The recent efforts by the government to promote informal sector growth have caught the attention of the World Bank in a new report that has flagged the move as a potential economic disaster in the future.
Coming at time Kenya’s economy is expected to maintain an upward trend, the World Bank warns that Kenya is sitting on a time-bomb by banking on the informal sector to drive its economy.
The report says while the informal economy can provide many employment opportunities, the unchecked expansion of the sector is courting disaster since, among other things, a huge informal sector contributes to lower government tax revenues, which in turn limits the fiscal resources available for public investment and social programmes.
“While sometimes providing the short-run advantage of flexibility and employment, a larger informal sector is associated with lower productivity, reduced tax revenues, greater poverty and inequality,” says the report titled “Economic Prospects, Darkening Skies” .
As a result, the report says, the sector for many reasons cannot deliver Kenya’s economic growth in the long-run.
“In all emerging market and developing economies, the proportion of informal employment exceeded the share of informal output, reflecting a tendency for the informal sector to be less productive than the formal sector,” it said.
The difference is particularly pronounced for South Asia Region (SAR) and Sub-Saharan Africa (SSA), where the informal employment share is approximately double the informal output share.
“In terms of employment, almost half (42 per cent) of the world’s informal workers can be found in SAR, although the region accounts for just nine per cent of the world’s formal employment and three per cent of the world’s formal output,” says the World Bank.
SSA accounts for 14 per cent of the world’s informal employment, well above its share of the formal output of two per cent over formal employment that stands at five per cent.