Why it matters to understand the informal economy in Nigeria

By Timi Olubiyi

The term “informal economy” covers a vast array of circumstances and events throughout the country. In contrast, working in the informal economy (IE) is frequently based on small or undefined workplaces, unsafe and unhealthy working conditions, unregulated, low levels of skills and productivity, low or irregular incomes, long working hours, and a lack of access to information, markets, financing, training, and technology.

Informal activities are those that occur outside of the legal framework and the government regulation. The informal economy can be viewed as either the nature of the enterprise’s operations or the nature of its employee relationships. Consequently, millions of Nigerians live, work and trade in the informal sector and also employ the most vulnerable residents. In terms of employment and output, the informal sector in Nigeria is larger than the formal sector, according to contextual observations.

According to the International Monetary Fund (IMF), the informal economy employs approximately 5.5 million people in Lagos State alone—roughly three-quarters of the state’s 7.5 million labour force. In the country as a whole, with nearly 200 million people, over 80 per cent of the population works in the informal sector. Given the labour intensity, there is little doubt that the bulk of businesses and entrepreneurs are in the informal sector.

Unlike the formal economy, the informal economy’s operations are not included in the country’s Gross Domestic Product (GDP). As a result, the GDP figure computation is a significant underestimate of the country’s GDP when the massive informal economy is excluded.

In the country, the informal economy has grown dramatically over the last two decades, with the root causes including elements related to the country’s economic context; decreasing levels of market regulation; weak policy frameworks; and socio-demographic drivers such as population growth, urbanisation, rising unemployment, widening inequality between rich and poor; and low-level education, including poverty. The major driver of the informal economy, on the other hand, is that such enterprises do not need to register with any relevant government authorities.

When citizens cannot find jobs in traditional wage employment, the requirement for sustenance forces them to look for labour elsewhere. The alternative is mainly in the informal sector of the economy, where there is no minimum wage and workers are unlikely to pay taxes, have no holiday or labour rights, and frequently work in unsafe conditions. Most of the time, it is difficult for them to obtain microcredit since they lack economic stability and concrete employer-employee ties.

In the middle of all of this, it merely provides a footing for survival for the most vulnerable and frequently ignored Nigerians. The majority of the elite view the enlarged and vast informal economy to be at the bottom rung of the economic system, whereas in fact, they are the key drivers of the economic system because they are too large, significant and relevant to be ignored. For example, it is unclear whether the country has reliable data on the National Union of Road Transport Workers (NURTW) activities in the country or the volume of transactions in Ladipo auto spare parts market in Oshodi, Lagos State, and the popular computer village in Ikeja, Lagos State, Balogun Market, and Alaba International Market, to name a few. This sector of the economy is notably significant in Nigeria, yet it is not subject to comprehensive government controls.

Meanwhile, employment in the industry is appealing owing to the simplicity with which operations are carried out as a consequence of the absence of a bureaucratic regulatory framework and little or no formal educational qualification requirements.

There are multiple perspectives on the informal economy. Some associate it with unfair competition, low productivity, human rights abuses and environmental degradation, while others associate it with entrepreneurship, flexibility, and resilience. Overall, the informal economy is enduring, but suitable regulations and policies are required to improve the sector and introduce formalisation. The decision for these businesses to formalise depends on the benefits that are derived from formalisation over the risks of remaining in the informal economy. If the former outweighs the latter, only then does formalisation seem like a viable option to the operators.

Clearly, there is a need for the government to embark on a series of measures, interventions, and support to encourage the formalisation of these businesses to sustain economic growth and development. As mentioned earlier, this informal sector is too large and important to be ignored. A concerted effort to identify and protect them is crucial for sustainability and economic development because huge potential tax revenue is lost yearly to this informality.

In recent times, the consequences of novel coronavirus (COVID-19) pandemic, inflationary pressures, insufficient electricity, high fuel cost have negatively impacted these informal businesses greatly. In this context, careful attention must be paid to the informal economy, and policy solutions need to be in place to encourage and induce formalisation. Besides, the International Monetary Fund (IMF) is urging national statistical agencies to gather information on the informal economy to help in policy formulations and to gather reliable data for economic planning.

Therefore, government may wish to have mass registration and identification and equally reach out to them through social interventions and palliative care. These suggestions, if efficiently considered, might, in turn, reduce the size of the informality in the country. Good luck!

Dr Olubiyi is an Entrepreneurship & Business Management expert