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Taking on the informal economy: Is it worth it?

FINANCIAL STANDARD
By Graham Kajilwa | July 14th 2015

When Devki Group opened its Sh7 billion plant in Ruiru, Kiambu County, last week, the firm’s chairman, Narendra Guru, asked the Government to address the proliferation of illegal imports from China, which he said were crippling the local steel industry.

“China has created an influx of cheap, counterfeit products in the country and our industries are finding it hard to grow,” he said.

Counterfeit products make up a small portion of the informal market, which, despite the uproar against its existence, continues to grow on a daily basis. Out of world’s population of seven billion, two billion — or about one in four people — are supported by the informal economy, otherwise dubbed the black market.

This sector accounts for 22 per cent of the value of goods and services the world produces, with the businesses in it including counterfeit products, illegal arms and drugs.

In the book Stealth of Nations: The Global Rise of the Informal Economy, author Robert Neuwirth notes that small, illegal and off-the-books businesses account for trillions of dollars in commerce, and employ half of the world’s workers.

Lax laws

Developing countries find themselves the most fertile grounds for black market businesses, largely due to the laxity of anti-counterfeit laws, porous borders and corruption at ports of entry. And in most of these countries, this is the only part of the economy that grows.

The black market does not necessarily refer to illegal products, but to illegal transactions, where taxes are not paid and economic activity goes unrecorded.

It is estimated that Africa loses up to Sh5 trillion a year in revenue as a result of these illicit business transactions. And we participate in them in Kenya when we make purchases from music and movie vendors, or hawkers with no permits, or from the numerous brokers in every sector of the economy who have no records of tax returns.

Black market products and services are appealing. They are cheap, timely and involve little paperwork. But as much as we blame China for the growth of this shadow economy, we have long been culprits.

As Mr Neuwirth says: “No one should blame China ... other economies simply fail to innovate. China was the first country to come up with dual-sim mobile phones. Even Samsung did not think it was possible.”

Locally, the black market has allowed millions of entrepreneurs to overcome the obstacles to setting up businesses, and forge paths to success. And as Neuwirth puts it, the black market is the best place to test one’s entrepreneurial skills because of its ever changing market trends.

The downsides

But, despite these advantages, economists argue that a country’s growth depends on more than the jobs the shadow economy excels in creating. Growth requires an accumulation of cash that can be used to finance investments in manufacturing plants, roads, railways and power stations.

Most business people in the shadow economy invest in goods that move fast, not in fixed investments that are vulnerable to confiscation or taxation, but would deepen economic development.

Further, studies have shown that lot of the goods that are sold in the black market would be cheaper to manufacture locally if governments invested in better infrastructure or cheaper electricity. But this becomes difficult to do when tax evaders make up the majority of a country’s revenue base.

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