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February 21, 2019

MSMEs need facilitation not regulation

The informal sector is the largest source of new jobs
The informal sector is the largest source of new jobs

The micro, small and medium enterprises survey that was recently led by the Kenya Bureau of Statistics gives very useful insights into businesses in the informal sector. The focus was micro businesses that are mostly household-based and unlicensed,  and small and medium businesses that are largely licensed.

The informal sector is the largest source of new jobs. In 2015, it created 84.5 per cent of the new jobs with the survey showing MSMEs employ 14.9 million people. While the sector is the biggest employer by the number of jobs, it accounts for only 33.8 per cent of the wealth of the country. Essentially, this means output and effectiveness may be limiting the growth of the sector. We have a large number of people that could produce more.

Granted, most government policies and incentives focus on the formal sector. Besides, businesses in the formal sector are better able to exploit government incentives, and are more resilient to shocks. However, some of the obstacles that are administrative and red tape in nature can be overcome fairly easily.

First of all, by owning up to the importance of the sector to the country. A change of attitude, in the way the informal sector is viewed, is needed to drive a helpful or facilitative rather than a regulatory approach. This is in both drawing policies and in their implementation.

Growing up within a household-based small business, I often came face to face with the fear of government in the informal sector. Whenever word spread that government inspectors were around, it would create a near panic situation.

It was during the time of price controls, and there was always the risk an item would be found wrongly priced, even by chance. Anyway, most businesses relied on informal means, such as suppliers and peer businesses, for access to official prices. The fear that the agents could always find some fault somehow, if not on pricing, in the accuracy of the weighing scale, was real.

The specific problems faced by the informal businesses today are different from those of earlier years. But the relation between the government and the informal sector continues to be mostly controlling and less helpful. And yet in view of its importance in job creation and input to the economy, a helpful approach is more beneficial in the long term. It is then critical that people in this sector are assisted to support their livelihoods, grow their businesses, and pay tax in that order of priority.

It is perhaps not a surprise the recent survey found the regulatory environment is the main limitation to the growth of MSMEs. In particular, the requirement of multiple licences seems costly and complicated.

Other limitations from the survey are; lack of access to capital, lack of markets, stiff competition, poor infrastructure and insecurity.  

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