Tag: informal sector

Core features for African Post-Covid-19 economic stimulus packages.

The global coronavirus pandemic has not only put public health and health systems under threat it has undermined livelihoods, businesses, and economies across the continent. As a result, many policymakers are turning their attention to how to get those economies started again, as they shift from the public health response. Some countries such as South Africa and Kenya have already released details on their stimulus packages. Each African country will need to come up with a package that works for them specifically. However, as diverse as these packages may be there are some core features and opportunities that I think apply to most if not all African states. That will not only aid in jumpstarting their economies but lay a foundation for long-term growth through tax reform, building social safety nets, and putting money in the right places. African states may not have the financial firepower that the developed world has deployed to keep their economies alive, but with some creative and bold policymaking African governments can not only jumpstart their economies out of the Coronavirus malaise but also lay the foundations for long term growth.

Investing in the right places

There are two sectors, agriculture, and the informal economy, that define sub-Saharan African economies, and will require specific focus in any form of stimulus.

Agriculture is the foundation of the African economy. At least 60% the population of sub-Saharan Africa are smallholder farmers, and about 23% of sub-Saharan Africa’s GDP comes from agriculture. Stimulus measures aimed at the agriculture sector are critical. This should include

  • Subsidies for inputs (fertiliser, seed, pesticides, etc.) for farmers, that will ease the cost of farming in a tough year.
  • Heavy investment in small farmer training and education that will enhance the skills and productivity of small farmers.
  • Investment in rural infrastructure such as warehouses and rural roads that improve farmer incomes cut the cost of storing and moving goods from farm to market, making those goods cheaper for consumers.
  • Facilitating through guarantees the provision of credit to businesses along the agricultural value chain that provides services to farmers, move agricultural goods or process agricultural goods.

Boosting agricultural incomes, productivity, and efficiency, will not only help drive growth out of the crisis but also help make food cheaper and more plentiful for consumers. In short, an agriculture targeted stimulus could be the foundation for long term food security

The second critical sector is the informal sector. The IMF has estimated that on average the informal sector contributes between 25% and 65% of GDP in Sub-Saharan Africa with Mauritius and South Africa at the low-end under 25% and Tanzania (over 50%) and Nigeria (over 60%) at the other end, and that the sector accounts for between 30% to 90% of non-agricultural employment.

For the informal sector, the key to a stimulus lies in cheap credit (or grants if the government can afford it). Many informal businesses have been subjected to weeks or months of low business volumes (or none at all) due to restrictions put in place to control the virus. This means they do not have working capital, to reopen and restart they will require this capital, and cheap credit is a quick and effective means of providing it. Governments can provide credit to Micro and small enterprises (as most informal businesses are) through existing channels that the informal sector already uses, such as mobile lending, cooperatives, savings groups, and microfinance institutions. Restarting the informal sector is critical to ensuring that people have jobs and incomes, livelihoods that do not just keep the economy turning but the food on tables and kids in school.

Combined the agriculture and the informal sector account for at least 40% of most African economies and are the primary providers of employment. The design of any African economic stimulus must have a significant focus on these two sectors if it is going to have any significant impact.

Tax reform

Some countries have introduced a set of tax cuts to ease consumer pain and help save businesses money. While tax relief will help a bit, outside of South Africa the tax base of most African countries is simply not big enough for tax cuts to have a big simulative effect.

However, taxes are a problem across the continent. African governments, do not collect enough taxes relying on a narrow base of taxpayers paying into a system riddled with tax loopholes, breaks and exemptions. Furthermore, the crisis will put millions out of work and cut the revenues of businesses significantly. However, as the American saying goes, never let a good crisis go to waste. This crisis presents a perfect opportunity for African governments to pursue genuine tax reform, that will help broaden the tax base and mobilize domestic funding for development rather than debt.

We can do this by reforming the tax system to make it, simpler. Make it easy to pay, easy to track and hard to confuse, this can be done through a combination of.

  • Removing existing individual and corporate tax breaks and exemptions while bringing down headline corporate tax rates.
  • Removing transfer pricing loopholes that allow large corporations to avoid paying local taxes.
  • Put in place new frameworks that will assess the proposed and existing tax breaks based on their verifiable impact. In other words, the impact of existing tax breaks should be clearly evident in the data and the justification for a new tax break should also include clear indicators on if it is working. This would prevent the myriad of loopholes creeping back into the system

Getting more companies in the tax net, on an evening playing field while doing away with all the complexity that enables the avoidance of taxes will broaden the tax base. This can be accompanied by a marginal lowering of headline rates as there will be more people and companies paying taxes. A smaller burden on more people will result in less stress on consumers and companies and higher tax revenue when the post-crisis recovery starts.

Safety Nets

One thing the crisis has done is put severe stress on the safety nets and support systems that most Africans rely on. Those with jobs, both formal and informal, often support their immediate and extended families. Foreign remittances (migrant workers sending money back home) has grown by ten times in the last 2 decades. This is a critical source of income and support for millions around the continent and in many countries is one of the largest sources of foreign currency and inward investment. Domestic and international transfers which essentially form our social safety nets are being ravaged. As the domestic economy sheds jobs and opportunities, incomes whether formal or informal will be cut or lost entirely. Internationally, as we have already seen job losses will be immense, and African migrants will be part of that and the World Bank expects international remittances to fall by 23%. Millions around the continent will be without vital support from struggling friends and families and governments must step in. This can take one of two forms:

  1. Give people money. Cash transfers (as I laid out in a previous post) are simple and effective and in a crisis potentially lifesaving. In Togo the government has deployed a cash transfer program called Novissi targeted at people whose daily income is no longer guaranteed due to disruptions caused by the Coronavirus crisis, using existing mobile money platforms. The cash transfer does not fully replace people’s incomes, but it does provide a lifeline, ensuring that people do fall into desperation. It also shows that a mass cash transfer program is possible and need not break the bank.

 

  1. The second option is to invest heavily and quickly in the provision and delivery of key services. Ensure that critical needs such as power, healthcare, sanitation are provided cheaply or free as widely as possible and that critical income-generating venues such as food markets can run with social distancing and sanitary measures in place, that would ensure income generation but also keep people safe.

Neither of these two solutions (or a combination of both) should be short term solutions. Building viable social safety nets is a key need across the continent and if included in a stimulus package, they could be the basis for long term remaking of the social contract across the continent. Without putting in place viable safety nets to replace the informal ones that are being worn thin by the pandemic we may see more people forced into desperate poverty, which would set endanger millions more lives and threaten social stability.

Speed is key

 

The primary goal of any stimulus plan is to move an economy out of a crisis or recession. To do so the stimulus must be deployed quickly before too many businesses and consumers go broke or permanently change how they do things. In deploying their stimulus programs, African governments must ensure that they are deployed quickly. Businesses need credit before they go bankrupt, farmers need inputs before the next planting season and people need to eat today not next quarter. Getting a stimulus package out of government treasuries and into the economy as quickly as possible will amplify its effectiveness.

The right type of stimulus

 

No two stimulus programs will be the same, African economies are diverse and the priorities of each government differ. However, there are common features across the continent that will need to be addressed. With limited resources, we must be smart and bold. That requires putting our resources where the majority of African’s earn their livelihoods in the agricultural sector and informal economy. Making sure that vulnerable communities whose livelihoods have been decimated or support systems undone, get adequate support. And it is an opportunity to reset a tax system that is not fit for purpose to one that can raise the resources we need to fund our long-term development.

African economies need a jumpstart out of what the IMF is calling “an unprecedented threat to development”. As we design our stimulus programs, we must do so in a way that does not just tick the boxes of orthodox economic thinking but addresses the realities of our economies and looks to the future.

 

 

Making it through the crisis: Africa’s crisis response policy

A few weeks ago I wrote a piece on what Africa can do to kickstart its economy and drive long term growth after the coronavirus crisis has ended. What’s becoming clear is that the crisis will be longer and deeper than many had first thought. This poses the question, what policies do we need to put in place so that when it ends, we are in a position to kickstart a recovery.

African governments do not have the financial firepower or operational capability that developed countries have deployed. But I do not believe that means we are hobbled. As policy responses around the world are showing, what was previously thought impossible, too expensive or too complex is doable. The same applies to Africa. To make it through the crisis we must abandon the art of the possible and attempt the impossible. This crisis presents critical obligations to African policymakers, that we must be bold and creative to save lives, livelihoods and possibly the state itself. This crisis also presents policymakers with an opportunity, to redefine what policy in Africa can do, particularly when health, wealth and well-being of its people are at its centre.

The Nature of the crisis

This crisis is unlike anything Africa has seen before. Its effects are multiple, simultaneous and intense.

First, this crisis will last longer than many of us thought. Until there is a widely available vaccine or cure, we will continue to see outbreaks, travel restrictions, social distancing, quarantines etc. In various parts of the world and Africa as governments try to avoid a second wave. Considering the staggered way in which the virus has spread across the world, it’s estimated that the most severe restrictions will continue for the next 3-6 months and various restrictions could remain in place for up to 18 months until medical solutions are widely available.

Economically the World Bank predicts the continent could lose between $37 billion and $79 billion in output and face a recession of –5.1% (negative 5.1%). Furthermore, agricultural production (the most important sector in terms of output and employment on the continent) could contract by between 2.6% and 7%. This is an economic disaster for the continent. The formal sector will be defined by falls in productivity, revenues and severe job losses. In the informal sector which accounts for 89% of employment on the continent, its traders, farmers, vendors, MSME’s, tradespeople who rely on daily incomes are facing disaster if those incomes are disrupted endangering their ability to afford food and shelter not just for them but also the people who rely on them.

This crisis will also stretch our healthcare systems, in many cases past their breaking points. Endangering, the lives of those with Covid-19 and the lives of those who need medical attention for things other than Covid-19 (expectant mothers, HIV-AIDS patients, cancer patients, malaria patients etc.).

Internationally, help (financial or technical) from the traditional donor/development aid community will not be as forthcoming, as it has been during previous crises, as they try to deal with the crises within their borders. Thus, Africa cannot rely on the international community as we have become accustomed to doing.

With all these effects, in responding to this crisis we have to have a core goal. That we have to keep our people fed, healthy and secure livelihoods as far as is possible. Which means designing and implementing a mechanism to enable people to keep themselves fed and secure. Providing lifelines to the informal and formal sectors, so that people have livelihoods to sustain themselves in the long run. Restructuring how our governments communicate with the public to ensure that the measures taken are as effective as possible and provide a foundation for re-forging our societies.

Keeping people fed and secure

This is probably the biggest headache facing African policymakers in their response to the crisis, and many will default to what they know, distributing foodstuffs. However, what we need in a situation like the current crisis where millions of people who were ok now fall into vulnerability, is a solution that is big, simple and fast. One solution that encapsulates all three is cash transfers. Give vulnerable populations money and trust them to know how best to use it. As I have previously written, cash transfers are effective, and people are rarely irresponsible with them. With innovations like mobile money which has permeated across much of the continent, it is possible to get money where it needs to go and to do it quickly. And, it avoids the mess of corruption and delays associated with government procurement. Finally, it puts money where the economy needs it. In the hands of consumers who buy their food and other essentials from the informal economy, keeping those value chains alive.

How do we pay for this? Simple, print money. The UK is doing this. Those afraid of inflation should note that the money would be replacing depleted economic activity, thus limiting the inflationary impact.

Reinforcing health systems

First, African countries need to devote more resources to public health. For decades we have let public health fall into a state of disrepair and underfunding. Over the short term, this needs to be remedied by immediately ramping up funding, and resourcing over the short term to fund the immediate Covid-19 response. As well as thinking through how to implement public health measures in an African context. Rather than lockdowns, how can we make markets which are critical nodes of the food system sanitary and credibly social distant? How do we make informal settlements where people share multiple spaces as safe as possible?

But it also represents an opportunity to start long term investment in community health. If we want to keep hospitals free to treat Covid-19 we need to deliver care to people in their communities. This means public health communication and education, provision of basic care at a grassroots level and investing in preventative infrastructure (sanitation, water, clean cooking etc). That could over the long-term form the basis of a viable universal healthcare system.

Paying for this will require shifting resources for normal noncritical spending (non-salary and critical operations) to the health systems, delaying or freezing development projects and tapping into capital markets (borrowing) where possible.

A lifeline to the economy

Through no fault of their own, businesses across the continent are suffering as demand falls, export markets go into lockdown, their supply chains are disrupted, and their consumers stay at home. To save jobs, livelihoods and in some cases whole industries. Many governments have already put in place tax holidays and encouraged banks to renegotiate loans with businesses. However, in a recession predicted to be deep, more is needed, and this could consist of several measures such as:

  • The utilisation of domestic private sector capacity by the government as part of the crisis response. Using streamlined public procurement to buy goods and services (e.g. Masks, logistics and transport, beds etc.) that are needed by the government to respond to the crisis. This will help keep some local businesses alive and build local capacity.
  • An SME loan program divided into two tranches. The first tranche would be given now, to keep SME’s alive and the second tranche would be given when the WHO declares the crisis over to enable SME’s to quickly restart their operations. This can be done by the banking sector backed by a guarantee given by the central bank in case of defaults. The guarantee would have 2 conditions: low-interest rates and a 6-12-month grace period before the loan payments start to give SME, breathing room. This would have the effect of giving SME’s working capital and keeping the credit system alive.
  • Safe business programs. Many businesses require social interaction such as open markets, salons & barbershops, restaurants bars and clubs, etc. We should be developing guidelines and rules for safe interactions in these businesses that integrate sanitary measures and social distancing (where possible) to enable these businesses to reopen as early as possible without endangering public health.
  • Utility bill and commercial rent holidays to ease pressure on businesses with reduced cash flows. Utility providers and commercial landlords can be provided with tax credits to offset the reduced revenue. I

Communicating with the public

I have written previously on the need for effective and persistent communications strategies to be built into policy design. This is critically important during a crisis, where not only do the public need to know what is happening, they need to buy into it, trust what their governments are saying and understand that it is being done for the public good. For that to happen governments have to change how they communicate with their publics from talking at them to engaging with them, this means:

  • Be honest. Now is not the time for bluster or false assertions. If governments lie and people die as a result, trust will be fundamentally broken, and people will be unwilling to listen again. Thus, governments must lay out the truth to their people, what this crisis will do to every one’s health, livelihoods and general welfare and why they are implementing exceptional measures.
  • Explain your thinking. Governments will be implementing measures that will affect people’s lives in a multitude of ways. As the heavy hand of government, intervenes in people’s lives in unprecedented ways, the government must explain why, what drove the thinking, and what they are hoping to achieve
  • Accept and respond to criticism. No policy response will be perfect. Being able to acknowledge where something has not gone as planned or was not implemented properly and communicating real action taken to fix it, will build trust and support.
  • Communicate often. This is a constantly evolving crisis; people need to be updated regularly. In times like these, there is no such thing as talking too little.
  • Engage across channels. To reach everyone, you must go where they are, which means going beyond traditional media onto social media, and breaking language barriers. If information is inaccessible, then it may as well not exist.

Communicating, honestly, effectively, and openly will help reshape the relationship that has been characterised by a lack of trust between opaque African governments and populaces that have long been indifferent to whatever pronouncements and declarations those governments make. Rebuilding trust can be the basis for rebuilding the sense of community and society that too many African countries have lost, reinforced by genuine efforts to assist people.

A pan-African response

Though the international community may be pre-occupied, it does not mean the pan-African community cannot respond. Though we may not have the money or the resources that the developed world can deploy, we can cooperate to ease the pain of the crisis. Critical areas of cooperation would be:

  • Sharing data and information on how the pandemic is evolving in each country. providing public health officials and policymakers valuable data on the epidemiology of the virus within similar demographics that can help every country fine-tune their response.
  • Sharing policy responses. What measures have implemented in other African states, how effective have they been, can they be adopted elsewhere.
  • Sharing resources. If the crisis has eased in one country but is ramping up in another, they could provide resources (equipment, personnel, money) to help in that fight.
  • Buy Africa first. Stimulating the African private sector by encouraging African governments to buy what they cannot find at home (e.g. if there is a food shortage) in other African countries before looking abroad.
  • Engage the world as one. While African states do not agree on everything, this crisis will bring us together on various things. One of the most important of those things is Debt. Africa needs debt relief to give it the fiscal space to pay for the virus response and a post-crisis stimulus. Rather than have each African country go to its bilateral and development partners on its own to beg for debt relief or a payment pause. The message will be much more powerful if the continent speaks and negotiates with one voice, increasing its bargaining power and the momentum behind the issue.

Unprecedented crisis – an unprecedented response

This crisis is unlike anything Africa has ever seen before. Even the Ebola crisis of 2014 did not threaten the whole continent and had significant international assistance. It is hampering our health systems, economies and socio-cultural way of doing things on a scale we have never had to deal with.

This is by no means a comprehensive look at the policies that can or should be implemented. The policy interventions I have presented are a few among many that a lot of talented and clever people are thinking of across the continent. What I have tried to lay out in this piece is that this dual health and economic crisis is a threat to us all. And responding to this crisis requires a multi-pronged approach that is big and bold. That will need African governments to get out of their comfort zones and implement measures such as cash transfers which they have termed too expensive or too hard,  shift money from cherished infrastructure and other projects to the health system, invest in the private sector especially SME’s in new ways and talk to the public in a more genuine way.

If we do not respond in a big and bold manner, many African nations will emerge from this crisis hobbled, suffering extended socio-economic aftereffects and much more likely to suffer civil and political unrest. If we can respond with boldness then we could lay the foundations for a genuine recovery after the crisis, a public health system that isn’t an oxymoron, a reset of the relationship between private enterprise the and public good and a  much more positive relationship between the government and its peoples. I’m hopeful that maybe, this time, African leaders and policymakers will recognise this crisis for the threat it is and start thinking big and acting boldly.

Avoiding Demographic Doomsday: Redefining Employment in Africa

One of the central challenges facing much of Africa is unemployment, in particular youth unemployment. The African Development Bank estimates (see figure 1) that of Africa’s approximately 420 million young people (aged between 15-35) only one-sixth (16.6% or 70 million) are in formal employment. One-third are partially or vulnerably employed, and half are not employed at all. That means 140 million young African’s are at risk of losing their job at a moment’s notice and 240 million have no job and little prospect of one.

(fig.1. source African Development Bank)

This is a disaster. Half of Africa’s youth, their potential contributions to society and personal dignity and well being, is wasting away. Is it any wonder that these young men and women are risking life and limb on horrific journeys to try and get Europe for the prospect of a better life?

This though, is only half of the story. Africa’s youth population is expected to double to over 850 million by 2050. If the continent cannot find a way to harness the potential of its youth, then the continents demographic dividend could turn into a demographic doomsday. As young unemployed Africans with no stake in the economy and no prospect of a better life turn to dangerous radicalism, extremism or crime as a way out; migration will be the least of our worries.

Thus, the question becomes how do we avoid this demographic doomsday scenario? One answer is to rapidly grow the formal economy and employment via industrialisation. This is the path that much of the continent is trying to pursue. Investing in infrastructure, ease of business reforms, business incentives and trade expansion, all aimed at spurring economic growth and employment. Frankly, it has not been enough. While growth has been positive it has not been at the rate we need, and not nearly enough jobs have been created.

What is needed is a policy for the biggest non-agricultural employer on the continent, the informal sector. The majority of those in informal business (and many with jobs who have a side hustle) depend on the informal sector for their livelihoods.

Alongside agriculture, the informal sector is the foundation of the African economy and its time our policies and laws caught up to that reality. Doing so would help solidify fragile livelihoods as well help drive growth and opportunity in the economy. We can start by changing our laws to redefine employment to include the informal sector and investing in the skills, knowledge and capabilities  of those in the sector.

The Informal Sector in Africa

The informal sector can be broadly defined as activities or enterprises that produces and sells good or services but are not formally registered and do not pay taxes.

The International Labour Organisation (ILO) estimates that the informal sector represents 41% of GDP on the continent and 66% of total employment in Sub-Saharan Africa and 52% in North Africa, and that eight in ten (80%) of young workers end up in the informal sector. These figures tell us an important fact about the reality of employment in Africa, that most people earn their livelihoods through their own ingenuity and drive, hustling, and either working for or running small enterprises, they don’t have an employment contract or get a pay check. Thus, the laws, regulations, and protections of labour and employment laws are irrelevant to them. The second key thing that stands out about Africa’s informal sector is its resilience and adaptability. It has survived the ravages of one party States and dictators, near collapse of the economy in the 1990s, endemic rent-seeking and corruption, changes in weather patterns and the cycles of economic booms and busts.

It is time that government policy focused on enabling, harnessing the sector by integrating it into the wider economy, not at the exclusion of wider policy goals such as industrialisation but as part of it.

Redefining Labour and Employment

The first step to integrating the informal sector and the people in it to the wider economy is through legal definition and recognition. Just as labour and employment legislation across the continent recognises, regulates, and protects people in formal employment; similar legislation for informal sector could provide the people and businesses in it with legal protection and a foundation upon which they can build and grow.

Informal sector legislation and policy would not simply be applying the rules of the formal sector to the informal sector (which would be ignored anyway); rather it should be crafted for the needs of the informal sector and would include the following:

  • A valid legal definition of an informal sector business and job with a simple way of registering it. Registering an informal business should be as easy as getting a SIM card or a mobile money account. The goals are not to tax or regulate the sector but for registration to be a gateway to the enabling and protective elements of the laws and policy.
  • Simplified contracts and small claims courts. A constant risk in the informal sector is that you do not have the protection of the law, if you make an agreement with someone to buy or sell something it is based on their word alone. Providing a simple contract template that all can use gives buyers’ and sellers’ basic rights (such as refunds on non-delivery of goods or services). A small claims court to enforce disputes under these specific contracts quickly (rather than the expensive, laborious and slow normal court system) would engender trust and facilitate business.
  • Banking and credit access. Make it possible for informal enterprises to use their registration to open bank accounts, access credit and use their assets (e.g. a motorbike) as security for loans.
  • Provide access to national health, pension and welfare schemes. Most national health, insurance, pension and welfare schemes are based on a (formal) employee contribution model, where a portion of your salary is contributed to various schemes. On a continent where most people are not in formal employment it means that these schemes are underfunded, and many do not include everyone. Providing a way into these schemes for the informal sector like a simple subscription or yearly fee would be a way to both expand them to the wider population as well as boost their funding
  • Allow informal employees and businesses to organise. Allowing the informal sector to form co-operative societies, unions and associations would open new avenues to credit (through the pooling of savings in co-operatives), better working conditions and more powerful voice to advocate for their interests.

Legal definition and recognition opens the door to the protection and progress of the livelihoods that depend on the informal sector. Laws may be boring, but they are crucial.

Capacity Building

Legal recognition is only half the equation, for the informal sector to move from being a source of subsistence for individuals to a source of growth for the economy. Africa needs to give the people in it the tools, skills and knowledge to create, recognise and take advantage of opportunity.

The first aspect of capacity building is coupled with legal recognition. Changing laws is ineffective if the people they are aimed at are not aware of the changes and how to take advantage of them. Thus, the capacity building exercise would be a public education exercise, focused on making people within the sector aware of the changes and how to take advantage of them.

The second is around skills and knowledge training. Putting together programs that train people on key aspects of business administration, opportunity identification and marketing, crucial skills needed if they are to successfully invest and expand beyond subsistence.

The Informal Economy as an Opportunity

Most policies that African governments have come up with around the informal sector are focused on formalisation and extracting taxes and most policy around employment growth is focused on expanding formal employment. While these goals make sense, they ignore the reality of the crucial role that the informal economy plays in livelihoods and the economy of Africa.

Employment in the informal sector is not wrong or inconvenient, it is normal for Africa. And, for Africa’s development to be truly African it must not only be led by Africans but work for the majority of Africans, many of whom are employed in the informal sector.

Few if any of the development initiatives pursued by governments and institutions across the continent are aimed at furthering this sector. This approach ignores and underserves a sector which has been the foundation of the African economy, which has, since independence proven to be resilient, innovative and frankly, African.

Redefining employment in Africa to recognise and support the informal sector will not hamper or stop industrialisation or the growth of formal employment. Rather it is about understanding that the giving the hundreds of millions of Africans whose lives depend on the informal sector a stake in the economy and the opportunity to grow, is not only good for the economy it is good for people, and if that is not what development policy is about it is what it should be about.