Informal Trade in Africa

I. Introduction Informal trade or unrecorded trade is broadly defined as all trade activities between any two countries which are not included in the national income according to national income conventions because they are not captured by official national income statistics. In addition to cross borders, informal trade also covers domestic trade on the pavements and market-places, informal trade contracts based on trust and the given word, and the portion of official trade that goes unrecorded or under-recorded.

Informal trade is one of the main sectors providing job creation to a large proportion of population in Africa. While it is difficult to get an accurate overview of the extent of informal cross-border trade in Sub-Saharan Africa, reviewed surveys suggest that such trade still represents a significant proportion of regional cross-border trade. On average, it provides between 20 per cent and 75 per cent of total employment in most countries, with the exception of South Africa, where the estimated figure is 12 per cent of the active population (McLachlan, 2005). In addition to job creation, informal sector is also one of the major sources of income among African population. It is estimated that about 60 to 70 per cent of African families are being sustained by income earned in the informal sector, either directly as operators, or indirectly as beneficiaries of the services it provides.

Informal trade, which in most cases is done by small business enterprises, takes place outside the official channels of trade and has been associated with smuggling of goods or illegal activities. It is very difficult to assess the true extent of unrecorded activities of informal trade that has seriously resulted into irregularities in actual statistics of informal

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economy activities. According to available statistics, about 60 per cent of informal trade activities are declared and recorded.

According to available statistics, women constitute a large proportion of informal trade in Africa. Undoubtedly, women control the most efficient and dominant forms of the economy, particularly the informal sector, and they make contributions that far exceed their share of the population of sub-Saharan Africa (FAO, 2008). In West Africa for example, four to five million women are involved in collecting, processing and marketing shea nuts and butter, bringing in an estimated 80 per cent of their income (Plunked and Stryker, 2002). In Benin, between 80-95 per cent of women are involved in informal trade, particularly in marketing of unprocessed goods. In Freetown, Sierra Leone, about 70 per cent of the active population is engaged in the informal sector of which the majority of them are women. The high proportion of women in informal trade is due to increased number of unemployed women, particularly in sub-Saharan Africa, where three out of four people are unofficially employed. Out of those who work in the informal sector, 60 per cent are women. Non-agricultural informal sector alone creates employment opportunities for 91.5 per cent of women, compared with 70.7 per cent of the men (FAO, 2008).

Financing the activities of informal trade remains a big challenge. Operators engaging in informal trade lack or have little access to credit because of the nature in which the business is conducted. A number of financial institutions are not willing or comfortable to finance informal trade operators. As a result, a number of operators have resulted into other ways of funding informal trade. These include: self financing and credit from relatives, friends and associates. Because of the manner in which the business is conducted, many informal operators prefer their own sources, which is more flexible.

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However, recently, some micro-finance institutions, NGOs and banks having started providing financial assistance to the informal traders, but the magnitude is still minimal.

II. Reasons for Informal Trade A number of factors explain why people or firms prefer to engage in informal trade rather than formal trade. Many people are encouraged to escape trade related regulations and duties when important price disparities arise between formally and informally traded goods in the importing country due to high levels of import and export duties. On the other hand, officially traded goods might be subject to complex, non-transparent or divergent regulatory requirements such as customs procedures and sanitary standards requirements that contribute significantly to the high transaction costs.

In analyzing the contribution of the informal sector to the African economies, emphasis is placed on the links between formal and informal activities. There is no direct link between the formal and informal trade. Formal trade operators always blame the informal trade operators in the way the latter conduct their business, particularly regarding to non compliance of trade rules and regulations. In most cases, informal trade operators find it convenient to organize themselves in the informal sector than formal sector due to many reasons. There are both foreign and domestic factors, which have significantly contributed to the increase in volumes of informal trade. These include: flexibility, transaction costs, tariffs and non-tariff barriers; and payment systems.

Flexibility: Many operators in informal trade find it easy to do business compared to formal trade as they are not tied to various rules and regulations as it is the case in formal trade. One of the predominant features in informal trade is the flexibility of doing business. Each actor is free to conduct business as resources permit and at any time. In most cases, government rules and regulations have little or no effect on the operations of Page | 3 Informal Trade in Africa

informal trade. Informal trade, therefore, appears as a form of exchange without any observable rules. However, there may be specific group regulations for conflict resolution, lowering entry barriers to markets in certain cases or tacit price setting agreements.

Transaction costs: In addition to production costs, transaction costs negatively impact on the prices of goods in both informal and formal trade. However, transaction costs are higher in formal trade than informal trade. The high transaction costs in formal trade mainly arise from the following, among others: high charges in obtaining a business license, regularized employment of workers; compliance with government laws and regulations, and government taxes.

High domestic taxes, tariffs and non-tariff barriers: A number of countries continue to experience challenges to foreign trade due to policy instruments, particularly relating to tariff. Many harmonized tariff schedule code remain under license control, mainly due to various factors, including health and national security reasons. Further, high domestic taxes on goods have resulted in a number of traders to be involved in informal foreign trade. High domestic taxes have in many cases, forced traders to explore various ways of trading, including the use of informal methods to trade goods in order to avoid taxes. Furthermore, a number of operators get interrupted with various non-tariff barriers such as numerous border checks. In number of cases, customs officials and police at roadblocks force operators to unload and unpack every little package, which contribute to long delays.

Payment systems: A number of traders are associated with informal methods of trading because of complexity of payment systems in formal trading, including additional charges such as interests, and services charges. Payments in formal trade usually take a Page | 4 Informal Trade in Africa

long time due to some rules and regulations. Many operators in informal trade do not favour this as a number of them are operating with small amount of capital and any additional charges or delays would further reduce their profits.

III. Challenges associated with informal trade There are a number of challenges affecting informal business operators in their day to day operations. The challenges, in a way, can be considered as a basis for policy makers to seriously link the informal and formal trade with a view to developing policies aimed at improving the relationship between the two sectors. The following are some of the challenges:

Quality of products and services: It is widely known that the quality of the products traded in informal market is poor compared to goods traded in formal trade. There are no quality guarantees as everything is done without following trade rules and regulations. Customers are not able to secure quality of products since sellers are not operating under regulated requirements. To some extent, traders find it easier to cheat the customers and further, products are sold without any guarantee.

Access to funding: In general, informal trade operators have limited access to resources due to various reasons. These include: no access to formal channels; no payback guarantee; limited stability of the business; lack of legal property titles, as well as legal business transactions. Lack of access to credit in the informal sector seriously impede on the development of sector which a negative impact on economic growth and sustainable development, particularly reducing poverty levels at micro level. Furthermore, operators in informal trade are not willing to engage in formal trade because of high interest rates and collateral requirements demanded by lenders.

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Direct formal credits from banking sources are practically impossible to obtain. There are few banks in remote border areas. To some extent, acceptable collateral is not available in trading zones; and unlicensed operators are not eligible for banks loans (Teka et al., 1999). According to literature, informal trade is funded by its own sources and contributions and credit from relatives, friends and associates. These traditional sources represented more than 90 per cent (Little et al., 2001). However, some banks, microfinance institutions, and NGOs have started giving loans to few informal trade operators. The only constraint is that funds may not be available when needed. Own sources and traditional mutual arrangements are more flexible and better-suited to this effect. Because of these constraints, a number of informal trade operators still prefer their own sources, which are believed to be less restrictive.

Availability of information and goods: Information plays an important role in facilitating business transactions both in informal and formal trade. As informal trade occurs outside government framework and regulations due to lack of legality, vital information regarding trade is always lacking, posing a big challenge to the progress of informal trade sector. In most cases, governments are not ready to develop and release information systems for the benefit of informal sector. On the other hand, suppliers of local markets, informal traders, often suffer from the seasonality affecting of the regular supply of agricultural produce, making it impossible for the operators to analyze the pattern as well as the price (FAO, 2004).

Lack of access to essential public goods and services: Informal trade operators lack good infrastructure networks, which contribute negatively to their operations. In most cases, there are no proper structures put in place by governments to facilitate their trade. To this effect, they lack basic essential things such as water, electricity and phone services some of which key to trade facilitation. In addition, informal sector businesses Page | 6 Informal Trade in Africa

lack legally accepted property titles and as a result, a number of the operators conduct their business without insurance to their products, a situation that makes the sector highly endangered.

IV. Recommendations Informal cross-border trade still represents a significant proportion of regional crossborder trade in Sub-Saharan Africa. Furthermore, informal trade remains one of the major activities among many Africans, particularly women. Despite its limitations, informal trade greatly overcomes the challenges facing many landlocked countries particularly relating to trade facilitation. Therefore, there is need for governments to play a significant role in improving market structures of informal trade to provide them with conducive operating environment.

The following are among the key issues that need to be addressed in order to encourage and develop informal trade in Africa:

Improvement in accessing fund: As indicated earlier, informal business operators have limited access to resources due to various reasons. Governments should come-up with policies which encourage small businesses to have access to financial resources at a lower cost. Local banks in remote borders as well as some NGOs should consider expanding their services to informal trade operators. In addition, governments should assist sellers in the informal trade who are, in most cases using ordinary equipments such as bicycles for running their businesses. It may be possible for governments to design a programme to assist these sellers to buy and maintain these equipments at bearable costs. Promotion of regional integration in Africa: It is well documented that a number of African countries are trading more with countries outside Africa than among themselves. A number of reasons have contributed to this, including poor infrastructure, complicated Page | 7 Informal Trade in Africa

rules and regulations among Member States, high tariffs and the types of products being exported, which in most cases, include primary commodities. Relatively lower tariffs on African goods entering other countries outside Africa such as European Union, China, and the United States of America also make exports to industrial countries more lucrative than to other African countries. To this effect, there is need to accelerate the implementation of regional integration agreements in Africa in order to facilitate the process of eliminating tariff and non-tariff barriers among the African regions. Programmes and administrative procedures: Operators in informal sector find it difficult to bear the costs, such as business license, compliance with government laws and regulations, and government taxes. Governments should come-up with restructuring programs which can accommodate both informal and formal traders. Customs duties and taxes on essential commodities must be lowered, and tariff and non-tariff barriers must be reduced through improved fiscal collection. In addition, administrative and registration procedures must be improved, including the following:

Providing business licenses and property titles to genuine small-scale operators of cross-border trade free of charge or at very small costs; Implementing tax exemptions and other incentives as part of reform package to informal trade operators; Supporting market structures for informal trade, particularly in the areas of communications infrastructure and storage facilities. Infrastructures such as roads and transport facilities, markets storage and border posts should be available for cross-border trade at key crossing points; Banks at border areas should give loans, credit and foreign-exchange transaction services to cross-border traders; Reducing complexity of rules and regulations pertaining to trade; Page | 8 Informal Trade in Africa

Measures should be taken to ensure that formal regulatory environment is not biased in favour of formal firms and workers over informal enterprises and workers; Eliminating procedural delays by improving quality of bureaucracy, eliminating corruption especially at lower ranks of bureaucracy, and strengthening meritocratic recruitment of government workers; and Reforming and strengthening property rights systems applicable to small and micro scale businesses. In addition, there should be some kind of adjustment funds to support these entrepreneurs during adjustment period. This will assist to voluntarily bringing operators of informal sector to formal sector.

Formal employment contracts: There appears to be no formal employment contacts between entrepreneurs and workers in informal trading sector due to non-existence of legal framework in the informal trade. Workers are usually disadvantaged as the entrepreneurs are free to determine any wage limit to them. Government should come up with measures aimed avoiding the exploitation of workers through formalization of employment relationships between formal and informal firms, particularly relating to wages. This will significantly help in improving the living standards of many African workers, particularly those living in the rural areas.

Remuneration packages for custom officials: One of the major factors to the increased number of informal trade in Africa is corrupt practices of custom and police officials. Governance must improve the remuneration and strict disciplinary measures to reduce corruption of custom and police officers. At some stage, governments should consider involving the informal trade operators in future development prospects along with political and administrative commitments designed to stamp out illegal operators. There is need also to increase trust between traders and border agencies, which could encourage Page | 9 Informal Trade in Africa

a higher level of integrity in their dealings among themselves and act as an incentive to formalization.

Marketing conditions: Governments should encourage and support the improvement of naturally emerged sales points attached to micro and small enterprises. Furthermore, governments should develop good market infrastructure aimed at providing basic

facilities to continue informal trading activities. This will play a big role in transforming informal trade operators into formal operators.

Training: Governments should develop training programmes aimed at educating informal trade operators on various government rules and procedures.

Trade Liberalization: Efforts should be made by all African countries in the area of trade liberalization. Reduction of informal foreign trade will require gradual and systematical implementation of trade liberalization by all African countries. This may involve unilateral liberalization, regional trade agreements, bilateral agreements, and intra-regional agreements. Consideration should be given to informal trade operators as countries engage in trade liberalization. A mechanism should be put in place to allow informal traders to continue business while complying with laws and regulations while governments continue the implementation of trade liberalization.

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