Thursday, 30 November 2017
The informal food sector – from the field to the market – constitutes a large proportion of agricultural trade in developing countries. To harness the potential of this vast section of the economy, policymakers and the private sector must facilitate stakeholders’ access to training,
Sub-Saharan Africa is hampered by chronic malnutrition, and access to food is highly dependent on cross-border markets. It is estimated that 75% of intra-regional trade is informal, a substantial share of which constitutes staple foods. Thus, informal trade has a direct impact on food security and according to an International Monetary Fund (IMF) report, it represents “a safety net, providing employment and income to a large and growing working-age population.”
In 2012, an African Development Bank (AfDB) brief estimated that 43% of the African population gained income via informal cross-border trade (ICBT). “ICBT can have positive macroeconomic and social ramifications such as food security and income creation, particularly for rural populations, who would otherwise suffer from social exclusion,” the AfDB brief explains. “If properly harnessed, ICBT has the potential to support Africa’s ongoing efforts at poverty alleviation.”
However, informal trade often results in substantial loss of revenue for states, so the key question is how can countries take advantage of the informal economy to create jobs, and support growth and sustainable development?
Informal yet inclusive
According to FAO, the informal economy, “includes legitimately-produced goods and services that do not necessarily follow formal processes such as standards regulations, business registration or operational licenses.” Informal trade is not necessarily illegal, but it is also not really legal, and yet it is vital to
The informal sector generates up to 90% of employment opportunities in some sub-Saharan African countries, while also accounting for a significant share of GDP. The sector often supports the most vulnerable people in society, including women, youth and the rural poor, as underscored by an International Institute for Environment and Development (IIED) report. AfDB also estimates that around 60% of informal traders at the borders of West and Central African countries are women. The IMF report points out that similar trends prevail in the Caribbean, where the informal sector also accounts for a substantial share of national GDPs (see box, Formalising informal agricultural trade in the Caribbean).
In developing countries, the informal economy tends to remain very pervasive. Many factors are responsible for this trend,
Interactions with the formal economy
The problem, however, is that “informality means that there is no access to the best production technology, financing structures or innovation capacity building instruments. This has all slowed growth,” says Ousmane Badiane, director for Africa at the International Food Policy Research Institute. Most agricultural processing companies are small, home-based and located far from technological innovation
Rural areas are nevertheless increasingly linked to national and international markets. In its report, IIED mentions that “the traditional informal practices of rural communities now interface with the rules and regulations of urban and global markets.” Long-standing practices and formal rules form a resilient rural informal economy that runs parallel to the formal economy, interacting with it along the value chain. This is the case for the groundnut, coffee and cotton sectors, for instance, where smallholders sell their crops to duly licensed processing companies, often via intermediaries or cooperatives.
Informal trade is most intense at country borders (see Spore Field Report, Realising the potential of cross-border trade), as a report by TradeMark East Africa – a non-profit
The road to progress
Another major problem is the difference in productivity between informal and formal businesses. On average, based on real output per employee, the productivity of informal firms is only 25% of small formal companies and 19% of medium-sized formal firms. The IMF explains
Nevertheless, “Great progress [in
However, better access to innovations and technology are often now facilitated by the private sector, which has been encouraged to invest in agricultural value chains due to social transformations that have increased demand for
Thanks to the emergence of a strong middle class and the construction of numerous shopping malls, the Kenyan retail sector has become the second most
Transformation of the informal sector can also occur through technological innovations. In South Africa, Mastercard and a local technological innovation firm, Spazapp, are offering small staple food shops the possibility of connecting to formal markets and digital payment systems through a mobile phone app. The Spazapp platform gives traders collective bargaining power to order a large variety of products at competitive prices, which they can pay for via their mobile phones using Mastercard’s digital wallet, Masterpass. The innovation has already directly linked 4,500 informal traders to leading consumer brands like Unilever and Tiger Brands.
A similar initiative, launched in Kenya in 2014 by the Twinga Foods start-up, has already proven beneficial for 2,600 informal traders. The app enables traders to access supplies quickly and
A measured approach
Rather than deploring informality, authorities are also being encouraged to facilitate a gradual transition to formal trade, as in the International Labour Organization’s recommendation 204adopted in 2015. This primarily involves simplifying customs and tax procedures. COMESA and the East African Community have recently introduced a Simplified Trade Regime aimed at streamlining trade by reducing taxes and simplifying bureaucratic procedures. However, these legislative instruments will only have an impact on the informal sector if stakeholders understand the mechanisms. FAO and the NGO, Catholic Relief Services, have
In addition, as a priority, trust in institutions must be restored in order to
Creating the right environment
For governments, fostering the right business environment for formal trade is key. For example, providing land titles can improve access to credit and have a positive economic impact as in Ethiopia, where a government programme focused on land certification has improved tenure security, investment and the supply of land to the rental market. Additionally, in supporting smallholder farmers to
In Kenya, where the informal dairy sector generates 70% of the 40,000 marketing and processing jobs and 86% of all milk is sold in informal markets, a joint IIED and International Livestock Research Institute study showed that adopting a progressive approach to transforming the sector has paid off, at least initially. Instead of sanctioning stakeholders in the informal dairy sector, the government has offered them the opportunity to be
Such initiatives demonstrate that it is essential to address the needs and constraints of everyday agricultural stakeholders, who often do not have any other option but to trade informally, in order to transform the informal economy into a major lever for growth and development. As Vorley outlines, “Recognition of the informal food economy and its stakeholders is a key step [towards
Formalising informal agricultural trade in the Caribbean
Since the 2007 global financial crisis, the slowing down of Caribbean economies has resulted in a marked expansion in the informal sector and a rise in small and medium-sized enterprises. The more prominent the agriculture sector, the larger the informal economy in the region. With an estimated tax burden of 43.2%, and the importance of agricultural raw material and food products, which make up 30.7% of total exports, Dominica has a large informal sector. However, it is the only market in the Caribbean where ‘hucksters’ (independent traders) have formed a formal trade association.
Hucksters are the biggest exporters of agricultural products within the Caribbean Community and Common Market. For example, hucksters are the main buyers of fresh produce in Barbados, and of fruit and root crops in Grenada and Saint Vincent and the Grenadines. These entrepreneurs are very price sensitive; usually operating in the informal sector, hucksters are able to offer lower than wholesale prices and tend to compete with the state marketing boards in each country. To maintain good business, hucksters’ buying criteria is based on quality,
Arnold Babwah, a management consultant who produced a Market Study for Fresh Produce in 2016, which included a review of the DHA, states that, unlike many hucksters operating in the informal economy, “Members of the DHA tend to pay a reasonable price to farmers, usually higher than the wholesale price, as they want to maintain