The Definitive Characteristics of Informal Sector. What is small and Micro-enterprises? The definition provided by Central Bureau of Statistics (1984) in its statistical publication on employment and earnings as “ this consist of semi –organized and unregulated activities largely undertaken by self employed persons in the open markets, stalls, in undeveloped plots or streets pavements within urban areas and centers. They may or may not have licenses from local authorities for carrying out such activities as tailoring, grocery, kiosks, car repair etc. ccording to International Labor Organization (ILO)-1972 defined the SME’s as activities that escaped enumeration in official statistics which still happens but in small urban and rural centers.
Ryan (1986) defined activities of the sector as those enterprises outside the tax net but cautioned that this is different from tax evasion by the formal sector registered enterprises. But this definition anyway does not hold much truth given that informal sector SME’s in Kenya pay various types of fees and charges to municipal and council authorities.One definition of economic development is an increase in national output. This occurs through the production process whose factors include land, labor, capital and human effort (entrepreneurship). According to economic survey 11 (1994), Kenya’s economic growth has fallen from 6% (1960’s and 1970’s), 4%in 1980’s and less than 2% in 1990. Kenya like other LDC’s took issue with small-scale micro enterprises as one of the seedbed of the future industrial development, which economists contend as the engine of economic growth, and development.
This will ensure problems of unemployment and high levels of poverty (47% of the population in rural areas and 29% in urban areas) are reduced. Several financial institutions such as ICDC, K-Rep, KIE and trade offices have been established with an aim of helping small and micro enterprises grow in the country. Ademola Oyeyide (1990) said MSE’s is one of the instruments through which the government intends to achieve high levels of income, employment generation and poverty alleviation. Firms with fewer than ten employees provide 59% of the total private sector employment n Kenya. By the year 2000, 14Mn jobs will be required with moderate rate of employment in modern wage sector, an increasing number of people will settle down to MSE’s whose share of total employment in the economy is expected to rise from 4. 9% to 7. 1%. (Kenya development plan 1989-1993). Considering the fact that the government and private companies have embarked on the principle of Business Re-engineering Process (BRP) at the pretext of downsizing and rightsizing their workforce. This has resulted to massive outlays, early retirement for employees.
Also the structural adjustment programmes (Sap’s) has left the government with no alternative but to retrench some of its workforce in order to meet conditions put by donor governments. It is in recognition of this short fall, that the Kenya governments together with a number of donor agencies and MFI’s have stepped in to assist the sector in achieving its full potential in contributing to growth and development in the country. 1. 2 Statement of the Problem. According to Baseline survey (1995), 70% of the new jobs came from the new starts and about 70% was from the existing enterprises.
Also MSE’s accounts for 12-14% of GDP. Therefore with this consideration, our problem is to establish how micro and small enterprises has contributed to economic development through increasing levels of employment and incomes earned. Also find out what role does the MSE’s sector play in poverty alleviation for the population that would be desperately poor. 1. 3 objectives of the study. The general objective is to identify the key factors constraining the growth and transformation process of small and micro enterprises with the view of determining ways through which MSE’s contribution to the economy can be enhanced.
More specifically, the study has the following objectives: – •Find out the constraint faced by the MSE’s in informal sector. •Establish the effectiveness of MSE’s in creation of employment, increasing income levels and poverty reduction. •Basing to above objectives come up with actionable and policy recommendations through which growth of MSE’s can be enhanced not only to informal sector but the entire sector in Kenya. Thereby putting MSE’s at the center stage in economic development process. 1. 4 significance of the study.
As already noted, informal sector plays an important role in the productive employment, income and poverty alleviation. Informal sector, far from being marginally productive, is economically efficient and profit making though small in scale and limited by simple technology, little capital and lack of links with other modern sector. It requires a leap of imagination and considerable openness of mind to perceive the informal sector (MSE’s) as a sector of thriving economic activities and Kenya’s future source of wealth.
The informal sector may hold the key to countries eventual industrialization, which according to the government and policy papers may be achieved by the year 2020. Hence the study is vital in that it aims at investigating the problems that are presently threatening the sectors viability as Kenya’s source of future wealth. Policy recommendations will also be beneficial to the business operators in the informal sector. It will also shade some light in the employment generation of the informal sector
The 1972 International Labor Organization (ILO) report on Kenya initiated a great deal of world wide interest in the potential of the informal sector for promoting the growth of income and employment in the rapidly expanding cities of the less developed world. Since then, various studies have been carried out to confirm or dispute the sectors long-term potential source of income earnings and employment creation. The following is a critical evaluation of some of the studies. As early as 1955, sir Arthur Lewis stated that, “small enterprise, in any country account for more than half of industrial commercial and agricultural employment”.
In the context of Kenya there are no reliable data on this, since most of the small businesses are missed in the annual enumeration of employees. However according to the World Bank estimate in 1972, “The small scale sector probably accounted for between one quarter and one third of all employment opportunities in the urban areas. If all the rural enterprises are included, small-scale African business sector is estimated to account for rather more than half of all African employment provided by private commerce and industry in Kenya.
The 1992 (ILO) mission report on Kenya stimulated a great discussion and research into the informal sector not only in Kenya but also in undeveloping countries across the world. This produced enthusiastic adherents of the “informal sectorism” on the one hand, and hostile critics on the other. The term “informal sectorism” coined by Davis (1978) refers to what is considered to be excessive and uncritical enthusiasm for the promotion of the informal sector and for the possibilities of emphasizing the sector within a general strategy for employment creation and development.
The position of the informal sectorists could be summarized as in the original report (ILO 1972, pg 21) as follows; “The informal sector provides income generating opportunities for a large number of people. Though it is often regarded as unproductive and stagnant, we see it as providing a wide range of low cost labor-intensive competitive goods and services. Not only does it provide them without the benefit of the Government subsidies and support that are received by firms in the informal sector, but operations informal sector are often harrassed and hampered by restrictions imposed from outside.
We therefore advocate for a positive attitude on the part of the government towards the promotion of the informal sector”. Other scholars have attempted a distinction between the formal and informal sectors. Mazumdar (1976), distiquished the two by suggesting that “employment in the formal sectors in some senses are protected so that the wage- level and working conditions in the sector are not available, in general to job seekers in the market unless they manage to cross the barrier to entry somehow.
This kind of ‘protection’ he argues may arise from the action of trade unions, the government, or both acting together, while identifying the informal sector as the ‘unprotected’ sector particularly with respect to its labor force which is not protected by minimum wage laws, contracted obligations etc, seems conceptually appealing a great deal of controversy can be aroused over how to identify the sector in practice.
One method of identifying the informal sector is to define it as the residual of all private enterprises after excluding the large industrial and commercial establishments whose pay and conditions of work, because of their size are enumerated and protected. For the purpose of our research and as per the Central Bureau of Statistics we shall define informal sector as one employing less than five or more than five workers but which operate in semi-permanent or temporary premises within the unprotected and informal environment in Kenya.
Mazundar further argues that the informal sector is overly dependent on the formal sector. For example he claims that it is formal sector incomes that define the extent of the market for goods and services produced in the informal sector. In a mathematical model that he developed, the major determinants of the rate of growth of informal sector employment are the propensities of the formal and informal sectors to consume informal sector goods, the relative levels of income in the two sectors and the rate of growth of employment and productivity in the formal sector.
Clearly then, the informal sector is depicted to be in some form of dependency relationship with the informal sector and is generally not thought of as playing the role of the ‘leading sector’. The critics had been led by professor Colin Leys (1973), the central criticism according to (Davis 1978, pg 20), much like Mazumdar, relates to the dynamism or growth potential of the informal sector.
He argues that the informal sector is only a consequence of the formal sector depending on the wages and demand quranteed by the later for a great proportion of its markets and for suppliers of many inputs both directly from formal traders and indirectly through the use of waste and scrap from formal productivity, hence its not capable of independent growth. Rempell (1974), on the other hand hypothesizes that informal sector incorporates two different groups of people both in terms of attitude and motivation.
The ‘community of the poor’ consisting of those engaged in informal sector job search who views their current situation as temporary as well as those who fail at the formal sector job lottery and continue to eke out a subsistence with a growing sense of despair and hopelessness. Second group he identifies in the informal sector is made up of small-scale entrepreneurs who have made a conscious decision to invest in their businesses and who have rejected wage labor in the formal sector. Collectively this group has been termed the ‘intermediate sector’ by Child and it is this sub-sector that the ILO report 1972) identified as having the greatest development potential.
Government assistance to this sector would boost its dynamism and increase its labor absorption capability. Ng’ethe and Ndua (1984), in their study of the role of the informal sector in the development of small and intermediate sized cities, noted that the role of the informal sector in most urban centers is of doubtless contribution as far as employment and income generation are concerned, because formal wage employment has not provided adequate earning opportunities for the existing adult population.
They also noted that the number of people engaged in the informal sector due to lack of jobs in the formal sector has been increasing rapidly. They hypothesized that changes in employment in the urban informal sector are influenced by age of the respondent, experience, number of years of formal education, informal sector training and investment. They found that both experience and investment are statistically significant in explaining changes in employment while education has a negative impact because those with high education standards are already in the formal sector.
They estimated a model in employment as a function of levels of experience among other variables as follows; X1 =? o+? 1X2 +? 2×3+? 3X4+U Where: X1 – Employment in numbers at time of the survey. X2 – Age of respondent. X3 – Experience in the business. X4- Number of years of formal education. U- Dummy variable for informal sector training. This concluded that the urban informal sector does not have the potential for employment generation since it is a one- person job.
In the sessional paper Number one (1986), the Kenya government emphasized the important role played by the informal sector by noting that “The informal sector activities conserve scarce foreign exchange, require very little capital to create jobs, rely primaly on family savings, often provide their own skill training at low cost to the government and are a prime training ground for future African entreprenuers, above all the informal sector offers unmatched potential as a source of new jobs for expanding labor force”.
McCormick and Pederson (1996), in their book on small enterprise as having noted that, many third world countries have focused on developing an entrepreneurial capacity because of poor economic performance. They also noted that the importance of informal sector has potential for employment generation in Kenya and much of the developing world. However this may be hindered by the dominance of the large firms in Kenya’s economy and the weaknesses of the small firms themselves.
Mullei and Bokea (1999) argue that, for rapid economic growth and development, a country requires a strategic approach to developing its entrepreneurs and enterprises. An entrepreneurship approach can be used to harness the tremendous amount of human resources capabilities that exist in Kenya for faster economic growth. Strategic entrepreneurship development and promotion of an enterprise culture can produce a mass of creative and innovative Kenyans capable of developing into high profile entrepreneurs and industrialists especially among women and youth, who constitute the majority of the population.