Can startups lead Senegal out of informality?
The definition of informal work is straightforward: economic activity that is not tracked or registered by a government and thus exists outside of tax and regulation practices. Typically, we think of manual or domestic labor, taxi driving or street vendors as informal workers.
In the context of understanding informal economic work and how to overcome it, it is important to keep its intricacies and benefits as well as its drawbacks in mind. It is tempting to think of informal work as antiquated or even criminal but it is neither. For most of the world, informal work is an opportunity for paid work when formal work is unavailable. Care work, largely informal for nearly the entire globe, powers economies but is almost always discounted. All global economies have a sizable amount of informality, albeit with significant disparities not only by region or country, but indeed within countries amongst persons with differing backgrounds (gender or sexual identity, race or ethnicity, migration status, age, or income status) .
Nonetheless, the extent to which informality remains an obstacle to economic development in emerging economies is clear. Far from lacking a labor force, Sub-Saharan Africa has the highest average rate of labor force participation at 70.9 percent, above the global average of 63.5 percent. Estimates of non-agricultural informal work in the continent place the regional average at 66% of total employment. In countries where sex-desegregated data exists, a clear gap between men and women exist, with women having an informal rate of 74% compared with 61% for men, likely not accounting entirely for the extent of child and home care they undertake. For youth in the region, the extent of informality is also startling: nearly 8 in 10 fall under informal employment .
While Senegal offers many regional advantages in terms of stability and economic growth, it is still struggling with the informality of its economy. The demand for work is out of step with the supply — the rate of demand is twice that of the supply and young people make up half of the population. According to a 2018 ILO report, 97% of enterprises in Senegal are informal . Besides the obvious drawbacks of a rampant informal economy such as a lack of legal protection for workers or social protections in the absence of pension, unemployment, healthcare, etc., informality also weakens the ability to govern and develop. Without formal businesses to add to the tax base, there is a significantly lower amount of resources to combat recessions, greater risk of poverty, less development, and weaker investment. In particular, informality can put off investors to invest in startups and SMEs in the region with formal structures. These disadvantages can also make governments and economies less resilient to crises, of which the COVID-19 pandemic is certainly an apt example.
Economists agree that there is no one-size fits all solution for large informal economies. To address it, holistic methods have to be sustained over decades to reduce inequalities and informality through the ‘market’. Improvements to education, access to the judicial system, updates to fiscal policy, and innovations in the labor market are all necessary to target informality. The heft of the work is one reason that informality remains an enduring challenge.
But not all is lost and surprising innovations can kick-start the journey to a more formalized economy. A great regional example of targeted public policy to address informality comes from Morocco. Beginning in 1988, Morocco started targeting informality in its economy. From hovering around 40% initially, by 2018 the country reduced the level of informality to less than 30% of the economy . Experts conclude that an array of economic, financial, and institutional reforms in place since the early 2000s are responsible for the drop.
These changes include policies aimed to foster entrepreneurship in the country. The 2015 Law No. 114-13’s primary purpose was to combat unemployment in Morocco by encouraging entrepreneurship . The law made registration as an entrepreneur a one-step process, allowed work from home, included a free dissolution process, and a generous tax rate. Many advocates believe that these types of policies can do a lot to encourage businesses to formalize and give a greater visibility to the benefits of owning your own business.
While an important part of the solution, however, we cannot rely on public policy alone to address informality. Startups themselves can directly combat informality by bringing more people into the formal economy. FinTech businesses in Jakarta, for example, are bringing more of Indonesia’s massive, and largely financially un-included population into formal banking by making it easier to send money digitally even without a formal bank account.
Other startups target informality more directly. One great example from Pakistan is H&O Services, a startup that literally operates by doing the hard, grass-roots work of finding locals who work informally in small towns and positively approach them to register for their online service. H&O Services is a head-hunting platform that serves as a win-win-win for workers, employers, and the state. The startup relies on cultural structures to find and attract laborers by calling on village chieftains to help in recruitment and add legitimacy to their efforts. Prospective employees are interviewed and given a profile, including video interviews. They are also informed about the benefits of entering the formal market such as state benefits including pensions and health insurance. Employers benefit from a readily available database of talent with verified skills. And, of course, the state benefits from bringing citizens into the formal economy.
Clearly, there is a lot of space for startups to move in and aid their states in the work of developing the economy. Senegal is no different. Like many other economies in its position, its youth rely on informal work as a source of employment. This, plus the current rise of startups means that the time is ripe for partnerships between the government and the private sector to bring more Senegalese citizens into the formal economy to jointly profit from an improved health and wealth.
