Counting the cost of informality in Africa.

Emmanuel Okoegwale

The technological, financial and structural dynamics of an economy determine how easily businesses can transition from highly fragmented micro-enterprises into scalable engines of growth. Highly formalized markets like the United States, many parts of EU and UK are usually backed by robust regulatory frameworks which ensures market certainty, with capital to scale exponentially. Formalization creates a foundation for capital efficiency , job creation, improved Government revenue etc.

In Nigeria, activities like landscaping are highly informal and disorganized whereas in countries like the United states with purposeful formalization foundation, it's a very organised sector valued at about $188.8 billion and employing over 1.4 million people across 720,000 registered businesses. It thrives on institutional clarity which produces market leaders like BrightView, which generates billions in revenue with thousands of employees.

Three sectors illustrate this formalization advantage namely in Nigeria: the financial services, Food and ride hailing. Financial services are now ubiquitous, available everywhere and anytime across different compliance segments, enabling trade, high transaction velocity etc.

In Kenya, remote villagers can order goods via their MPESA and it is delivered via public transport. Without formalization, Amoke-oge restaurant in Lagos, will still be in business but with limited service coverage and patronage but with formalization, the likes of Chowdeck are helping to fulfil online requests, backed with payments from likes of Moniepoint, flutterwave, Opay etc while government collects own ‘Caesar’s share’

Despite the few impacts of formalization, Africa is still largely overwhelmingly informal driven by unclear regulation and policies required to transition to formality hence trapping the systems in survivalist informality with significant economic and social cost.

High formal economies provide clear pathways for one-person operations to access credit, build institutional trust, and scale into multi-million-dollar enterprises while high costs of informality in Africa restrict business growth, forcing micro-enterprises to remain small and volatile.

Understanding the gaps and the economic value of formalization by the leadership is the first step to unlock the massive untapped potentials across diverse sectors in Nigeria and Africa covering many sectors such as Agriculture, food systems, blue-collar workers, waste recovery etc.

The cost of informality is increasing the inability to convert Africa’s vast entrepreneurial energy into sustainable, broad-based economic growth.