How Digital Platforms are Shaping Africa’s Informal Economy

A new digital generation of informal African entrepreneurs have adopted and adapted gig economy tools and digital platforms to meet their needs for a flexible and negotiable digital marketplace. Apps that can drive demand and scale reach affordably are transforming African markets, opening up new opportunities for young Africans.

photo by Jeeva Rajgopal Wiego Informal Sector https://www.africancentreforcities.net/wp-content/uploads/2016/10/Seminar-input-24-Aug-Final.pdf

With contribution from Niti Bhan

When people think about the informal economy, this is the picture that often comes to mind.

What is often forgotten, is that the next generation of informal economy actors – mama mbogas, boda boda okada riders, wakulima farmers, traders, taxi drivers, matatu touts, drivers et cetera in Kenya and East Africa will be vastly different from the women depicted here.

The coming generation of Africa’s informal economy are today’s millennial digital natives – hungry, educated, exposed to global trends, with all the tools available to them like everyone else anywhere in the world. Only with no prospects of formal employment on the horizon.

‘Informal’ is no longer synonymous to the streets, associated with the roadside, automatically defaulting to the marginalized or vulnerable – it is not a disease to recover from. The informal economy is an equal opportunity, organized and commercial operating environment offering Africans the chance to achieve their aspirations.

Africa’s prosperous future will only be realized by embracing the informal. This is not a choice.

While my thoughts are presented in the context of East Africa, I believe it resonates with the broader, global ‘gig’ economy. So perhaps my 60,000 ft view from Nairobi, East Africa rings true for the rest of the world.

Allow me to paint a picture for you using one of the sectors of the informal economy – trade.

Informal 1.0 : The Origins of Africa’s Informal Economy

Close to 80% of Africa’s human capital works and earns in the informal economy contributing between 35% to as high as 60% of Africa’s economies. Pick a country anywhere in Sub Saharan Africa and you’ll find this to be true, be it Kenya, Uganda, Senegal, Zimbabwe, or Nigeria.

Despite this glaringly significant contribution, there is still a gulf between the mindset of people who play god in our economies and the informally employed. The implicit biases of decision makers get amplified in the real economy at the expense of real people, hindering meaningful economic development for African people.

What do I mean by the informal economy?

One definition focuses on the enterprise, whereby the informal economy comprises economic activities which are beyond the purview of the state because they lie outside its framework of laws, regulations and protections. A small proportion of these activities are illegal, but mostly they are activities which are simply not covered or partly covered by the state’s rules and regulations.

Another definition focuses on the nature of employment rather than characteristic of the enterprise. The informal economy is seen as comprised of all forms of ‘informal employment’ – that is, employment without secure contracts, worker benefits, or social protection, both inside and outside informal enterprises, including self-employment in informal enterprises (small unregistered or unincorporated enterprises), and comprising of employers, own account operators, and unpaid family workers in informal enterprises.

Ravi Kanbur, a University Professor at Cornell University, attributes the current policy mindset on informality to two main historical sources —the academic and the administrative.

The academic theory  views informality as a symbol of underdevelopment, a nuisance to be swept away and kept out of sight in the modernizing path of the national economy. The theory follows that as a modern economy grows, the size of the informal diminishes in favor of the formal.

The administrative mindset on the other hand traces its origins from the colonialist regimes that made a distinction between those activities that fell under the purview of colonial rules and regulations, and those activities that were beyond the legal and administrative reach of the colonial government. Whenever you see Nairobi’s hawkers fleeing police and city council officials, it is these laws still in force today.

Both of these prevailing attitudes have meant that for a long time, the informal has been viewed as something to get rid of – frowned upon, pitied, viewed as native, perceived to be chaotic, disorganized, teeming with criminal elements. Informal employees were viewed as rejects who ended up in the informal economy for lack of choice.

Some of it is true.

In the past, as far back as the 80s, the people who ended up in the informal employment were the formally uneducated, who for one reason or another lacked school training and relevant skills or knowledge required for the formal economy.

Like my two dear Aunts from my father’s side now in their late 60s. They were not fortunate to study up to University level due to lack of means. In the 80s and 90s they managed to carve out a place for themselves as biashara traders in the informal economy: Aunt Wangari in the mitumba (second hand clothes) trading sector while my aunt Njeri traded at Nairobi’s Marikiti: Kenya’s largest wholesale fresh produce market. It is what they did all their lives, and brought up 7 kids over that period until they retired.

But since my Aunts’ heydays, 30 years ago, the dynamics of the informal economy have changed and assumptions about people like my aunt and their operating environment have been unpacked. Niti Bhan Blog documents the changes over a decade.

As part of the  Borderland Biashara: Mapping the cross border, national and regional trade in the East African informal economy project, we discovered that a lot of prior academic work had, sadly, mischaracterized the informal economy. We found that

The lack of formal education was not a hindrance. You could start from scratch, learn and work your way up

There is a hidden class of informal sector workers that is not accurately captured by economic statisticians both in size and quality ( TED Talk )

Learning was through hands on practice, enabled by mentorship and apprenticeship. You learnt on the job

Contracts in the informal economy were built on trust and reputation

Marketing was by building strong relationships and word of mouth

Your social and trade networks was your greatest strength

The number of formally educated people was surprisingly high and on the rise

The sectors in the informal economy were innovative out of necessity to make up for gaps

There was no time or resources to waste. Every tool was thoroughly assessed for ROI

The impact of digital tools on these factors was magnitudinal

So the informal economy was not broken and did not require fixing.

Yet, old attitudes persist; the narratives that shape our media; policy recommendations by the McKinsey’s of this world; even the technologists are still in the mindset of the colonials. And, the unproductive friction between state agencies and the informal economy rages on.

Just look at some recent headlines from Kenya, Zimbabwe and Nigeria:

  • New City Hall team promises to restore sanity to Central Business District – Business Daily
  • How Zimbabwe’s Street Vendors Are Responding To Threats of Government Action – Ventures Africa
  • Ban on Street trading goes full throttle in Lagos – The Guardian

Informal Economy 2.0: How Mobile Phones Shaped the Informal Economy

A shift to a second generation of informal economy unfolded as East Africa’s rising literacy levels converged with the rise of telecommunication networks and sprawl of mobile phones, Aspirational, formally educated and able bodied men and women joined the informal economy.

Unlike their predecessors like my Aunt, they now had access to technology tools like the handy nokia 1110 for storing contacts, calls and SMSs coupled with the rise of Mpesa which introduced the ability to send and receive money remotely.

Alice Support Network
An illustration of Alice’s Biashara Network source Borderland Biashara: Mapping the cross border, national and regional trade in the East African informal economy

The image above is an illustration of Alice and her network, one of the many actors in this second generation enabled by the mobile phone.

Alice is a 43 year old informal cross border trade from Malaba – the borderland of Kenya and Uganda. She runs three lines of business: new leather shoes and bags, mitumba curtains, and school children’s accessories, operating out of a tiny physical store at Malaba. Her trade spans across Kenya, Uganda and Rwanda.

⇒On the demand side,

Alice mentors a network of traders including her sister who helps out at the store. She takes in both men and women looking for opportunities through referrals, mentors them on the trade, and incorporates them as retailers or sub-wholesalers under her wholesale business. This network forms her sales and distribution network and she is able to manage everything by mobile phone since they are spread across the Western region of Kenya and other countries in Rwanda and Uganda.

⇒On the supply side

Alice is in touch with a supplier from Nairobi’s bustling Eastleigh area for her shoe business. She brings in raw leather material and outsources the stitching work to a cobbler in Malaba before stocking up her store.

For her curtains and mitumba (second hand clothes) business, she has a supplier from Kampala, Uganda. After meeting in person severally, they established a relationship that is now maintained by mobile phone. Sometimes she will take the trip to Kampala, sometimes she will delegate to her sister while the rest of the time they will communicate via mobile phone. Like many other actors in the informal economy, a relationship with informal matatu, bus and boda boda system is necessary to handle the logistical nightmares.

Alice’s husband is a clearing and forwarding agent at the Kenya Uganda border cross at Malaba and helps out with the paperwork at the border crossing.

When she got started, Alice got the initial funding to kickstart her biashara from her parents and has since paid it back in full. She now sources financing from her chama savings group and Equity Bank and equally, supports her network with funding when necessary.

Her sister is gradually learning the ‘best practices’ of this informal sector from Alice and can now manage part of the biashara.

The second generation, like Alice, used all the tried and tested traditional offline methods of biashara applied by my Aunts in the past: cultivating trust, building a network, establishing a rock solid reputation and spreading word of her business via word of mouth. But, with an education and a bevy of tools available to her like mobile phones and mobile money Mpesa, they could amplify all the methods to scale across borders, no longer limited to her immediate physical environment.

In a lot of ways, Alice is a template of men and women in the informal economy. They could be in one of many trade and services in the informal economy and this description would still hold true, whether they sell vegetables, or mitumba bales or carpets imported from turkey; whether offline or online; whether in Kenya or Burundi. What they are all looking to establish is multiple lines of business and move from retail to wholesale. These are the documented biashara growth strategies we uncovered during our fieldwork at the borderland.

Informal 3.0: How Internet Platforms Are Shaping Africa’s Informal Economy

Ravi Kanbur attributes the persistence of informality in the face of economic growth in the last quarter century to fundamental trends in technology and trade which have smothered the employment intensity of growth in the formal sector.

Africa’s economies cannot generate enough formal jobs for all the young people born in the post 90s era. Less than 20% of East Africa’s human capital is employed in the formal sector. With not enough formal jobs to absorb the armies of youth churned out into the economy every year, the young men and women of Africa turn to opportunities in the informal economy. Even the few employed in the formal sector either have gigs on the side and or are increasingly looking outwards for opportunities in the informal sector.

Simultaneously, in the last decade, the number of smartphones, prepaid mobile phone subscribers, mobile money and mobile internet users has dramatically escalated, converging with a global tide of web platforms. Young Africans have grown up in a post digital era where Mpesa, whatsapp and facebook are the norm.

Now, everything about Africa’s informal economy has been amplified by today’s electronic media.

Jane MitumbaThe 3rd generation informal traders are women like Mukami pictured here, who, while educated, could not find a job placement in the formal economy. She is one of many young Kenyans who fled to Bahrain and Middle East to scout opportunities. After a bad experience, Mukami returned home to set up shop.

Mukami is 33 years old, a mother of 2 kids and sells bales of mitumba out of her 5X5 square store on the ground floor of Manuti building at Muthurwa’s booming market. Like Alice, she too is a cross border biashara seller with clients spanning Naivasha, Narok, Kitui, Mombasa, Kampala in Uganda, even as far south as Botswana.

Just like my Aunt in the late 80s and early 90s, she uses all the traditional methods of offline trust building, referrals reputation and word mouth. Just like Alice too, she has mobile phones and mpesa at her disposable for scaling.

But over and on top of my Aunts and Alice, the internet penetration and explosion of web platforms has opened up new opportunities to make use of Facebook, Whatsapp and Instagram to grow and scale her biashara networks unlike her predecessors.

⇒On the demand side

Mukami manages a facebook group of 198,000 people and 4,000 followers on instagram, mostly women from across Kenya and broader Africa.

Some followers are looking to become traders and she is happy to take them under her wing and nurture them as a mentor.  She teaches them all the tricks of identifying fashion trends and spot fake mitumba bales. As soon as they are ready, she furnishes them with full bales, that they can open and resell as single items on retail. She will even recommend them on her group and let them sell to other members of the group.  This forms her sale and distribution network.

Once in awhile she will share pictures of models and mannequins draped in some of her clothes – “this is how you match this trench coat with a pair of heels” – generating engagement in form of comments from buyers from different countries.

Most of her leads will first interact with her online via comments, then facebook messages, followed by connecting on whatsapp and phone before eventually following up with a visit at her store in Gikomba. Other leads stem from referrals from satisfied clients. Every lead is nurtured, and a relationship cultivated via her platform pipeline.

Mukami attributes 80% of her new leads to her customized Facebook group.

Her supportive team includes her husband, who helps out with managing the facebook group as co-admin so that one of them is always available to quell customer anxiety. She also has employed two assistants, Alfred, a 23 year old who is taking the opportunity to learn the ropes, because he too, one day wants to join the trade and rise up the ranks. Wafula is the delivery guy and takes care of errands.

Across town, one of Mukami’s long time mentees, a 27 year old Wanjiku quit her formal job to get into selling mitumba handbags full time. While working at a law firm, Wanjiku quietly dabbled in the mitumba trade as a side gig, sourcing designer handbags from Mukami, cleaning them up, taking pictures and sharing with her whatsapp, instagram and her facebook page. In the last 2 years, it has grown large enough that she is now ready to quit her formal office desk job, and join Mukami as a full time biashara trade.

This new generation of the informal economy is opting out of “formal” economy because it makes sense to do so.

Our research concludes that because this 3rd generation is educated and digitally native, they will leverage all the new emerging platforms to scale because the roadside is no longer restricted to next to the street; the street has been scaled to whatsapp and SMS and calls and facebook groups.

The long tail of industrialization and globalization

Today, in Kenya, you can open the business papers and immediately spot three stories of entrepreneurs who are involved in different types of manufacturing – charcoal briquettes; fortified flour; paper bags – at different scales of operation. Yet all three would tell you that the bulk of their business enquiries and sales come from online platforms and social media.

All are university educated and see themselves as micro-entrepreneurs and employers. That is, there’s a whole new demographic of value creation taking place at the grassroots of the Kenyan economy that straddles the challenges of the real world in which they must make their goods and deliver them to customers; and the online world which is where they build a brand and promote their products, generating new business leads and sales.

These hidden value creators are the new generation of tech savvy, young, educated entrepreneurs who toil unseen to put food on the table, not only for their own families, but also for their entire networks of suppliers and service providers. We can trace their supply chains stretching invisibly from the east coast of Africa all the way to the Pearl river delta of east Asia. This network includes merchants, traders, wholesalers, retailers, transporters, and a host of intermediaries involved in lowering the barriers to the flows of value being exchanged along the line. Now, the entire supply chain can run on mPesa, as Safaricom – Kenya’s leading telcom giant – ties up with Chinese payment solutions, and with Western Union, to span the globe or Kenya’s Family Bank, which recently partnered with SimbaPay to launch instant transfers to China’s WeChat

This economic ecosystem may never resemble the conventional models of industrialization and globalization, nor the textbook diagrams of linear, hierarchical supply chains. But it is flexible, digital, decentralized, and responsive to rapid changes in consumer taste and market demands. This is the foundation of Informal 4.0, the recognizable reality of the transforming African economy harnessing the power of connectivity, communications, and commerce on the phone.

 

 

 

This essay was inspired by this twitter thread

Much thanks to Niti Bhan for her thoughts, contribution and 4 years of inspiration.

 

Recommended readings

Rethinking the informal economy  – Martha Alter Chen 

Borderland Biashara: Mapping the cross border, national and regional trade in the East African informal economy – Emerging Futures Lab

The hidden opportunities of Africa’s informal economy  – Niti Bhan 

It’s time to drop meaningless formal-informal economic model – David Ndii

Mindsets, Trends and the Informal Economy – Ravi Kabur 

Author: Michael Kimani

Consultant, Entrepreneur, Researcher, Writer, Digital Assets Investor and Trader,

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