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A Matter of Formality: Rethinking the Economy in the Sahel

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09/07/2021

A Matter of Formality: Rethinking the Economy in the Sahel

Three questions to Ahmadou Aly Mbaye

Economy Middle East & Africa

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A Matter of Formality: Rethinking the Economy in the Sahel

Ahmadou Aly Mbaye

Professor of economics and public policies at Cheikh Anta Diop University

The economic impact of Covid-19 has urged unprecedented responses by governments. In the Sahel, this has revealed the limits of State action on the formal economy, while also highlighting the porous boundaries between the formal and informal sectors. Ahmadou Aly Mbaye, Professor of Economics at the University of Cheikh Anta Diop in Dakar, argues that challenging the dichotomy between the two could allow for a more thorough understanding of their effects and potential of the Sahel economy for the local population.

Your research focuses on the concept of the informal economic sector and tries to go beyond the formal/informal dichotomy. How does this apply to African, and more specifically, Sahelian economies?

One important hypothesis of our research on the informal sector is that definition is paramount in designing methodologies to collect factual data on the informal economy, which affects most analyses on the sector, as well as their policy implications. It is now being increasingly accepted that the binary formal/informal approach to informality is irrelevant in understanding the great complexity of Africa’s economy. When we started to make the point in the early 2000s, mainstream literature on informality was only focusing on small informal firms as constituting the sole segment of the informal economy. We now see a growing body of literature arguing that while micro- and family enterprises are the bulk of the informal economy, we can also observe many other informal firms, by varying standards, being at least as big as many formal ones. From our surveys conducted in Africa, we generated unique datasets showcasing the significance of big informal firms, their contribution to GDP, their relationship with the government and also with small informal and big formal firms. Instead of using one or two criteria (usually firm size and registration) to define informality, we consider a larger spectrum, including honesty in accounting, mobility of workplace, non-payment of tax, the type of tax paid (lump-sum or regular business tax), to come up with a more comprehensive assessment the formal/informal dichotomy. This system highlights different degrees of formality/informality based on the number of informal criteria that firms meet.

The binary formal/informal approach to informality is irrelevant in understanding the great complexity of Africa’s economy.

In the case of West Africa and the Sahel, while it is true that the bulk of private enterprises are small informal businesses, they do coexist with many other larger formal ones, taking advantage of the weak regulatory enforcement capacity, and trying to dodge a very hostile business environment. This methodological discrepancy from mainstream literature is not trivial, since policies that are likely to work for one category of informal businesses might be ineffective for others.

Clearly our data show a great diversity in the firm responses to policy stimuli, depending on which degree of informality they respond to.

The stability in the Sahel is undermined by the presence of terrorist and armed groups, such as Boko Haram or Aqim. How does the informal sector play into these organizations' strength and legitimacy, and more broadly on the region's security?

Security is becoming the biggest challenge for Sahelian countries, as well as for the international community, due to the central role the Sahel has as a transit tunnel for drugs, weapons, and human trafficking between Africa and the rest of the world. In addition, the Sahel is increasingly becoming the hub for international terror, where radical Islamism finds a fertile ground to nurture, develop, and connect with international terrorist organizations. The links between insecurity and informality are quite clear. Informality is a testimony of weak statehood. Our findings, as well as many others, have generated strong evidence that informality thrives in Africa due to the combined effects of a weak business environment and a weak state capacity to enforce its own rules, in particular the ones applicable to private entrepreneurship.

Therefore, it is no surprise that with a growing insecurity in the Sahel, informality is increasingly overwhelming the Sahelian economies. Plus, it is increasingly shifting towards criminal and illicit activities. Before the Jihadist crisis in the Sahel, informal firms were producing and trading licit goods and services. Now, most production and trade consist of counterfeit goods, narcotics, weapons, human trafficking and the like. Hence, not only has state fragility brought about a staggering boost to informal activities, it has also turned them into more criminal ones, which are further fueling insecurities.

The links between insecurity and informality are quite clear. Informality is a testimony of weak statehood.

This dire vicious circle is to be broken in order to make any development strategy in the subregion viable.

The economy of African countries have been shaken by the Covid-19 crisis, sometimes revealing structural weaknesses. How do you see the role of the informal sector going forward, as Africa is expected to reach new development goals and eventually become a booming continent?

Covid-19 has had very dramatic consequences for African economies, and small informal actors have suffered the most. With restrictions on people’s mobility, transportation services have suffered very serious disruptions. With the closure of the airspace, small traders have not been able to operate and small producers have been struggling to sell their output. All the main activities that constitute the bulk of African economies were put under very severe restrictions, depriving most vulnerable people from their livelihoods.

As a result, Covid-19 is undermining the important role that the informal sector plays in African economies, in terms of contribution in value added, employment, and as a social safety net. At the same time, it has revealed how precarious the informal economy is, with its actors losing all resources of livelihoods and falling into a situation of complete poverty, almost immediately after restrictions were put in place. That’s why almost all governments in the subregion were compelled to remove the restrictions shortly after their implementation, because they realized it would have been challenging for people to survive a lockdown of the economy. Modernizing the informal sector is a vital necessity if these economies are to continue their development, and the same is also true for political stability.

Copyright: ISSOUF SANOGO / AFP

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