
regional differences exist, influenced by economic, social, and cultural
factors. In some regions, particularly in the North and Northeast, a higher
percentage of the population engages in informal economic activities,
often driven by limited job opportunities in the formal sector. These
regions face specific challenges, including high levels of poverty,
insecurity, and a lack of educational opportunities, which can perpetuate
informality (Orji and Agu, 2018).
Urban areas such as Lagos and Abuja exhibit a different dynamic. While
informal economic activities are still prevalent, these cities have a more
significant number of small and medium enterprises operating in both the
formal and informal sectors. Urban informal workers may engage in
diverse economic activities, such as street vending, transportation, and
artisanal crafts. The density of urban populations can create opportunities
for informal businesses to thrive, but these areas also experience intense
competition and regulatory scrutiny (Farinmade et al., 2018). Regional
variations in the grey economy also extend to the level of government
support and infrastructure development. Some states have made
substantial progress in creating business-friendly environments that
promote formalization. For instance, states that have adopted the State
Business and Economics in Developing Countries (BEDC) 2(2) (2024) 72-78
Cite The Article:
Augustine Okon Jacob and Okon Joseph Umoh(2024).
Understanding the Grey Economy in Nigeria: Implications For
Growth, Governance, and Social Equity.
Business and Economics in Developing Countries (BEDC), 2(2):
72-78
Micro, Small, and Medium Enterprises (MSME) Policies often provide
support services such as training, access to credit, and simplified
registration processes (Usman, 2019). These initiatives can significantly
enhance the potential for informal businesses to transition into the formal
sector.
On the other hand, regions with limited government presence or resources
may lack the necessary support for informal businesses. In such areas,
informal entrepreneurs may find it challenging to navigate the
formalization process without adequate assistance or incentives. This
disparity can further entrench economic inequalities across the country.
Understanding these regional differences is crucial for developing
targeted policies that address the unique challenges and opportunities
presented by the grey economy in each area. Tailoring formalization
strategies to specific regional contexts can enhance their effectiveness and
ensure that the diverse needs of informal entrepreneurs are met.
6. CASE STUDIES
6.1 Street trading in Lagos
Lagos, Nigeria's bustling economic capital, serves as a microcosm of the
country's grey economy, with street trading playing a pivotal role in its
informal trade sector. Street traders, commonly referred to as "hawkers,"
operate in diverse urban spaces, from busy markets to bustling street
corners. These traders contribute significantly to the local economy,
providing essential goods and services to a rapidly growing urban
population while also facing various challenges. Street trading in Lagos is
characterized by its dynamism and diversity (Xiao & Adebayo, 2019).
Vendors offer an array of products, including food, clothing, electronics,
and household items, often adapting to the changing demands of
consumers. The informal nature of these businesses allows traders to
enter the market with minimal capital and risk, fostering
entrepreneurship and providing livelihoods for many individuals who
may lack access to formal employment opportunities (Ibidunni et al.,
2021). According to estimates, street traders in Lagos constitute a
significant proportion of the informal labor market, showcasing their vital
contribution to the city’s economy.
One of the primary advantages of street trading is its accessibility. With
limited barriers to entry, many residents, especially women and youth, can
engage in trading activities. This accessibility is particularly important in
a city like Lagos, where formal job opportunities are often scarce. Street
traders not only support their households but also contribute to the local
economy by circulating money within their communities. The ability to
quickly adapt their offerings to suit consumer preferences enables street
vendors to thrive, creating a vibrant marketplace. The informal trade
sector in Lagos also faces significant challenges. Regulatory issues are
among the most pressing concerns for street traders. Despite their
contributions to the economy, many hawkers operate without permits or
licenses, making them vulnerable to harassment and eviction by local
authorities (Adama, 2020). Government officials often perceive street
trading as a nuisance that contributes to urban congestion and disorder.
Consequently, traders face frequent raids and confiscation of goods, which
undermines their ability to sustain their businesses and livelihoods.
In addition to regulatory challenges, street traders also confront issues
related to competition and market access. The presence of established
retail businesses and supermarkets can marginalize informal vendors,
limiting their customer base and profitability. As formal businesses
expand in urban areas, they often push informal traders to the fringes,
creating disparities in market access and exacerbating economic
inequalities (Taiwo, 2015). The COVID-19 pandemic has further
complicated the landscape for street trading in Lagos. Lockdowns and
restrictions on movement led to a decline in foot traffic, adversely
impacting sales for many hawkers. Although some traders adapted by
diversifying their products or utilizing digital platforms for sales, many
struggled to recover from the economic fallout. This situation highlights
the vulnerability of informal traders in the face of external shocks and the
need for targeted support measures to enhance their resilience.
In response to these challenges, there have been calls for the government
to adopt a more inclusive approach to street trading. Rather than viewing
hawkers solely as problems to be eradicated, policymakers should
recognize their contributions to the local economy and explore ways to
integrate them into formal economic structures. This could include
establishing designated trading zones, offering training and support for
business development, and creating pathways for traders to obtain
licenses and permits.
6.2 Agriculture and informal employment in Northern Nigeria
In Northern Nigeria, the informal agricultural economy plays a crucial role
in shaping the region's socio-economic landscape. Agriculture remains the
backbone of the economy in this area, employing a significant portion of
the population and providing sustenance for countless families. However,
much of this agricultural activity occurs within the informal sector,
characterized by unregistered businesses, smallholder farms, and
informal labor arrangements. The informal agricultural economy in
Northern Nigeria is diverse, encompassing various activities, from
subsistence farming to small-scale cash crop production (Uduji et al.,
2018). Farmers typically cultivate staple crops such as millet, sorghum,
and maize, alongside cash crops like groundnuts and soybeans. Many of
these farmers operate on a small scale, often relying on traditional farming
techniques and limited resources. Despite facing numerous challenges,
including inadequate access to land, credit, and modern farming inputs,
these farmers play a vital role in ensuring food security for their
communities (Chiaka et al., 2022).
One of the defining features of the informal agricultural sector is its
reliance on informal labor. A significant proportion of agricultural workers
in Northern Nigeria are engaged in seasonal or temporary employment
arrangements, often without formal contracts or protections. This
informal labor force includes family members, casual laborers, and
migrant workers, who contribute to agricultural production during peak
seasons. While this flexibility allows farmers to adapt to labor demands, it
also exposes workers to vulnerabilities, including low wages, lack of health
benefits, and minimal job security. The socio-economic impact of the
informal agricultural economy is multifaceted. On the one hand, it
provides livelihoods for millions of people, contributing to rural
economies and ensuring food availability. The income generated from
informal agricultural activities helps families meet their basic needs and
invest in education, health care, and other essential services (Ademola,
2019). Moreover, the informal sector can enhance rural resilience by
enabling communities to cope with economic shocks and fluctuations in
formal employment.
However, the informal agricultural economy also faces significant
challenges that hinder its potential for growth and development. Limited
access to finance remains a critical issue for informal farmers. Many
smallholders lack collateral or credit history, making it difficult to secure
loans from formal financial institutions. As a result, they often rely on
informal sources of credit, which can be costly and exploitative. This lack
of access to finance restricts their ability to invest in modern farming
techniques, machinery, and inputs that could enhance productivity and
income. The informal agricultural sector grapples with a lack of
infrastructure and support services. Many rural areas lack access to
reliable transportation, storage facilities, and market information, making
it challenging for farmers to connect with buyers and achieve fair prices
for their products (Adegboyega, 2020). Without proper infrastructure,
farmers may face significant post-harvest losses, further diminishing their
income potential.
Moreover, climate change poses a considerable threat to the informal
agricultural economy in Northern Nigeria. The region is vulnerable to
erratic weather patterns, including droughts and floods, which can disrupt
agricultural production and exacerbate food insecurity. Informal farmers,
who often lack access to climate-resilient farming practices and
technologies, are particularly susceptible to the adverse effects of climate
change (Adeosun et al., 2021). To address these challenges, there is a
pressing need for targeted policies and interventions that support the
informal agricultural economy in Northern Nigeria. Initiatives aimed at
enhancing access to finance, improving infrastructure, and providing
training on sustainable farming practices can significantly bolster the
resilience and productivity of informal farmers. Recognizing and
formalizing informal labor arrangements can help improve working
conditions and ensure fair wages for agricultural workers.
The informal trade sector in Lagos and the informal agricultural economy
in Northern Nigeria are vital components of Nigeria's grey economy. Both
sectors provide essential livelihoods and contribute to local economies
while facing significant challenges. By understanding the dynamics of
these informal activities and implementing inclusive policies, the Nigerian
government can foster a more equitable and sustainable economic
environment that benefits all citizens.
7. CONCLUSION
The grey economy in Nigeria is characterized by a significant presence of
unregistered businesses, informal labor markets, and under-the-table
transactions, which collectively contribute to a complex socio-economic
landscape. Unregistered businesses, including street vendors and small-
scale enterprises, thrive in the absence of formal licensing, while the
informal labor market encompasses a diverse range of workers, from
Business and Economics in Developing Countries (BEDC) 2(2) (2024) 72-78
Cite The Article:
Augustine Okon Jacob and Okon Joseph Umoh(2024).
Understanding the Grey Economy in Nigeria: Implications For
Growth, Governance, and Social Equity.
Business and Economics in Developing Countries (BEDC), 2(2): 72-78
artisans to gig economy participants. This informal sector plays a crucial
role in providing livelihoods, particularly in rural areas. However, it also
poses challenges, including tax evasion, limited access to social
protections, and a lack of regulatory enforcement. These characteristics
highlight the grey economy's dual impact: while it contributes to economic
activity, it simultaneously undermines fiscal revenues and perpetuates
social inequalities.
To effectively reduce the grey economy in Nigeria, coordinated policy
action and long-term strategies are essential. Policymakers must prioritize
simplifying the formalization process, expanding access to finance, and
enhancing awareness of the benefits of formalization for informal workers
and businesses. Strengthening regulatory enforcement will ensure
compliance with existing laws and promote a more equitable business
environment. Engaging various stakeholders—including government
agencies, financial institutions, and community organizations—in
collaborative efforts can help create comprehensive frameworks that
address the unique challenges of the grey economy. By adopting a multi-
faceted approach that combines education, financial support, and
regulatory reform, Nigeria can facilitate a smoother transition for informal
businesses into the formal sector. This transition is crucial for fostering
economic resilience, enhancing tax revenues, and promoting social equity,
ultimately contributing to sustainable national development.
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