towards west-africa regional economic integration … · towards west-africa regional economic...

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TOWARDS WEST-AFRICA REGIONAL ECONOMIC INTEGRATION:

FORMALISING THE INFORMAL SECTOR

1Oluwole Ibikunle OGUNYEMI &

2Adebayo Sunday ADEDOKUN

1. Agricultural Extension and Management Department, Lagos State Polytechnic, Ikorodu,

Lagos, Nigeria

Corresponding: Email: [email protected] Tel.: +2348023124607

2. Economics Department, University of Lagos, Akoka, Lagos, Nigeria

Email: [email protected] Tel.:+2348027507021

PAPER DELIVERED AT THE

17TH

ANNUAL CONFERENCE ON GLOBAL ECONOMIC ANALYSIS

United Nations Economic Commission for Africa (UNECA)

organised session on ‘‘Boosting Intra-African Trade’’

KING FAHD PALACE HOTEL, DAKAR, SENEGAL

JUNE 18 – 20, 2014.

mailto:[email protected]

mailto:[email protected]

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TABLE OF CONTENTS

Page

Title page and authors‘ details 1

Table of contents 2

Abstract 3

1.0 Introduction 3

2.0 Literature Review 6

3.0 Methodology 10

3.1 Scope of study, data and analytical framework 10

3.2. Analytical procedure 11

3.2.1 Currency ratio/demand method 11

3.2.2 Descriptive statistics 12

3.2.3 Definition of terms 12

3.3. Formalising the informal sector framework 12

4.0 Discussion of results 13

4.1. Currency in circulation and Money supply in Nigeria 13

4.2 Ratio of currency in circulation to M2: 1960-2010 16

4.3 Ratio of currency outside bank to M2: 2000 - 2013 16

4.4 Informal-Formal Sector Transmission (INFOSTRA)

Model for Economic Integration in West African Sub-region 17

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4.5 Linking formalisation of informal sector to inter-regional trade

in West-Africa 22

5.0 Conclusion and Recommendations 23

5.1 Conclusion 23

5.2 Policy recommendations 24

References 25

Abstract

The existence of large informal economy is one reason for the developing countries not to be

benefiting fully from the world economy through integration. The countries have remained

behind those of the north in global financial, monetary and market development. The paper

employed secondary data for Nigeria, the largest economy in the West- African sub-region,

computes the indication of the informal sector in the country with monetary variables and

develops an Informal-Formal Sector Transmission Model for Economic Integration. The data

were analysed using currency-money supply approach, graph and tables. The ratio of currency

in circulation to M2 indicates that the incidence of the informal sector shrunk between 1960 and

2013. The currency outside bank to M2 ratio reduced from 9.39 to 8.81 per cent while currency

in circulation to M2 ratio reduced from 11.96 to 10.66 per cent in 2010 and 2013 respectively.

The Model explains the means of transforming informal sector to formal sector that leads to

market access in which all artificial barriers to trade are removed to facilitate free trade flows

within West-Africa. The paper reflects that with market access for the formal sector, countries

would benefit in terms of growth, employment, poverty reduction, intra regional trade and

labour mobility. This will promote the drive for financial and monetary union as well as

economic integration of the sub-region. The paper recommends the registration of informal

activities, the establishment of Informal Sector Institute and provision of inputs support for the

sector.

Keywords: Informal sector, Market Access, Economic Integration, West Africa, Employment.

1.0 Introduction

The informal sector remains a veritable source of economic growth and emancipation in

Africa and in West Africa in particular. It is equally seen as a means to step up the process of

economic integration in the sub-region as it accounts for the highest proportion of non-

agricultural employments. Never-the-less, the informal sector has not been given the kind of

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attention it requires both at the advocacy and policy levels in many developing countries

including those in the sub-region. This is one of the motivations for the current study. In addition

to this, the role of the informal sector in generating employment, reducing social set-backs and

serving as a catalyst for economic growth cannot be over-emphasized. Similarly, the paper

intends to investigate the link between informal sector, market access and economic integration

in the case of West African countries.

Conceptually, many authors have defined informal sector in one way or the other. The

definition in the current study aligns with convergence view describing the informal sector as the

legal economic or income generating activities that operate outside the regulatory framework of

the state (Castells and Portes 1989; Harding and Jenkins 1989; Feige 1990; Ogunyemi, 2009).

Though the paper recognise the illegal economic activities like drug trafficking and money

laundery at significant levels as part of the hidden economy. This illegal aspect is being

continuously fought by the governments of all countries and does not qualify for formalising the

informal sector concept underlying this study.

The informal sector is second largest employer of labour in West Africa. It follows

agricultural sector employment even in countries that are rich in natural capital like Nigeria,

Ghana and Cote d‘Ivoire. The sector has been a panacea for women and youth unemployment

and youth restiveness as it provides these vulnerable groups the opportunity to earn meagre

income in order to bullet proof themselves from food and income poverty. It is equally a sponge

that absorbs the population that is willing and able to work but does not have the requisite

qualifications necessary for gaining employment in the formal sector.

The study of the informal sector, market access and economic integration in the case of

West Africa Sub-Region is very important in the current time because the global economic

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slowdown has been discovered to have a prolong ripple effects on job destructions in the formal

sector. The informal sector thus provides social safety nets for the industrial reserve armies

(I.R.A) that are rendered jobless as a consequent of the waves of shocks affecting the global

economy. The informal sector provides the sizeable number of the working population with the

opportunity to be productively engaged even at the face of devastating effects of climate change

in several countries.

Flash floods and other natural disasters have succeeded in destroying farm lands in

several countries in West Africa. This has reduced agricultural employment, particularly those

involved in direct farming. The affected farmers can only find solace in informal sector

activities. The effects of adverse weather have not only affected agricultural productivity but also

employment in the agricultural sector. It has equally contributed massively to environmental

degradation and negative growth in many countries. The ecological fund notwithstanding,

poverty and depravity are widespread in developing countries, including those in the West

African Sub-region.

It is expected that the study will provide us with some salient information that are

asymmetry in nature on the nexus between informal sector, market access and economic

integration in West Africa. The lessons from the study can be used in other regional

arrangements among developing countries with some homogenous characteristics with West

Africa. Further, the paper contributes to the ongoing debate about the important roles of the

informal sector in regional alignment and economic integration. It shows the potential roles the

informal sector can play in promoting regional agenda within the study area.

The choice of West Africa for this study is informed by the fact that there have been

incessant conflicts, insurgencies and separationist movements within the West African sub-

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region. The remote cause of this upward rise in conflicts in the sub-region is primarily economic.

It is our conviction that an investigation into the roles of informal sector through market access

will promote integration within the sub-region. It will also encourage policy that will free

resources to the vulnerable groups in the society, thereby reducing armed conflicts and

insurgencies that have their root in poverty and depravity.

The paper develops an Informal-Formal Sector Transmission Model (INFORSTRAM)

for economic integration to establish the link between the informal sector, market access and

regional economic integration among any given countries. The remaining part of the paper is

divided into four. Section 2 is the Review of literature, where body of knowledge in the thematic

area is extensively discussed to establish gaps for the current study. Section 3 is for

Methodology, while section 4 is for Discussions. The paper ends with Section 5 which is for

Conclusion and recommendations.

2.0 Literature review

Different terms have been used to describe the informal sector and some of which are

underground, hidden, unobserved, unofficial, shadow or unrecorded economy. According to

Killam (1992), underground economy entails all off-the books and unregulated activity. It

encompasses a wide range of economic activities and services as well as legal activities that are

concealed from or misrepresented to government authorities such as involving tax evasion or

benefit fraud. Underground economy may then be illegal or legal economic activities. But Feige

(1999) identify four different components of underground economy as illegal, unreported,

unrecorded and informal economies. The illegal economy entails any income generating activity

done contrary to the legal definition of commerce. Unreported economy involves the activities

that dodge fiscal rules such as tax codes like under-reporting of income and under-invoicing.

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Unrecorded economy consists of those economic activities such as smuggling that circumvent

reporting requirements of government statistical agencies.

The informal economy refers to those activities that escape the costs and are excluded

from the benefits and rights of property relationships, commercial licensing, labour contracts,

torts, financial credit and social security system. This study focuses on the informal sector as

described and it entails the legal monetary and non-monetary economic activities that are not

against the law of any country but escape official recording and do not take advantages of labour

laws and property bonds as obtained in the formal sector (Schneider and Enste, 2002; Ogunyemi,

2009; ILO, 2009).

There is plethora of literature on informal sector of the economy in all the regions of the

world but it is an under-investigated topic in developing countries. All publications on the sector

highlighted its meaning and importance; some emphasise on transforming the informal to formal

sector but hardly is there any literature linking the informal sector to regional market access and

economic integration. The studies include Fluitman (1989), Rauch (1991), Armah (2001), Chen

(2001), ILO (2002), Carr and Chen (2002),. ILO (2002), Goldberg and Pavcnik (2003), Klarita

(2004), Adeyinka (2006), Alan et. al. (2009), Ogunyemi (2009), Sparks and Barnett (2010),

Chen (2012), Duru (2012) and Olunloyo (2012). The informal sector is defined as all economic

activities by workers and economic units that are either in law or practice not covered or

completely covered by formal arrangements (ILO, 2002). Fluitman (1989) reports that the

informal sector is heterogeneous, comprising a wide variety of economic activities that often

failed to be noticed in statistics.

In Sparks and Barnett (2010), the informal sector boosts job creation, reduces poverty

and is a veritable tool of unemployment reduction and governments need to take away barriers

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from the formal sector to encourage more participants. Similarly, Chen (2012) mentions that the

sector provides a larger share of the world working population and economic activity. Among all

the literature mentioned, Chen (2012) examines the formalisation of the formal sector which

includes formalising both the employers and employees, both self-employed and wage workers

and the concept goes beyond official recognition of the informal sector businesses. Specifically,

formalisation of the informal sector is of two sides; formalisation of the informal businesses and

jobs in the countries concerned.

However, market access is a phenomenon among countries of the world in the face of

globalisation and drive towards regional and sub-regional economic integrations. It refers to the

conditions especially on tariffs and non-tariffs measures agreed upon by countries for the entry

of particular commodities into their markets (Hoekman and Martin, 1999; IMF/World Bank,

2002). Market access can be said to be one of the necessary ingredients of economic integration.

According to Investopedia (2013) economic integration is an economic arrangement between

different countries characterised by partial or full elimination of trade barriers and the

coordination of monetary and fiscal policies. The aim of economic integration is to reduce costs

for both consumers and producers, as well as to increase trade between the countries taking part

in the agreement. Some features of a regional economic integration are preferential trade

agreements (PTA), free trade areas (FTA), customs unions, common markets and economic and

monetary unions. The more integrated the economies become, the fewer trade barriers exist and

the more economic and political coordination among member states (Carbaugh, 2004).

These foregoing definitions point to the fact that market access is directly related to

economic integration as the former enhances the later. Market consideration is one of the five

processes of economic integration which are free trade area, customs union, common market,

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economic union and complete regional integration respectively. An advantage of economic

integration is regional economic growth and larger market for diverse commodities. Several

authors including Goldberg and Pavcnik (2003), Klarita (2004), Adeyinka (2006), Alan et. al.

(2009), Sparks and Barnett (2010), Chen (2012), Duru (2012) and Olunloyo (2012) have pointed

out the contributions of the informal sector to the growth of the economy through employment

generation and production of goods and services. During period of economic growth in countries

that have integrated economically, the benefits will be enormous for all in terms of wealth

creation especially in Africa with large proportion of the informal sector. This paper is thus

adding to existing literature in the area of informal sector formalisation that promotes market

access for businesses for the achievement of regional economic integration with its

accompanying benefits.

Due to the relevance of the informal sector, efforts have been made to estimate its size in

many economies. In this endeavour, there are few quantitative studies in both developed and

developing countries which include Tanzi (1980 and 1983), Simon and Witte (1982) and

Scheneider (2002). More of the literatures have been for developed countries than developing

countries. The interest in informal sector estimation started immediately after the World War II

in the United States and since then about five to six methods have been demonstrated.

The methods either involved the use of aggregate (macro) data or individual (micro) data

and were grouped by Georgiou (2007) into direct survey, monetary measures, income and

expenditure measures, indirect non-monetary measures, labour market indicators and multiple

indicators-multiple causes model. Georgiou reports that all the methods have short-comings.

Those applying micro data are faced with the challenge of non-representative sample and

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respondents biasness among others. The macro data based approaches are weakened by some

factors which include unrealistic assumptions and measurement error problems.

Table 1 shows the size of the informal sector in five West-African countries as computed

by Scheneider (2002). Though the estimates are for over a decade ago, they are pointers to the

significance of the sector in the region‘s productivity. As at 2000, the informal sector was about

60 per cent of Nigeria‘s gross national product (GNP) and about 40 per cent for Burkina Faso,

Table 1: The size of the informal economy of 5 West African Countries

S/N Country GNP at

Market Prices

(Current USD

Billion) 2000

Informal

Economy (%

of GNP

1999/2000)

Informal

Economy

(Current USD

in Billion) 2000

1 Burkina Faso 21.7 38.4 17.6

2 Cote d‘Ivoire 86.1 39.9 34.4

3 Ghana 48.3 38.4 18.5

4 Niger 18.1 41.9 7.6

5 Nigeria 367.3 57.9 212.6

Source: Scheneider (2002)

Cote d‘Ivoire, Ghana and Niger. These estimates could have either increased or decreased by

significant per cents in 2013 after a period of ten years with rising population, higher

unemployment rate in the formal sector and poverty levels in countries like Nigeria, Niger and

Cote d‘Ivoire.

3.0 Methodology

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3.1 Scope of study, data and analytical framework

The study used the data for Nigeria. The country is the largest economy in West Africa

and represents more than 40 per cent of the population in the sub-region. Therefore the paper

used secondary aggregate data obtained from the site of the Central Bank of Nigeria and its 2010

Statistical Bulletin. We used the monetary measure procedure to indicate the occurrence of the

informal sector in Nigeria instead of its actual estimation in terms of GDP for which all known

methods Georgiou (2007) have drawbacks. The monetary approach is of three types: banknote

denomination indicator, currency ratio/demand method and the transactions method. The

banknote denomination indicator and transaction methods are not used for the following reasons.

The former wrongly assumes that the informal economic activities, both legal and illegal, are

done only by cash ignoring electronic money and cheque payment systems as well as

commodity-for-commodity means of exchange. The method shows the incidence of both legal

and illegal informal economic activities. The transaction method is weakened mainly by lack of

empirical validity.

3.2. Analytical procedure

3.2.1 The currency ratio/demand method:

We examined the long-period changes in the ratio of currency to money supply (M2) in

Nigeria between 1960 and 2013. This enabled us to determine the proportion of the broad money

that is outside the bank all over the period as an indication of the informal economy in the

country. This approach involving broad definition of money indicates the proportion of money

out of the banking system which is in the informal sector. The method is based on the following

assumptions: (i) there is one to one relationship between transactions and cash payment, no

barter and cheque payments (ii) velocity of currency in the informal sector is the same as in the

formal economy.

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The advantages of the method are (i) it provides rough indication of the informal sector in

any economy (ii) where aggregate data are not available in detail for all financial, income,

expenditure and labour market indicators, it can be relied upon as it uses the readily available

central bank monetary data (iii) It can also be relied upon where survey cannot be done due to

cost and time constraints. However, the method has inherent weakness. There are other factors

which affect the relationship between currency and monetary indicators like demand deposits,

opportunity cost of holding cash, level of income tax rate, level and rate of urbanisation,

expected real per capita income and volume of retail trade. This affects the basic assumption of

currency-money supply ratio adopted as indicator of the informal sector. Estimates to be arrived

at will depend on many quantitative and qualitative factors.

3.2.2 Descriptive statistics

Graph and table were used to analyse the data to present an indication of the informal

sector in Nigeria. This informal sector indication procedure can easily be adopted based on

available data within the West African sub-region as alternative to more sophisticated estimation

options.

3.2.3 Definition of terms

Money supply: The amount of money which is available in an economy in sufficiently liquid

and spendable form (Afolabi, 1998).

Broad money supply (M2): This is the wider definition of money supply recognised in Nigeria

and other countries of West-Africa. It is expressed as:

M2 = M1 + TD + SD

where, M1 = Narrow definition of money supply = C + DD

C = Currency in circulation

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DD = Private sector demand deposits with commercial banks plus adjusted private sector

demand deposits with the Central Bank

TD = Time deposits, and SD = Savings deposits

3.3. Formalising the informal sector framework

We developed a model for changing the informal sector to formal sector for the West

African sub-region. This framework emanated from the nature and scope of informal economic

activities in the sub-region which are almost alike in all its countries.

4.0 Discussion of results

4.1. Currency in circulation and Money supply in Nigeria: 1960-2010

As shown in Figure 1, the gap between broad money supply (M2) and currency in

circulation was not pronounced until in 1995 when the gap opened and continued to widen up to

2010. From Table 2, in 1960, 1970, 1980, 1990, 2000 and 2010, M2 (in Million Naira) in

absolute terms was 272.40, 978.20, 15,100.00, 68,662.50, 1,036,079.50 and 11,525,530.30 while

currency in circulation was N154.2Million, N370.4Million, N3,589.5Million, N16,212.5Million,

N310,496.3Million and N1,378,134.4Million respectively. These are indications of growth and

developments in both formal and informal economic activities in the country and the impacts of

various monetary and fiscal policies that have been implemented in the countries.

Table 2: Currency in circulation and Broad money supply in Nigeria

Year

Currency in Circulation

Million Naira Money Supply

M2 Million Naira

Currency to

M2 Ratio in

Per cent*

1960 154.2 272.4 56.61

1961 160.2 292.8 54.71

1962 174.7 325.4 53.69

1963 183.3 361.8 50.66

1968 202.2 515.3 39.24

1964 214.7 430.5 49.87

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1965 217.9 467.4 46.62

1967 221.0 451.3 48.97

1966 236.5 518.1 45.65

1969 273.2 660.4 41.37

1970 370.4 978.2 37.87

1971 386.4 1041.8 37.09

1972 414.0 1214.9 34.08

1973 486.3 1522.5 31.94

1974 638.7 2352.3 27.15

1975 1155.5 4241.2 27.25

1976 1540.0 5905.1 26.08

1977 2162.6 7898.8 27.38

1978 2381.7 7985.4 29.83

1979 2703.4 10224.6 26.44

1980 3589.5 15100.0 23.77

1981 4347.7 16161.7 26.90

1982 4728.9 18093.6 26.14

1983 5299.3 20879.1 25.38

1984 5347.2 23370.0 22.88

1985 5375.0 26277.6 20.46

1986 5696.3 27389.8 20.80

1987 6854.9 33667.4 20.36

1988 10210.5 45446.9 22.47

1989 10722.4 47055.0 22.79

1990 16212.5 68662.5 23.61

1991 25331.2 87499.8 28.95

1992 39725.0 129085.5 30.77

1993 62571.0 198479.2 31.53

1994 96166.5 266944.9 36.03

1995 113940.8 318763.5 35.75

1996 126040.3 370333.5 34.03

1997 144825.1 429731.3 33.70

1998 172377.8 525637.8 32.79

1999 208561.1 699733.7 29.81

2000 310496.3 1036079.5 29.97

2001 403506.0 1315869.1 30.67

2002 463153.0 1599494.6 28.96

2003 502254.5 1985191.8 25.30

2004 545803.0 2263587.9 24.11

2005 642388.2 2814846.1 22.82

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2006 779254.2 3674641.9 21.21

2007 960774.4 5809826.5 16.54

2008 1155334.6 9166835.3 12.60

2009 1181541.9 10767377.8 10.97

2010 1378134.4 11525530.3 11.96

Sources: http://www.cenbank.org/documents/Statbulletin.asp CBN (2009) Statistical Bulletin Vol 20 Dec

*Authors‘ computation

0

500

0000

1.0

0e+

07

1.5

0e+

07

Mill

ion

Na

ira

1960 1970 1980 1990 2000 2010Year

Currency

M2

Figure 1: Currency in circulation (Currency) and Broad Money Supply (M2) in Nigeria

Sources: http://www.cenbank.org/documents/Statbulletin.asp CBN (2009) Statistical Bulletin Vol 20 Dec.

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1020

3040

5060

Per

cen

t

1960 1970 1980 1990 2000 2010Year

Figure 2: Currency in circulation to M2 Ratio in per cent from 1960 to 2010

Source: Authors‘ computation from M2 and Money in circulation

4.2 Ratio of currency in circulation to M2

As shown in Figure 2, there is an overall decline in the ratio of currency in circulation to

money supply. In 1960, 1970, 1980, 1990, 2000 and 2010, the ratio was 56.61, 37.87, 23.77,

23.61, 29.97 and 11.96 per cent respectively. This implies that the informal sector monetary

activities especially the cash transactions are gradually declining as they may have been

changing their cash transactions into other payment systems like cheque. The ratio reduced from

30.67 in 2001 to 10.97 in 2009 but upturned in 2010 to 11.96. The reason for the overall decline

in the ratio showing decrease in the informal sector is not far-fetched. There is growing

awareness among the people for banking services as the effect of globalisation becomes more

obvious in everyday economic activities. Economics agents are now moving from cash based

transactions to other payment options such as e-payment. However, the progress made so far in

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this direction is not satisfying as many are still unbanked in the country and by extension in the

sub-region.

4.3 Ratio of currency outside bank to M2: 2000 - 2013

Table 3 shows that the ratio of currency outside the banking system to M2 from 2000 to

2013. The ratio is smaller in value compared with the ratio of currency in circulation to M2. This

is because the later comprises the currencies in- and outside the banking system and may be

better indicator of the informal sector as some informal activities have their monies in the

banking system. Following an increase in the ratio between 2009 and 2010, both ratios declined

towards 2013. Currency outside bank to M2 ratio reduced from 9.39 to 8.81 while currency in

circulation to M2 ratio reduced from 11.96 to 10.66 in 2010 and 2013 respectively. This implies

that the informal businesses gradually crept into the formal banking system within the period. A

development that may not be unconnected with the financial inclusion as well as the cash-less

policies of the monetary authorities. The observed reduction in the prevalence of the informal

Table 3: Currency outside the Banking system and Broad Money in Nigeria: 2000 - 2013

Year

Broad

Money M2

Currency in

Circulation

Currency

Outside

Banks

Ratio of

Currency

Outside Bank

to M2*

Ratio of

Currency in

Circulation

to M2*

2000 1036079.5 310496.3 274010.6 26.45 29.97

2001 1315869.1 403506.0 338671.2 25.74 30.67

2002 1599494.6 463153.0 386942.3 24.19 28.96

2003 1985191.8 502254.5 412155.2 20.76 25.30

2004 2263587.9 545803.0 458586.5 20.26 24.11

2005 2814846.1 642388.2 563232.0 20.01 22.82

2006 3674641.9 779254.2 690841.5 18.80 21.21

2007 5809826.5 960774.4 737867.2 12.70 16.54

2008 9167067.6 1155566.8 892907.8 9.74 12.60

2009 10780627.1 1181541.9 927236.4 8.60 10.97

2010 11525530.3 1378134.4 1082295.1 9.39 11.96

2011 13303494.5 1566046.4 1245135.4 9.36 11.77

2012 15483847.5 1631717.1 1301160.6 8.40 10.54

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2013 14734882.8 1571034.8 1298533.8 8.81 10.66

Source: CBN (2013) web site http://www.cenbank.org/rates/mnycredit.asp?year=2010

*Authors‘ computation

sector is policy induced during the last three years, 2010 to 2013. If the policies implementation

is sustained with other incentives and initiatives as discussed later for formalising the informal

sector, the dream towards complete formalisation of the informal sector will be achieved earlier

than envisaged.

4.4 Informal-Formal Sector Transmission (INFOSTRA) Model for Economic Integration

in West African Sub-region

According to Meagher (2013) ‗growing awareness of the size and organisational potential

of informal economies in the era of globalisation has triggered a profusion of research on

linkages between the formal and informal economies, moving in a range of empirical and

theoretical directions‘. There is a need for countries to work decisively to transform their large

traditional informal sector to modern formal sector in order to promote economic growth and

regional agenda within their sub-region.

Shrinking Fluctuating Expanding

Informal Sector Semi-

formal Sector

Formal Sector

Market Access

http://www.cenbank.org/rates/mnycredit.asp?year=2010

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Informal in Size Formal Sector

Sector Semi-formal Sector

Set of Input Incentives Outcomes:

by each country: Country Specific Benefits:

Recognition of activities - Boosts Planning

Enumeration and Registration - Increases employment

Inputs supply support -Enhances Consumption

Training, Education and Advice -Increases Production

Medium to Long –Term Business: -Reduces poverty

o Entity Tax holidays - Boosts public revenue

o Financial Supports -Improves public

confidence and support

Cross country/Sub-regional

Benefits:

-Enhances production

- Aids economic

integration

-Boosts trade

-Aids labour mobility

-Catalyses monetary

and financial policies and

Key union implementation

Direction of flow

Figure 3: Informal-Formal Sector Transmission Model for Economic Integration

Source: Authors‘ construct

With the foregoing, it is pertinent to make some fundamental assumptions. It is assumed

that all countries in the West Africa sub-region possess the political will and administrative

acumen to encourage avalanche of informal sector organisations within their domain of influence

to gradually transmit to formal sector in order to have access to international market within the

sub-region in which artificial barriers to free trade must have been removed through regional

bloc membership.

From the INFOSTRA model diagram as shown in Figure 3, the left hand side of the

diagram depicts a set of incentive variables that is expected to be carried out by governments of

countries within the regional bloc. For informal sector to migrate to formal sector in the case of

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Africa where poverty is widespread and informal sector serves as bail out for the vulnerable

people, it is expected that government will recognise the various activities within the informal

sector of the economy. For government policies to achieve its aim of promoting formalisation of

economic activities, it is necessary for government to carry out enumeration and registration of

informal sector activities.

However, the registration should be done with caution and public enlightenments in order

to have more informal businesses enumerated. In West Africa, public policies must be well

communicated to the people particularly at the grass root because many may misunderstand or

misinterpret government intention. This is because many past administrations in these countries

have failed in their social contracts to the people. Another formalisation input of the informal

sector is provision of input supplies supports by the governments of various countries in West

Africa. Training and advisory services as most of them do to agricultural sector by providing

extension services to farmers in different locations and settlements is equally a necessary

ingredient for informal sector formalisation.

Financial supports to formal sector are also important incentives that must be given in

order to encourage mass drift of economic actors from the informal sector to the formal sector. If

government through her agencies provides financial supports in form of low interest loans to the

formal sector of the economy, many operators in the informal sector will be encouraged to

formalize their activities.

The intention of the above mentioned incentives is to ensure that the informal sector

shrinks in size as indicated by upward arrow in figure 3. The next line of action will be that the

communication gap between the state and the informal sector will start to close at the instance of

the incentives and the sector begins to open up for interaction with the government particularly

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on issues that impede informal sector operations. This is the semi-formal stage of transformation

of the informal sector to mainstream formalisation of economic activities and it is recognised that

this stage can fluctuate in size.

The resultant outcome of continuous interaction between the state and the informal sector

is the final stage of formalisation which gives the informal sector units the rights and privileges

reserves for corporate organisations. Once an organisation is formalised it becomes an entity that

can enjoy the rights and privileges under commercial and property laws. Its employment

contracts are also expected to be formalised (Chen, 2012) so that labours‘ rights, welfare issues

such as pensions, retirement‘s benefits are guaranteed under the employment contracts with its

employees.

The macroeconomic benefits of transforming a country‘s crude informal sector to a

sophisticated modern formal sector can be divided into two under regional arrangements. The

benefits can be country specific and cross country in nature (sub-regional benefits). Each country

within the West Africa sub-region will benefit from formalising their informal organisations and

opening up of market access through removal of all form of artificial barriers to trade including

tariff and non tariff measures within the sub-region through ratifications of conventions under

Economic Community of West African States (ECOWAS) which has been working to ensure

regional integration of the sub-region. Such country specific benefits include improvements in

planning and plan implementation. Since it is easier to plan with formal organisations than

faceless informal sector, the expansion of formal sector in any country no doubt will boost

formal employments and improve the level of work decency as indecent work and poor working

conditions will reduced drastically.

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Once formal employments increase, it will automatically increase productivity as more

factors are now employed. In the long run, government revenue will increase as businesses

mature in number and scope. The maturing formal organisations will cooperate with the

government in paying corporate tax that will increase government revenue base. The extinction

of informal sector or the shrinking of the same will reduce poverty incidence as more people get

better employment contract deals in the formal sector.

The cross-country or sub-regional benefits of formalising the informal sector include a

larger market for products and services produced anywhere within the region. This will enhance

intra- regional trade which is currently less than 10% when considering Africa as an entity. West

African countries are not trading sufficiently with themselves as they should. South African

Development Cooperation (SADC) for instance accounts for about 33% of intra-African trade

according to UNCTAD (2012) trade statistics. Formalisation of informal sector in West Africa

and execution of conventions and commitment to free movement of goods and services, free

movement of people and improved road networks and other infrastructure within the sub-region

will promote economic integration as well as improvement in the quality of life of the people.

Market access can be aided by availability of information to the organisations that can

benefits from the removal of all form of artificial barriers to trade within the region. When

information is asymmetry in nature, it will reduce trade that could have taken place when

information is available. Formalisation of organisations in West Africa will reduce lemon in

intra-regional trade. Lemons are sub-standard products sold under the pretence of quality

products and thrive when there are hidden information that could also lead to hidden actions

among organisations. Lemon sales are characteristics of underground economic activities which

could be reduced through formalisation of economic activities.

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4.5 Linking formalisation of informal sector to inter-regional trade in West-Africa

Theoretically, economic integration involves some basic stages that must be achieved in

subsequent order. These are: achievement of free trade area, the erection of uniform custom duty

against non-member of the regional organisation often called custom union followed by the stage

of common market for goods, services and factors and the next being economic union which

involves the synchronization of economic policies among member states in a regional

arrangement. The last stage is the monetary union involving common monetary policy and

common currency. The integration and subsequent formalisation of informal sector within the

sub-region will boost the drive towards the achievement of these steps as volume of trade is

expected to increase which will necessitate the need for a common currency among West Africa

countries.

Realistically, achieving a formalising and formalised informal sector promotes the

proliferation of cottage industries in each country. These thriving industries leverage on the

available resources in their domain based on Heckscher-Ohlin proposition that countries would

specialise in the production of commodities on which they have factor endowment. By so doing,

varieties of goods and services are made available and commerce is boosted within the sub-

region through free trade arrangements.

Further, the formalisation of the informal sector will boost the implementation of

monetary and banking policies such as financial inclusion and cash-less policies as presently

being implemented in the region. Formalising the informal sector also has the potential of

encouraging the expansion of the West Africa Monetary Zone (WAMZ) beyond its current five

countries as the remaining eleven countries would be attracted into the zone. It should however

be noted that there is need for macroeconomic stability within the region to ensure that the law of

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one price holds such that interest, exchange and inflation rates will converge among member

states within the regional arrangement.

5.0 Conclusion and recommendations

5.1 Conclusion

The paper examines the informal sector, market access and economic integration. There

are a lot of literatures on the informal sector, the legal economic activities that are not officially

captured, highlighting on its relevance in employment generation and production of goods and

services. To the best of our knowledge, none of the existing literature on any of the West Africa

countries has linked the sector with market access and economic integration. The current effort is

an addition to stock of literature in this area. For Nigeria, with the ratios of currency in

circulation and currency outside bank to broad money, the informal sector is indicated to have

fallen between 1960 and 2010. Following a slight increase in the ratios between 2009 and 2010,

both ratios declined towards 2013. Currency outside bank to M2 ratio reduced from 9.39 to 8.81

while currency in circulation to M2 ratio reduced from 11.96 to 10.66 in 2010 and 2013

respectively. The informal sector is shown to be shrinking in Nigeria with monetary indicators.

The informal sector can be transformed into formal sector through the adoption of

Informal-Formal Sector Transmission (INFOSTRA) Model for Economic Integration. The model

rests on the assumption that there is political and administrative will among countries to

formalize the informal sector due to its importance. In the model, inputs incentives like

enumeration and registration of the informal business as well as business tax exceptions for

medium to long term would transform the informal sector into formal sector. With market access

for the formal sector, countries would benefits in the areas of growth, employment, poverty

reduction and public support. Across the countries in the economic integrating region, trade

would be boosted; labour mobility would be aided geographically and occupationally as well as a

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fast-tracked monetary and financial union would be achieved. Market access enhances regional

economic integration and vice versa. A formalised informal sector boosts market access. Formal

sector and market access promotes the achievement of economic integration in all ramifications.

5.2 Policy recommendations

The paper therefore recommends the following:

Countries in the West-African sub-region should agree to transform the informal sector

to formal sector over a defined period of time.

Immediate census and registration exercise of the informal sector with high level of

publicity without cost to the actors in the sector. In the present state of ICT penetration in

West Africa, the cost of collecting information through media like telephone and optic

mark reader is expected to be infinitesimal which governments of various countries

should bear for the long run benefits.

Upon registration, the governments should exempt the registered informal businesses

from any form of tax payments for five to ten years but individuals could pay personal

income tax as being done in Lagos State, Nigeria for artisans.

Harmonization of the activities of all government agencies in West African Countries that

have the capacity of working for the transformation of the informal sector to formal

sector.

Small and medium scale enterprises development agencies in respective countries should

step up advisory, training and education of informal sector participants to improve their

efficiency towards transforming it to formal sector. The agencies may also collaborate

with existing higher institutions in the training while government could establish the

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Informal Sector Institute to enhance training, education and transformation of the sector

to formal sector.

Financial supports for the formal sector businesses would have to be stepped up through

micro-finance institutions and small and medium scale enterprises development agencies.

As more businesses in the informal sector metamorphosed into the formal sector, the march

towards full economic integration in West Africa is achievable within very short time.

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