NAIROBI – The COVID-19 pandemic and its economic fallout have hit everyone in Kenya hard. But at the height of lockdown measures, while the formal sector of the economy ground to a halt, the informal sector demonstrated its resilience. For young people in particular, whose schools were closed and whose parents may have lost their jobs, the informal sector has been a lifeline.
Since the start of the pandemic, an increasing number of young Kenyans have established informal micro-businesses, or “hustles.” In an April 2020 SMS survey by the Shujaaz Inc. network, 5% of young people said they had set up a hustle for the first time since the pandemic began. By May, 16% of them had, and in August, an additional 10% reported starting a new business.
Crucially, this has enabled young micro-entrepreneurs to maintain at least some level of income, and therefore gain a sense of control over their future. By contrast, many young people who had lost formal or public-sector jobs as a result of the coronavirus told us that they were still looking for a job and struggling to secure an income, even four months later.
The informal sector is not just a “lifeline” during crises like these. According to the Kenya National Bureau of Statistics, the informal sector was responsible for more than 90% of the demand for employment, even before the pandemic.
Despite the dominance of the informal sector, international development efforts and national government policies have historically been geared toward supporting the formal sector. In Kenya, that trend looks set to continue: only $3 million of the government’s $503 million COVID-19 economic stimulus reportedly will go directly to the informal sector.
But some commentators have begun to question the conventional view of informal employment as a stopgap, and have called for more ambitious interventions to support the informal sector. Experts like economist David Ndii have argued that the informal sector will in fact play an essential role in Kenya’s post-pandemic recovery.
That conclusion is not surprising, given the dependence of Kenya’s young, fast-growing population on the informal sector. With one million people entering the job market annually, the number of young Kenyans running informal micro-businesses – currently estimated at three million – is expected to rise.
About a third of young micro-entrepreneurs work full-time. They earn slightly less than the state minimum wage – but earned double the average income for their age group in 2019 – and create work opportunities for at least one other person in their community, adding $290 million to the economy each month.
Moreover, Shujaaz Inc’s 2019 national survey showed that Kenyan micro-entrepreneurs were 79% more likely than their peers to use financial services, more likely to vote, and 15% more likely to have used modern contraception the last time they had sex. But, despite their vital economic and social contributions, most young entrepreneurs won’t benefit from any of the formal-sector investment planned for the coming years.
Our recent research highlights a range of low-cost interventions to support young entrepreneurs as they seek to establish their hustles as full-time micro-businesses, which would provide them with urgently needed protection against the pandemic’s economic impact while helping to drive Kenya’s recovery. We estimate that supporting two million young “start-up” entrepreneurs could yield an additional $110 million per month for Kenya’s economy and create work for more than a million people.
Most young entrepreneurs remain largely excluded from the formal financial sector, unable to access the capital they need to grow, because they lack a formal credit history. In a digital world, that should not be a barrier to accessing finance. Millions of high-potential entrepreneurs have the necessary skills and a rich history of informal activity proving their ability to run a successful business. It is time for banks and financial-service providers to embrace new digital tools that will enable them to recognize these informal-sector entrepreneurs and introduce targeted products to serve them.
Policy and regulatory changes – for example, simplifying and digitizing the application processes for obtaining business licenses – would also help micro-entrepreneurs bounce back and flourish. Improved access to networks and skills through affordable training and peer mentoring also is vital – and frequently requested by those in our network.
Finally, despite the social and economic value that micro-entrepreneurs create – and their potential to produce much more – many young people still view setting up a micro-business as a sign of failure. If they got through school or college, they were told, full-time jobs would await them in the formal sector. When 90% of graduates discover that these jobs simply don’t exist, they often feel deceived and paralyzed by disappointment. The University of Chicago’s Lauren Berlant calls this phenomenon “cruel optimism”: an inability to let go of an unachievable dream and create a plan B.
It’s time to tell a new story about the opportunities available in the informal sector. In the next two decades, 20 million young people will enter Kenya’s labor market. Formalizing the economy may remain the long-term goal, but in the meantime, most young Kenyans will have a career in the informal sector. Celebrating, supporting, and investing in young informal-sector micro-entrepreneurs can give the economy a huge boost, and will be essential in navigating the challenging road ahead.
Anuj Tanna is Managing Director of the Digital Network Division at Shujaaz Inc.
© Project Syndicate 2021