Informal Economy and Poverty Reduction in Nigeria

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Tuesday, August 07, 2018 4:00PM / FDC

Nigeria is now the country with the highest number of extreme poor, with 87million Nigerians in abject poverty. This is disheartening, but true. The country officially overtook India which has 73million of its population living in poverty. It is noteworthy that India’s poverty numbers appear more benign than Nigeria’s due to its high population. With an estimated population of 1.3billion, 5.26% of Indians live in extreme poverty. By comparison, 45% of Nigerians live in extreme poverty. 

This poverty situation in Nigeria is unarguably worrisome and it demands urgent policies that boost employment and aggregate income. Meanwhile, the weak growth in the formal economy suggests that employment in this space will be relatively inadequate to reduce poverty. The sector grew by 0.8% in 2017. In fact, employment in Nigeria’s formal sector does not guarantee a break from extreme poverty. 

The sector currently offers a minimum wage of N18,000 ($50), which translates to an average daily income of $1.67, still below the poverty threshold of $1.9 per day. The informal economy by contrast has grown faster in size at an annual average rate of about 8.5% between 2015 and 2017.2 Growing Nigeria’s informal economy would require skills development, cheaper credit accessibility and improved power supply.

 

The structure of Nigeria’s informal economy 

The informal economy involves economic activities undertaken by individuals and organizations, which are not subject to full government regulations. Such activities include photography, catering, hairdressing, motorcycle services, tailoring, fashion designing, carpentry, painting, etc. This part of the economy is particularly large in Nigeria, with the International Monetary Fund (IMF) estimating it to constitute about 60% of the entire Nigerian economy.3 This represents about $240bn. 

Informal activities are usually not captured in the process of computing GDP numbers.  Meanwhile, working in the sector is attractive due to the ease attached to operations as a result of the absence of a bureaucratic regulatory framework, and little or no formal educational requirements. 

At times, even Nigerians with high formal education find employment in the informal economy when well- paid formal sector jobs are unavailable. The big size of this economy, the in-evitable demand for their goods and services and the ease attached to working therein, could be a strategic consideration for Nigeria to raise employment. This growth in the informal sector and an increase in employment would imply higher household income and lower poverty in Nigeria.

 

Strategies to spur informal economic growth 

Nigerian government policies are typically lopsided in favor of the formal economy. The most no-table of the current administration’s policies corroborate this. In the quest for economic diversification from oil, the government has given priority to solid minerals and agricultural sectors. The N-power scheme, which aims to reduce youth unemployment, has also largely involved the employment of graduates in formal activities. With regards to informal economic activities, the government plans to empower 100,000 artisans across the country. This is commendable, albeit with a potential marginal impact as the amount only represents 0.05% of total population and 0.12% of the country’s labor force. More attention is required. 

The first strategy that is worth considering is the development of informal skills amongst Nigeria’s working-age population. The government could create and sponsor well-equipped platforms that bring individuals who intend to learn skills and corresponding experts together. This should be at low costs in order to increase their attractiveness to prospective trainees. 

In addition to skill acquisition, workers in Nigeria’s informal economy have raised concerns over credit accessibility. New graduates from the would-be government skills development institutions are expected to be faced with the same challenge. These workers mostly require funds to acquire tools and equipment that are either fundamental to their operations and/or necessary for them to carry out their activities more easily. This highlights the need for the government to give low interest loans in this space. A grant might even be more effective in reducing poverty, as it has the ad-vantage of taking off the burden of repayment. If this were the case it would allow workers to maximize their profits and further ease their escape from the poverty trap. 

Furthermore, informal employees in Nigeria generally require electricity for their operations, al-though it varies across different segments. For instance, the electricity requirements are huge in areas such as laundry services, hairdressing and printing, while it is moderate for photography and catering for instance. Activities such as transport services generally have marginal electricity demand. Given the poor condition of power supply in the country, most of those who fall in the category of high users resort to generators. 

This is found to be relatively expensive and translates to a higher cost of production. Addressing power infrastructure challenges demands huge capital requirements and takes a long time to materialize. However, a short term focus on maximizing gas availability would be a good start. Nigeria’s average electricity output per day of about 3,500MW/hour has been significantly below installed capacity of about 7,500MW, while gas unavailability accounts for approximately 45% of total generation constraints. 

Maximizing gas availability could result in significant benefits, not just for the informal economy, but Nigeria as a whole. In the meantime, the government could focus on securing an adequate supply of gas to power stations. This could draw actual power output closer to its potential pending the time the country sees other significant investments that could raise capacity. 

Nigeria might need to tilt towards an informal driven economy to create more employment and significantly reduce poverty. The formal sector of the economy, which represents the aggregate output, grew by 0.8% in 2017.5 This weak growth might not be enough to reduce poverty levels in the country. A new approach is expedient.

 

Proshare Nigeria Pvt. Ltd. 

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