The informal sector in Africa

By Yolaine Samantha EPOMA, holder of a Master's degree in Private Law.

Present on almost every continent, the informal sector is particularly noticeable in Africa, to the point of being perceived by some as the rule. Indeed, the scale of the informal sector in Africa is considerable, and the majority of activities carried out there are not formal. It would not be an exaggeration to say that informality reigns over African economies. For some economists, it's an obstacle to the African economy, a threat; for others, it's an opportunity, a lever for development. The reasons for the existence and expansion of the informal sector on the continent include lack of employment, lack of financial resources, a business environment deemed inadequate by economic operators, corruption, tax burdens, practices such as lax enforcement of regulations, and lack of education. High demographic growth is also one of the reasons for the existence and importance of the informal sector. It is worth noting that numerous empirical research studies have demonstrated the decisive impact of the regulatory framework in which businesses operate on results such as the level of informal activity, employment and economic growth.

The term "informal sector" first appeared in 1972 in the International Labour Organization (ILO) report on the Global Employment Mission to Kenya. One of the main conclusions of this report was that, in developing countries like Kenya, the real problem was not unemployment, but the existence of a large population of "working poor", many of whom toiled to produce goods and services without their activity being recognized, registered, protected or regulated by the public authorities. The report referred to this as the "unstructured sector". At the time, the mission put forward the idea that, with support and minimal legal protection, certain activities in this sector could offer more and better jobs. Many studies have been carried out to better understand the informal sector phenomenon, but there is no official legal definition of this sector. The notion is explained here and there according to research interests and objectives. Here are a few definitions. 

According to Professor Filiga Michel Sawadogo, talking about one sector is not very accurate, since the informal sector encompasses a wide variety of activities, and practically all economic activities have parts in the informal sector. He defines this sector as all economic activities that take place on the bangs of legality, outside legal requirements. 

According to economist Emmanuel Sedegan, to define the informal sector, you first need to know what gross domestic product (GDP) is. This is the monetary sum of goods and services produced in a nation over a given period, preferably one year; it is the wealth created. He goes on to define the informal sector as that part of GDP, the wealth that was actually created but not accounted for in the national accounts, because the national accounts couldn't capture what was done to ensure that this wealth was created. According to him, it's only the official part, the economic players who have registered that the State can evaluate, and the informal sector is the non-accountable part that doesn't enter into the State's official accounts.

From Professor Noukpo Agossou's point of view, it's not certain that the economic approach is satisfactory when it comes to defining the informal sector, since it's a sector that integrates almost all aspects of life (social, religious, economic, cultural...), and nothing escapes the informal sector. In his view, we can't be content with a restrictive definition; we need to broaden the scope to get a satisfactory definition of this sector.

For simplicity's sake, we will also use the definition of the Institut National de la Statistique (INS). According to this institute, "the informal sector comprises all production units that have no taxpayer number or do not keep formal written accounts within the meaning of the OHADA accounting plan".

The informal sector has long been a major preoccupation in African countries, due to the dominant position it occupies (I). Some see it as a real bottleneck for the continent's economies. Concerned about their place in the business world, and the attractiveness of their territory, African countries are constantly looking for strategies to successfully control the informal sector, in order to put in place policies that are adapted to it, as its expansion affects the development of African countries (II). The best solution is to find accompanying measures to support this sector and facilitate its integration into the formal sector. In other words, the formalization of informal economic activities (III) is the main objective of African countries.

I The preponderance of the informal sector in Africa

To better understand the importance of this sector in Africa, it is necessary to characterize it (A), before analyzing the weight of informal production units in African economies (B).

A - Characterizing the informal sector

It was noted that informal sector activities in Africa must be distinguished from illicit or uncivil activities and underground activities. Indeed, the vast majority of activities in the informal sector produce goods and services whose production and distribution are perfectly legal, as opposed to underground, criminal or illicit production activities. This clarification was made by statisticians in a resolution adopted in January 1993 by the International Conference of Labour Statisticians at its fifteenth session, who were keen to clarify the nature of informal activities: "the activities carried out by production units in the informal sector are not necessarily carried out with the deliberate intention of evading payment of taxes or social security contributions, or of contravening labour legislation, other legislation or other administrative provisions. Consequently, the concept of informal sector activities should be differentiated from that of activities in the hidden or underground economy."

       Informal sector players include shopkeepers, craftsmen, scrap dealers, mechanics, plumbers, bricklayers, etc. While it's true that the heart of informal activities lies in trade, other trades are also involved. Transport activities, for example, as well as industrial and itinerant activities, are also part of the informal sector. The informal sector accounts for a large proportion of the working population in Africa, and is a part of the productive workforce. What distinguishes the informal sector and poses a problem is the fact that it doesn't keep reliable accounts, so it's difficult to really assess informal activities since they aren't declared. According to author Aly Mbaye, analyses show that informal sector players are essentially poor households, poorer than others, more vulnerable than others, with a more precarious status than others, and when the economic climate is unfavorable, there is a renewed dynamism for the informal sector. The informal economy thrives where unemployment, underemployment, poverty, gender inequality and job insecurity are rife.

In general, what distinguishes the informal sector are working conditions, working hours and income. According to a study carried out in Senegal, informal activities are often carried out in unsuitable and dangerous conditions, and workers are generally illiterate and unskilled. Informal sector workers have to work long hours for very low incomes, and are excluded from social dialogue and social protection. What's more, women workers are largely represented in the most precarious jobs in the informal economy. Generally speaking, women are more present than men in the informal economy. In reality, most informal workers have a high level of illiteracy, are poorly qualified and have few training opportunities; their income is more uncertain, less regular and lower than that of workers in the formal economy. They are deprived of their rights to collective bargaining and representation, and their employment status is often ambiguous or concealed.

The characteristics of informal activities can be summed up by author Harold Lubel's definition of them as activities that are not generally recorded by official statistical devices, services and censuses. Largely escaping administrative regulations, social security and labor protection systems, tax impositions and making little use of accounting, they are not illegal, but outside the law. It has always been the case that the informal sector, rather than retreating, is gaining ground, hence its preponderance in African economies. 

B - The weight of informal production units in African economies

The informal sector plays a dominant role in African economies. This has been demonstrated by numerous studies. Some even claim that these economic activities, which escape the tax authorities, are the rule on the African continent. In general, the weight of the informal sector in African countries is measured both in terms of its contribution to GDP (1) and its contribution to job creation (2).

1- The contribution of informal production units to GDP 

According to a report published by the International Monetary Fund (IMF) in 2017, the informal market accounts for between 20% and 65% of gross domestic product (GDP) in sub-Saharan African countries. The IMF study also shows that in countries such as South Africa and Namibia, the informal economy accounts for between 20% and 25% of GDP, while in others such as Benin, Nigeria and Tanzania, it accounts for between 50% and 65%. In Africa, the informal sector accounts for around 40% of GDP on average in low-income countries, and around 35% of GDP in middle-income countries. Sub-Saharan Africa is one of the regions where the informal economy weighs most heavily, averaging around 38% of GDP between 2010 and 2014, compared with 34% in South-East Asia and 23% in Europe. According to statistics released by the African Development Bank in 2015, the informal sector accounts for almost 55% of cumulative GDP in sub-Saharan Africa.

As we have noted, the contribution of informal activities to gross domestic product varies from country to country, and is greater in some countries than in others. Indeed, according to the Institut Nationale de la Statistique, the informal sector accounts for almost 50% of GDP in Cameroon. The informal sector plays a significant role in the Cameroonian economy. In Senegal, the informal sector accounts for 41.6% of GDP, according to studies carried out by the Direction de la prévision et des études économiques in 2011. The informal sector is therefore an essential component of most African economies. It is important to note that the International Monetary Fund report highlighted that "the share of the informal economy decreases as the level of development increases". The informal sector's contribution to job creation is another indication of its weight in African countries.

2- The informal sector's contribution to job creation

In African countries, the majority of jobs are in the informal sector. Indeed, the informal sector accounts for up to 60, 70% of jobs in some countries. In reality, when it comes to informal employment, the proportions can be as high as 80 or 90%, depending on the country. A study by the African Development Bank reveals that in sub-Saharan Africa alone, informal employment represents over 80% of total employment for women, and over 60% for men. According to the World Bank's 2019 World Development Report, the informal sector provides more than 70% of jobs in sub-Saharan Africa. According to a recent World Bank study, the informal sector generates 97% of job creation in Senegal. In a city like Cotonou, the informal sector accounts for 90% of all activities and 97% of employment, according to a report by the International Labor Office. In Togo, the informal sector accounts for around 80% of the working population. In West Africa, the informal sector accounts for around 75% of jobs. Studies carried out by the national statistics institute show that around 80% of the Guinean workforce is employed in the informal sector. 

The informal sector in Africa remains omnipresent in both urban and rural areas, employing the majority of the working population and constituting its main source of income and supply. However, the fact that this sector is gaining ground is not without effect on the development of African countries, which is why public authorities are seeking to bring it under control.

II The impact of the informal sector on development in African countries

While it's true that the informal sector has some positive aspects (A), it also has some negative impacts that hamper the development of African economies (B).

A - The positive aspects of informality

The informal sector plays a vital role on the African continent, solving certain specific problems and meeting other needs. Indeed, it is essential to the functioning of African societies, providing social, economic and educational support. It enables families to send their children to school, feed them and look after them. In other words, the informal sector enables a large part of the working population to find the means to live or survive. This sector therefore has a function not only socially, but also economically. It is perceived as an economic and social mattress, because on the one hand, informal sector players are able to create their own jobs without asking for help from the state, and on the other hand, they manage economically. In reality, people in the informal sector often don't have a choice; they're generally people who lack financial means and education, which means that it's through this sector that they exist socially and economically.

According to economist Ousmane Birame Sané, the informal sector in Africa is of enormous economic and social importance, because when you look at Cameroon, Chad, Ghana or South Africa, the public authorities in these countries generally don't recruit enough. As a result, the informal sector is still the biggest provider of jobs. He calls this sector a "social shock absorber". From the point of view of certain specialists, the informal sector enables social inclusion, social peace, and ensures a certain social stability for the State, as it is a sector where young graduates or the unemployed try to find activities to survive.

One of the main assets of the informal sector lies in its flexibility: it is able to adapt quickly to the needs of the target market and to changes in demand; job creation is totally flexible and is not hindered by any regulatory barriers. The informal sector therefore plays a significant role on the continent, enabling social, economic and even psychological inclusion. However, it also has a negative impact on development in Africa.

B - The negative impact of the informal sector on the development of African economies

The adverse effects of the informal sector on development on the African continent can be seen mainly in economic(1), social and even legal (2) terms. 

1- On the economic front

In this respect, the informal sector does little to improve the business climate, and weakens the position of African countries in the business world. According to author Aly Mbaye, one of the main consequences of the informal sector is the loss of revenue to government coffers (lost tax revenue, lost social security contributions). Although the informal sector accounts for 60% of GDP in African countries, its contribution to taxes is only 3%, which deprives governments of the resources they need to make structural or social investments. What's more, the result is a disproportionate tax burden on the shoulders of the formal sector, because the economic players who are identified and pay taxes ultimately constitute a very small proportion of the population and businesses.

The expansion of the informal sector is not conducive to economic attractiveness in Africa, and has a negative impact on business competitiveness. It's impossible to win business by remaining informal, because when it comes to awarding contracts today, one of the major obligations is to be administratively recognized (on the tax side). It's very difficult for informal businesses to access financing, since bank financing is based on financial statements, and if you don't keep accounts, there are no financial statements. As a result, informal businesses have a low rate of investment and therefore a lower level of productivity. Informality limits the development potential of African economies, as it prevents companies from acquiring modern managerial skills, and its extent makes investors wary of granting credit to economic operators. The balance of trade is increasingly in deficit due to informal enterprises, since they cannot export, and exports also have a major impact on the economy.

It is important to note that the main adverse effects of informality on the economy have been identified as low productivity, reduced investment, an inefficient tax system, stunted technological progress, and a series of difficulties in formulating macroeconomic policies.

The informal sector is a brake on economic development in Africa, as it creates a poor business climate; on the one hand, it competes unfairly with formal companies, which has an overall negative impact on the development of their business, and on the other, it does not encourage foreign direct investment. What's more, the predominance of the informal sector in Africa makes access to finance even more difficult, even though finance is essential for wealth creation and economic development.

2 - Social and legal aspects

In reality, informality has harmful social effects: on the one hand, it keeps the economic players concerned in poverty, which runs counter to development policies in Africa. Indeed, the jobs offered by informal enterprises are characterized by insecurity, precariousness and indecency. Most employees in the informal sector have no employment contract, which exposes them to vulnerability. Economic players in the informal sector have no legal protection, which puts them at a disadvantage. In the event of a work accident, for example, if one of them is disabled, he or she will receive nothing to compensate for the loss of income. The persistence of informal economic activities is incompatible with real progress towards decent work. On the other hand, informality has a detrimental influence on consumers, on the living environment of populations, who are generally attracted by the proximity and lower cost offered by informal production units. The consumption of certain goods offered by informal production units, such as medicines and foodstuffs for example, involves high health risks, due to their dubious quality and origin. These goods generally do not meet established standards, and packaging and preservation are not always appropriate.

From a legal standpoint, it has been noted that informal players cannot benefit from the legal system, and are unable to take part in commercial trials or to have or offer legal guarantees. What's more, the expansion of the informal sector is an obstacle to the establishment of stable legal relationships, a prerequisite for maintaining a favorable business climate.

Although the informal sector has positive aspects, its establishment, or indeed its scale, is not conducive to growth in African countries, and can be a threat to the development of African economies. Concerned about the attractiveness of their territory, African states are constantly conducting studies to master this sector and find the best strategies to facilitate its formalization.   

III Formalizing the informal sector

African economies are trapped in a veritable dualism, characterized by the coexistence of two sectors of activity, one informal and the other formal, with the former dominating the latter. The importance of the informal sector on the continent is considerable, as it is very often taken into account in policies designed to modernize the economy. For some experts, the informal sector is a threat to African economies and should be combated; for others, it is an opportunity and should be managed so that it can gradually migrate towards formalization. The second approach is the most widely adopted. Indeed, numerous initiatives have already been launched at international, regional and national levels to promote migration from the informal to the formal economy. Here, we will focus on the initiatives of the Organization for the Harmonization of Business Law in Africa (OHADA) (A). We will also dwell on some specific measures that are generally recommended in countries faced with informality to facilitate the formalization of the informal sector (B).

A - OHADA initiatives to formalize the informal sector

An intergovernmental organization currently comprising 17 countries, OHADA's mission is to promote investment by guaranteeing the legal and judicial security of economic activities, with a view to making Africa a pole of development. Its main objectives are to facilitate trade and investment, and to guarantee the legal and judicial security of business activities in member states. It is a tool for growth and development in Africa, a market with great potential. It is therefore with a view to achieving its objectives that OHADA advocates the formalization of the informal sector in Africa. OHADA is reaching out to the informal sector to improve the business climate and economic outlook on the continent. Indeed, an analysis of the reforms of certain Uniform Acts reveals that innovations have been introduced to facilitate the integration of informal production units and promote their formalization.

Examples include the 2010 reform of the Uniform Act on General Commercial Law and the reform of the Uniform Act on Commercial Companies and Economic Interest Groups. With regard to the Uniform Act relating to General Commercial Law, the legislator has introduced the status of entrepreneur in favor of informal players. The status of entrepreneur was introduced to simplify business creation and reduce the number of informal production units. With the "statut de l'entreprenant", simpler, more accessible rules are adopted to encourage entrepreneurs in the informal sector to gradually migrate to the formal sector. In reality, this is a transitional status.

With regard to the reform of the Uniform Act relating to the law on commercial companies and economic interest groups, we can mention, on the one hand, the reduction in the minimum capital required to set up a business in the legal form of a Limited Liability Company (SARL), from FCFA 100,000 to FCFA 100,000. In addition, the Uniform Act relating to the law on commercial companies has also made the use of third-party services (notarial services, for example) optional when setting up a company. OHADA's aim is to simplify regulations on business start-ups in order to restrict the scope of the informal sector, facilitate the formalization of informal businesses and promote self-employment and job creation. Everything will now depend on the results obtained with these reforms. With regard to the idea of reducing the minimum paid-in capital, it was pointed out that eliminating or reducing the minimum paid-in capital facilitates business start-ups, whereas the density of new activities is low in economies where the minimum paid-in capital is high. As for the status of entrepreneur, this is difficult to implement, as it is hardly ever used. All the more so as it is understood that each OHADA member state must take steps to encourage the players concerned to declare themselves, hence the risk that states may take diversified measures or do nothing at all. It would certainly be better to standardize rules to encourage the migration of informal production units to the informal sector. However, OHADA's initiative is to be encouraged, as facilitating business start-ups can reduce the scope of the informal sector and contribute to improving the business climate and therefore attractiveness of the OHADA area.

B - Specific measures to formalize informal production units

The establishment of informal production units in African countries is one of the main concerns of governments, due to their influence on the business climate. This is why numerous studies have already been carried out to better understand the situation and identify measures that could help formalize it. Here, we look at those that have been most widely recommended and which seem to us to be the most appropriate. According to the results of a study carried out in Morocco to analyze the informal sector and facilitate its integration by the Confédération Générale du Maroc (GCEM), formalization of informal production units could be possible if certain recommendations are implemented. These include education and training, the fight against corruption (digitizing public services), enhancing the attractiveness of the formal sector by making companies more competitive, and supporting the integration of informal production units into the formal economy.

Formalization also requires improved access to credit for informal economies. Economists generally recommend improving the productivity of informal economies by facilitating their access to credit and infrastructure to help them grow and become formal. We can point out that the focus must be on the fiscal, administrative and legal aspects to better integrate the informal sector. It is necessary to promote regulations that are adapted to African economic realities and effective, to ease the conditions of access to the informal sector through simple registration mechanisms, and to improve the tax regime for the informal sector by developing institutional and structural measures to better distribute the tax burden across all economic operators according to their ability to pay.


The informal sector is a major source of employment and income in Africa, and understanding its dynamics is important for policies and governments to achieve structural transformation of economies and create more productive, growth-generating activities. Even if it has certain negative aspects, we believe that the informal sector is a lever for growth in Africa, a key to development. It's up to African governments to try to better manage it, and integrate it effectively into the formal economy. The progress that has already been made is commendable, and we believe that even better results can be achieved.


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