Photo: FES Ghana

A different approach to dealing with informal businesses in Kenya

A trick to dealing with informal businesses in Kenya is to do nothing about them at all. It is more or less the approach our Government has gone with for a long time. But things have not quite worked out as the informal sector has proven to be resilient, and just won’t die. How so? Read this article to find out, a few reasons, why doing nothing about informal business is a bad idea.

The goal for informal businesses in Kenya is to see them formalize. The main reason is because Government wants another pocket to draw tax revenue from. It’s now clear that this (formalization) won’t happen on its own. But how will the Government influence the business environment, to achieve the goal, without making things worse?

The way that is always proposed by entrepreneurs and economists is deregulation. It means opening up industries to free and fair competition. This is pretty obvious in Kenya where a lot of supply chains are at the mercy of middle-men (and women, equality yay!) and market access under the control of cartels. Combine this with the hurdles set by Government, in the name of compliance, and you can understand why running an honest business is such a difficult thing to do here.

There was a guy on Twitter who was complaining about how Billionaires in Kenya attain that status.

The observation above may cool his frustration. Also, the truth that making the jump to spectacular wealth requires “shady deals” anyway, anywhere in the world.

The combined effect of these difficulties in doing business in Kenya is several of us opting for informal business, partly or wholly. These hinderances have roots in colonial rule. They were set up to protect a small class from competing with the common mwananchis. When we took over we didn’t change this state of things.

It’s true, there have been improvements. But starting a business in Kenya is still a costly registration process, which involves too many steps. One woman entrepreneur found this out, but she’s doing okay.

It would be wiser to change tact in how to deal with informal businesses in Kenya. Trying to pull them towards formal hasn’t worked. It’s dissapointing. A number of the counties never hesitated to introduce or increase levies that only made running an honest business more expensive. What if they could push towards said businesses? What if the rules could be eased upon, costs lowered and registration steps minimized? What could be the effects?

A sure thing is that deregulating formal would open up industries. We spoke about this against the campaign on so-called counterfeit products. Many Kenyans have skill but there are walls raised to keep them from competing. For example, at the so-called Bottom of the Pyramid market segment you’ll find impressive snack concepts. Yes, better than Pizza. But they can’t go anywhere because health certification costs an arm, relatively speaking.

If barriers of entry can be lowered, we would see standards across industries rise from the competitiveness. Let’s consider another real-world example. Your America and Europe are entangled in issues like what logo is plastered at the back of your phone or whether you imported genuine wine from France. The Chinese have become so good at making things that there is hardly discernible difference between real and fake. Jack Ma complained, “…the fake products today, they make better quality, better prices than the real products, the real names.” Function over form.

It would be the same for us if the artificial barriers Government imposes were removed. The informal sector has plenty to offer in breaking bulk, last-mile logistics, low pricing and much more (yes, I can’t think of others at the moment).

In addition, it would be great for formal business. Yes, they would suddenly face new types of competition. But they would enjoy lower operating costs with the burden of compliance lessened.

Will things go that smoothly?

Of course not. You must remember that formal entrepreneurs are among the biggest lobbyists against this kind of thing. In their networking groups, they only ever want problems solved just enough to suite them. And they do use compelling arguments to maintain status quo.

One excuse always used to not invite informal businesses to the party is consumer safety. If it’s not mercury in your sugar then it’s dangerous counterfeit alcohols being made in backstreets. Nobody is concern about the skillset in our faces, only the apparent harm that it’s doing. And they will tell you that consumers will buy against their own self-interest as we see with skin bleaching products. The Kenyan Government has been pretty hands-off over that.

But problems of customer safety are a result of lack of information. This is in turn caused by the very barriers Government has established as norms. It is the Government which has pushed inventive individuals into such levels of desperation. A little bit of the bad mouthing, against informal businesses in Kenya, is propaganda pushed by the status quo. Nowhere is it more clear than in the alcohol sector.