Reinventing Informality in Sub-Saharan Africa : The Role of Digital Innovations

Abstract

This research examines the impact of digital transformation on the informal sector in sub-Saharan Africa. As the digital revolution unfolds globally, sub-Saharan Africa actively participates in this transformation. The informal sector, a critical pillar of the regional economy, is undergoing significant change. The World Bank estimates that the informal sector employs over 70% of the workforce and contributes nearly a third of Gross Domestic Product (GDP) in many sub-Saharan African nations. However, the dominance of this sector presents challenges, particularly by limiting governments’ ability to mobilize resources for economic stimulation, especially during crises. This paper explores the potential of digital transformation as a solution for formalizing the informal sector. It highlights the opportunities for job creation, wealth generation, and increased tax revenue.

Key words: Digital transformation, Informal sector, sub-Saharan Africa, Economic development, Formalization.

Introduction

Digital transformation is much more than just a global trend : it is a veritable revolution that is redefining the economic, social and cultural contours of this planet. Under its influence, no corner of the globe stands still, and sub-Saharan Africa, far from being on the sidelines, is at the heart of this evolution. In this dynamic region, where the informal sector plays a crucial role, the transition to digital is shaping an entirely new economic landscape. According to a recent World Bank study, the informal sector is the mainstay of the economy in many sub-Saharan African countries, accounting for more than 70% of total employment and contributing almost a third of GDP (World Bank). However, this predominance of the informal sector presents major challenges, particularly by limiting the ability of governments to mobilise the budgetary resources needed to stimulate economic activity, especially in times of crisis. Faced with these challenges, formalising the informal sector through digital transformation is emerging as a crucial solution. This process, facilitated by the widespread adoption of digital technologies, offers immense potential: it can not only create jobs and generate wealth, but also considerably increase tax revenues, thereby strengthening the financial foundations of governments (IMF, Finance Developpement). Yet this transition is not without obstacles. Major challenges stand in the way of formalisation, including lack of access to technology, gaps in digital skills and complex regulatory barriers. These difficulties underline the crucial importance of a holistic and collaborative approach, where researchers, policymakers and private sector players work hand in hand to overcome these obstacles.

In the ever-changing digital landscape of sub-Saharan Africa, recent statistics on internet penetration show explosive growth. In 2017, the region’s internet penetration rate was 24%, well below the global average of 64%. However, this situation has changed radically over the last decade, with a penetration rate that has increased tenfold. In 2016, sub-Saharan Africa already had 420 million unique subscribers, and projections indicated that this figure would reach 535 million in 2020, representing a penetration rate of 50% for the region (GSMA). To better understand these trends and their impact on the informal economy, ten specific countries in sub-Saharan Africa will be discussed: Nigeria, South Africa, Kenya, Ghana, Ethiopia, Tanzania, Uganda, Cameroon, Senegal and Rwanda. These countries have been selected for their diversity in terms of size, level of economic development and progress in digital innovations, offering valuable insights into the different facets of this regional phenomenon.

The informal sector landscape in sub-Saharan Africa

The informal sector, also known as  the informal economy, refers to a set of economic activities that operate outside the regulatory and fiscal frameworks established by government authorities. It encompasses a diverse range of businesses and workers, from street vendors to artisans and domestic workers. In sub-Saharan Africa, this sector plays an essential role in the economy, often providing jobs for those who cannot find work in the formal sector.

Economic and social importance of the informal sector

In many countries in sub-Saharan Africa, the informal sector represents a substantial part of the economy. In Nigeria, for example, it is estimated that the informal sector employs around 80% of the working population (National Bureau of Statistics). In South Africa, the figure is around 30% of the working population. In Kenya, the informal sector accounts for 83% of total employment (Chen). These statistics highlight the economic and social importance of the informal sector in the region, as the main provider of jobs and livelihoods for many individuals and families.

Main sectors of activity and trends

The activities of the informal sector in sub-Saharan Africa are diverse, reflecting the needs and economic realities of local populations. In countries such as Ghana and Ethiopia, informal agriculture plays a predominant role, with many small-scale farmers operating outside the formal system. In Tanzania and Uganda, informal retailing is particularly widespread, with bustling markets selling a variety of local produce. In Cameroon and Senegal, informal services such as hairdressing, vehicle repair and petty trading make up a large part of the informal sector. In Rwanda, crafts and informal production are booming sectors, with many artisans producing craft goods for local and international markets.

In terms of trends, there is a growing adoption of technology in the informal sector across the region. In Nigeria, for example, informal e-commerce is booming, with many vendors using online platforms to sell their products. According to a recent study conducted by the Nigerian Communications Commission (NCC) in August 2023, Nigeria now has over 160 million internet subscribers, a significant increase on previous years (Nigerian Communications Commission). This growing adoption of the internet has fuelled the growth of informal e-commerce, providing informal vendors with a platform to expand their customer base and increase sales. In South Africa, mobile applications are increasingly used by workers in the informal sector to find employment opportunities and manage their business activities. According to data from Stats SA, South Africa’s statistics agency, more than 70% of the adult population now uses a smartphone, and this figure is rising steadily. This widespread adoption of smartphones has given informal sector workers easy access to online employment platforms and business management applications, facilitating their commercial activities and enabling them to connect more effectively with customers and business opportunities.

Digital transformation: opportunities and challenges

Digital transformation represents an unprecedented opportunity to redefine the economic landscape of sub-Saharan Africa, particularly where the informal sector is concerned. In this region, where access to technology has increased considerably in recent years, digitalisation offers new prospects for informal entrepreneurs.

Impact of digital transformation on the informal sector

Taking the example of Nigeria, where around 77% of the working population is employed in the informal sector (National Institut of Statistics), mobile applications such as “Gokada” have revolutionised the transport sector by offering secure motorbike taxi services accessible via mobile applications. This technology has not only improved access to transport for citizens, but has also created new job opportunities for drivers.

In South Africa, where the informal sector accounts for around 17% of GDP, according to the World Bank, initiatives such as “Spaza Online” enable small traders to sell their products online, thereby extending their customer base beyond traditional geographical boundaries. This transition to e-commerce has enabled informal businesses to remain competitive in an increasingly digitised market.

Opportunities offered by digitisation for formalisation

Digitalisation also offers opportunities for the formalisation of the informal sector. In Ethiopia, for example, where almost 80% of the workforce is employed in informal agriculture, (African Development Bank), online platforms such as “EthioMarket” connect farmers to national and international markets, offering greater traceability of products and facilitating access to credit for small-scale farmers.

In Tanzania, where around 93% of businesses are informal (International Monetary Fund), government initiatives such as the TRA iTax online platform are simplifying the process of registering businesses and paying taxes for informal entrepreneurs. This simplification of administrative procedures encourages formalisation by reducing costs and bureaucratic obstacles.

Challenges to overcome : access to technology, digital skills, regulation

Despite these opportunities, challenges remain. In countries such as Cameroon and Senegal, where the digital divide remains significant (International Telecommunications Union), limited access to the Internet and digital technologies hinders the adoption of digital solutions by informal entrepreneurs. Additional investment in technological infrastructure and connectivity is needed to ensure that all informal sector players can benefit from the digital transformation.

In addition, the lack of digital skills is a major barrier to the adoption of digital technologies in the informal sector. Training and awareness-raising programmes are needed to build the capacity of informal entrepreneurs in information and communication technologies, enabling them to take full advantage of the opportunities offered by digitalisation.

Finally, regulation plays a crucial role in facilitating or hindering the digital transformation of the informal sector. Inappropriate or excessively restrictive regulations can hinder the adoption of digital technologies by informal businesses, thereby limiting their potential for formalisation. It is, therefore, essential that governments adopt policies that favour the digitalisation and formalisation of the informal sector, taking into account the needs and realities of informal entrepreneurs.

 Conclusion

Several key lessons have emerged. These lessons provide valuable insights to guide recommendations aimed at promoting the formalisation of the informal sector and maximising the benefits of digital transformation. Here are some of the key lessons and recommendations :

• Digital transformation offers significant opportunities for the formalisation of the informal sector in sub-Saharan Africa, by improving accessibility to financial services, expanding markets for small businesses and facilitating administrative processes.

• Government policies play a crucial role in promoting the formalisation of the informal sector. Regulatory reforms to simplify administrative procedures, strengthen law enforcement and promote digital entrepreneurship are essential to create an enabling environment for formalisation.

• Reform government regulations and policies to reduce barriers to formalisation, including simplifying administrative procedures and strengthening law enforcement.

• Encourage collaboration between governments, businesses and civil society to develop innovative solutions and promote digital entrepreneurship in the informal sector.

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