The Importance of the Informal Economy for Local Economic Development (LED) in Africa
- Shared by:
- LEDNA TEAM
While the informal sector in Africa is often blamed for everything ranging from tax evasion to witchcraft, it makes a huge contribution to Sub Saharan African economies. Studies suggest that the sector contributes nearly 55% of the sub continent's GDP and a staggering 77% of non agricultural employment. Given that the aim of LED is usually increased economic growth and employment opportunities at the local level, positive LED outcomes are unlikely to be achieved unless the potential and needs of the informal sector are adequately considered. This short paper argues that there is a two way relationship, where focusing on the informal sector is crucial for the success of LED strategies and initiatives, while the LED process provides a major opportunity for improving the performance of the informal sector in Africa. As a result, it is imperative that LED strategies and local economy assessments consider the needs and potential of the informal sector as a matter of priority. Bottlenecks facing its performance can then be identified and addressed, towards improving its ability to generate revenue and employment for poor localities and poor people.
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The Importance of the Informal Economy for LED
I appreciate Ms Hobson's contribution and would like to add a few comments from our experience here in Morogoro Tanzania.
In a study conducted in Tanzania in September 2005, Henando de Soto (Empowering the Disadvantaged towards Expanded Market Economyi) had this to say abount the Tanzanian informal sector investment: ".... the informal sector had assets worth 29.3 billion US Dollars, equivalent to 10 times all foreign direct investment accumulated since independence." The fact is that economic activity amongst the majority of Tanzanians takes place outside of the formal economy.
The experience in the Engineering sector in Morogoro has demonstrated that it is possible to absorb the informal sector and gradually transform it into mainstream economic sectors in manufacturing and trade.
In 2005 we started work under a programme initiated by The College of Engineering (COET) of the University of Dar-Es-Salaam (The Innovationi Systems and Clusters Programme in Eastern Africa) A preliminary inventory revealed that there were 12 medium scale engineering workshops (All registered and formal enterprises) and 44 groups of tinsmiths (All informal). The Morogoro Engineering Cluster Initiative involves these core enterprises (workshops and tinsmiths) but has other stakeholders including the Morogoro Municipality Council, Sokoine University of Agriculture (SUA), The Small Industries Development Organisation (SIDO), Vovational Education and Training Authority (VETA) to mention but some of the members of this Cluster Initiative. This configuration is known as the "Triple Helix". (Business, Government+Academia).
Working in this mode, cluster members managed to access technologies from national research institutions (Commission for Science and Technology COSTECH, Tanzania Engineering, Design and Manufacturing Organisation TEMDO etc) and utilised these technologies to introduce new products. This was a measure departure form their original operations of waiting for customers needing repairs for broken items. The 44 tinsmiths received formal registration with the assistance of the Municipality Council. VETA conducted special coursed to upgrade the skills of the workers in the Cluster Initiative. Incomes rose from approx USD 550,000 annual turnover for the whole cluster in 2005 to above USD 3m annual turnover in 2010.
The Municipality Council and SIDO are currently addressing the challenge of working premises which is a major challenge for most of the cluster firms.
Cluster based approaches are gaining ground not only in Morogoro and Tanzania but in Africa in general. The experiences in Tanzania and Eastern Africa have been shared through Africa and a continental institution was established in April 2008 by African cluster development enthusiasts with the support of the AU, The Competitivenessi Institute (TCI and Sida (Swedish International Development Agency). The Pan African Competitiveness Forum was established to promote knowledge, innovation and cluster based approaches to economic development in the continent. Please visit www.pacfnetwork.com .
Emma, in Ethiopia, the coming up cluster initiative is the Merkato Leather Cluster Initiative with the involvement of the Addis Ababba University, The Addis Chamber of Commercei, The Ministry of Industries and these institutions are expected to bring in other players in the Local economic development platform.
The cluster approach has potential to accelerate LED through the triple helix involvement and engagement.
Thank you for the wonderful document.
Peter Chisawillo
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