Africa’s informal economy presents a huge opportunity for the continent to create decent jobs. The informal sector, which accounts for approximately 55% of the region’s gross domestic product (GDP) and up to 83% of employment, is significant for alleviating poverty and promoting economic development. The role of the informal sector is expected to continue in the foreseeable future in light of Africa’s growing population, up to 224 million by 2030. The sector has seventy-four percent of women’s employment, and informal work is standard among most youth on the continent. Transforming this sector using digital tools is vital for Africa’s economic growth.
Digital technology can transform the informal economy by improving the type of job opportunities in the sector, particularly in the areas of digital entrepreneurship, digital marketing, e-commerce, and other technology services. A World Bank report, Digital Africa: Technological Transformation for Jobs, points to evidence that shows that internet availability has a positive impact on creating jobs and reducing poverty in Africa. Access to e-commerce and online information via digital tools is necessary for workers in the informal economy to succeed.
While the usage of technology in Africa has been increasing over recent years as technological strategies are now being implemented in various industries, the digital divide continues to grow in Africa. Only 2% of micro-sized firms owned by young women and 8% of micro-firms owned by young men use a computer. The World Bank notes that “sub-Saharan Africa, of all the regions in the world, displays the largest gap between the availability of digital infrastructure and people’s actual usage.” Governments must create an enabling digital environment to allow the informal sector to incorporate technology into their daily lives.
Digital transformation can improve financial inclusion in the informal sector by offering access to mobile banking and payment solutions, enabling informal businesses to conduct financial transactions more efficiently and access formal financing. Fifty-seven percent of Africans do not have a bank account. Mobile banking and payment solutions provide easy ways to carry out financial transactions online. Digital payments enable cost savings that can benefit micro and small businesses and allow them to access finance through traditional banking methods.
For Micro, Small, and Medium-sized Enterprises (MSMEs) operating in the informal economy, digital technology can give them access to relevant information which can help them make more informed decisions and improve their business operations. Digital transformation can also provide the informal business sector access to new markets and customers beyond their borders through e-commerce platforms, social media, and digital marketplaces. The informal sector’s participation in the digital economy will be a vital factor for them to reap the benefits of the African Continental Free Trade Agreement (AfCFTA).
Several factors are limiting digital transformation in the informal economy. Some of these factors include:
High cost – 40% of Africans fall below the global extreme poverty line, and the cost of basic phones and mobile data plans are often out of their reach. In addition, the cost of necessary technological resources, such as computers, and smartphones, affect technology usage. This high cost limits people in the informal economy’s ability to adopt new technology. For informal businesses, even if technological resources are available, the cost of maintenance can be a significant challenge for many. Micro and Small businesses do not have the financial resources to invest in technology, so they end up sticking to manual processes instead of incorporating technology into their operations.
Insufficient digital infrastructure – In many parts of Africa, there is little or no technological infrastructure to increase the use of digital products. Electricity and data centers to support storing data and hosting websites are vital to the digital economy and increasing the use of digital products in the informal economy. Africa lags behind the rest of the world in terms of fiber network and broadband connectivity, spectrum, and data center processing capabilities. In addition, fewer than one-third of Africans have access to broadband connectivity with a poor internet penetration rate which affects technology adoption.
Lack of digital skills – Africa faces a huge digital skills gap. The International Telecommunication Union (ITU) data suggests that only 2% of Kenyans are using the Internet to find and apply for jobs, against a global average of 17%. In Sudan and Zimbabwe, the data also suggests only 4% of adults are able to copy and paste files. Low education and digital skills are associated with lower technology adoption. Statistics show that ninety percent of children in Africa leave school without learning any basic digital skills. Without the requisite skills, it is difficult for the informal sector to use digital tools.
While the factors above slow digital adoption in the informal sector, there are things governments and stakeholders can do that could accelerate digital usage.
Areas of opportunities to increase digital usage include the following:
- Public-Private Partnerships (PPPs)
Public-private partnerships (PPPs) can be a vital building block for the successful digital transformation of the informal economy. Governments should partner with banks, fintech, education, telecommunication, market associations, and other companies in the private sector to develop personalized digital solutions designed for the informal sector with the sector’s limitations in mind. Furthermore, the private sector can digitally transform government services to enable easy use for the informal sector. For example, government and telecommunications companies can ensure that data is affordable. At the same time, regulators can take steps to allow banks to accept e-signatures, and the education sector can include a technology curriculum in all schools. PPPs can bring the needed knowledge to deliver on digital goals.
Additionally, African governments need to intensify the efforts channeled toward policy development. Governments should implement policies and regulations that support technology usage in the informal sector. This includes reducing barriers to entry for private companies entering the technology market, developing an enabling legal environment, implementing cybersecurity laws, creating sound digital policies, and focusing on holistic investment in the ICT (Information and Communication Technologies) sector.
- Provide digital skills training and support
Training for those in the informal economy will help them learn digital skills ranging from the use of mobile phones, the internet, and social media to more advanced skills which will help improve usage rate. Governments should provide training and support through the use of hubs, primary schools, government agencies, and other skills support providers.
A study by the International Finance Corporation (IFC) shows that some 230 million jobs in Africa will require some level of digital skills by 2030. For the informal sector to take advantage of these jobs, a concerted effort must be made to develop and support digital skills.
- Incentivize digital usage
Governments can incentivize those in the informal sector to adopt and use technology. First, the government and other companies in the private sector should slowly transition to online services. Creating easy-to-use applications can incentivize more people in the informal economy to use digital tools. Another incentive is a faster response time for those who apply for government benefits online.
In addition, another incentive is for government offices to have mini-centers within their ministries to assist those applying for services physically learn how to apply online. An incentive can also include a telephone hotline for regular assistance. Lastly, providing a discount on the payment of services if an application is processed online can push the informal sector to increase its usage of digital services.
Conclusion
Nearly eight out of ten employed persons in sub-Saharan Africa were in vulnerable forms of employment in the informal sector. Technology is essential to transform the African informal economy and promote decent jobs. With the aid and usage of technological innovations and resources, Micro, Small, and Medium-sized enterprises (MSMEs) can also carry out business activities more competitively. Micro-firms are a large part of the informal economy, and digital transformation can increase their chances of business success by giving them better access to finance, greater access to markets, and improved productivity.
Certain factors are limiting the adoption of technology in the informal economy. These limiting factors include high cost, limited digital infrastructure, and lack of digital skills. The public and private sectors can work together to promote the usage of digital tools by investing in digital infrastructure, providing incentives, and digital skills training. Additionally, personalized digital solutions and a supportive regulatory and legal environment would encourage digital adoption by the informal sector. Increasing the adoption of digital technologies could drive employment growth for the women and youth that operate in the informal economy.
