The Informal Economy and Entrepreneurial Development

    In September 2008, the prominent Vanguard newspaper published an interview with a senior labor department bureaucrat who admitted that 90% of new jobs in the country were being accounted for by the informal sector1. Quoting an unnamed survey, the official went on to add that the sector was also responsible for 80% of all non-agricultural employment and 60% of urban jobs. The figures are credible in source, but for a country now intent on revamping its economy for accelerated growth, they are incredible in import.

    The informal economy is described as the sum total of economic activity that happens outside state regulation, which is neither taxed nor represented in a country’s GDP. It includes a range of goods and services – from handicrafts and street traders to farm labor and money lending – that, by tradition or necessity, operate outside formal regulation and are oftentimes marked by a lack of social benefits. In the case of Nigeria, it accounts for a considerable chunk of the formal economy.

    Coming into a huge fortune of oil and natural gas reserves soon after gaining independence from British colonial rule in 1960, Nigeria’s nascent leadership tipped the balance towards over-dependence on non-renewable resources. The country profited immensely from the oil boom of the 1970s, though its growing prosperity was accompanied by a simultaneous atmosphere of official neglect towards agriculture and small scale manufacturing. In the decades following, Abuja reaped huge profits from oil exports (to the tune of an estimated $600 billion), leaving the country awash with petrodollars. However, extended civil strife and political instability permitted a continuation of outdated and non-inclusive policies that left the economy in tatters. The resulting ‘Nigerian Paradox’ describes the massive macroeconomic imbalances that have pushed a country brimming with natural and human resources into catastrophic poverty.

    The effects of economic stagnation resulted in the rapid growth of a huge informal economy that was outside the state’s influence. The activities of this sector were largely deemed survivalist because of their inherent and almost exclusive dependence on personal initiative and risk-bearing capacity. Ironically, it is the same unorganized, informal economy that is now coming to Nigeria’s rescue.

    The informal sector in Nigeria is a mammoth, heterogeneous operation that continues outside the purview of official regulation and monitoring. It transcends a wide variety of unorganized and often unobserved small-scale activities that have traditionally sustained the country’s urban and rural poor. These activities can be classified into three broad categories.

    * Products: This sub sector comprises agricultural production, mining and quarrying, small-scale building and construction and machine-shop manufacturing. Traditional Nigerian crafts in clothing and furniture are other notable mentions.

    * Services: This category includes a whole gamut of rural and urban services relating to education, health, counseling, labor, vehicle and mechanical repair, utility services, midwifery et all.

    * Financial: Nigeria has numerous parallel finance structures operating mostly on unwritten rules. The most prominent example is Esusu, which offers loans by rotation from a contributory fund.

    Although this is by no means an exhaustive definition, it does serve to highlight the extent and percolation of Nigeria’s informal economy. It is not without reason that many observers have called it the backbone of the country’s formal economy.

    If Nigeria is to get anywhere near the Millennium Development Goals by 2015, or its indigenous 2020 targets, a lot depends on its management of this tremendous underground powerhouse. Theoretically at least, the economic challenges for Nigeria are effectively reduced to transforming these subsistence activities into entrepreneurial ventures, and a vehicle for genuine and broad-based economic progress.

    Since the return of democracy in 1999, Nigeria’s elected leadership has undertaken a slew of progressive micro and macro-level initiatives designed to promote entrepreneurship. A positive indicator in this regard has been the subsequent growth of the non-oil economy, the size of which doubled to more than 7% since 20012. A massive redirection of economic policy under the regime of former president OJ Obsanjo also helped boost currency reserves and bring down inflation from a soaring near-18% in 2005 to 5.5% in 2007 (According to the National Bureau of Statistics3, the figure has since gone up to 9.7%, largely due to falling oil prices and influences of the current global financial crisis). Additional measures were put in place to buttress the financial sector’s ability to provide micro-credit to small and medium enterprises. A sustained disinvestment program that led to privatization of several large petrochemical, communication and port entities was also undertaken with the larger objective of encouraging entrepreneurial practices.

    A special initiative was the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), established in 2003 to exclusively promote the country’s MSME sector. The agency was tasked to establish structured and efficient models for enterprise development, operating as a single-window solutions provider. Its primary focus has been on accelerating the development and modernization of MSME operations, with added responsibility for rural industrialization, poverty reduction and job creation. Over the years, SMEDAN has been leading the Nigerian government’s efforts to jumpstart economic progress by encouraging finance for micro-level enterprises. Abuja has also partnered with numerous international aid agencies, most notably the World Bank, to pursue several micro and macro-level programs aimed at cultivating a rapidly sustainable MSME sector.

    However, and despite the optimism surrounding individual achievements, overall success in terms of formalizing the informal economy has been grossly underachieved considering the size of its revenue potential. A major challenge in this direction is changing established mentality that makes Nigerian financial and capital markets shy away from investing in small businesses. In 2006, Abuja sought to correct this trend by passing legislation that mandated commercial banks from setting aside 10% of pre-tax profits for equity investment in micro, small and medium enterprises (MSMEs). However, these and other arguably piece-meal measures have abjectly failed to deliver.

    For Nigeria, tapping into the informal economy requires more than just policy directives; it calls for an emphatic mind-shift in official and popular perception on the validity and inherent economic worth of activities that have colloquially been docketed, not for lack of better idiom, as ‘black market’ enterprises.

    Effective strategy in this context has to work to diverse objectives simultaneously. The predominant prerequisite of such strategy is proactive enterprise mobilization under an umbrella program designed to provoke, sustain and enrich small businesses. In terms of specifics, the Nigerian government has to deepen and widen the financial services availability to MSMEs, develop sustainable markets for its products and services and remove infrastructure and trade barriers that cripple their expansion.

    The informal economy has withstood the worst circumstances of historic and institutional neglect in Nigeria, and continues to flourish in the best traditions of entrepreneurial spirit despite tremendous local and international pressures. The country’s long-term macroeconomic performance is critically tied to its management of this sector, which can eventually prove much more valuable than its rich reserves of oil.

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