Hidden figures: tapping into the informal economy

Long before the proliferation of solar power made deep-cycle batteries an option for household use, people in rural Ghana were watching TV and charging their phones with what they had: car batteries.

Not keen to miss out on tech trends or big football games, ingenious local electricians took gadgets apart, put them back together and connected them to create new ones to suit locally available materials and needs.

Equally, high tech security features on iPhones or Samsungs are light work in the hands of a determined 'phone guy' in the corner of Accra’s Makola Market or any of other market stalls dotted across west Africa.

Hidden in these corners of Africa are budding tech talents and potential entrepreneurs who lack access to the formal training and capital needed to scale up and break out of the informal economy. These hidden figures have learnt their craft out of necessity, but their ingenuity would be a boon to bigger businesses looking to crack bottom of the pyramid consumer markets.

Building a complete car from salvaged parts? No problem. On a visit to the Tema Harbour, right outside Ghana’s capital Accra, mangled metal blobs are removed from newly arrived containers and handed from forklift to forklift. These may look like nothing more than unsalvageable vehicles written off by insurance companies in Europe, America, and Asia, arriving in Africa for burial or to be cannibalised as scrap metal.

What really happens is closer to resurrection. The school dropouts at Kokompe in Accra, or further inland at Magazine in Kumasi, can bring these wrecks back to life. They restore automobiles to their shiny, speedy, former glory. The work of these largely self-taught mechanics would make engineers in Detroit, Japan, Korea, or Germany applaud. 

Underground economy 

These techies, tinkerers, and transformers are innovating to solve everyday problems, but due to them being outside the formal system their activities are not captured by GDP measurements. IMF researchers estimate the contribution of the informal sector to Africa's economy at 38 percent overall. That figure varies from 20 percent in Mauritius and South Africa, to as much as 65 percent in Tanzania and Nigeria.

The International Labour Organisation (ILO) says the informal economy employs about 75 percent of workers in sub-Saharan Africa.  However the average productivity of informal firms in sub-Saharan Africa is only one-fifth to one-quarter that of formal ones, according to the IMF. Clearly, a lot of potential is going to waste.  

Significant barriers to entry exist. Operators in the underground economy need additional skills, capital, and the organisational capability to scale up and enter the formal economy. They are also viewed as risky bets for the formal banks, leaving them at the mercy of loan sharks when they want capital to scale up a business.

A role for big business

This is where big business can play a significant role: by providing infrastructure, capital, facilitating the transfer of knowledge, organisational skills, and technology and offering opportunities within their supply chains.

One approach is to create or support incubators for tech entrepreneurs and their micro-businesses. For instance, a solar energy company might create an incubator providing opportunities for people recycling batteries in the underground economy. The energy company could contribute structure, institutional backing and expertise in power storage to budding entrepreneurs. This would allow micro-businesses to grow.

In return, the company could draw on new insights into the needs of underserved communities and consumers. This would allow them to develop effective solutions for lower-end markets.

Alternatively, big companies can simply provide seed investment. A telephone manufacturer could invest in a market stall ‘phone guy’, giving the small business the support needed to set up a proper phone recycling enterprise. The manufacturer gains in turn access to a huge amount of retrospective quality control information – useful for ensuring the durability of future models – as well as reducing its environmental footprint.

Aligning a company’s social investment strategy with its core operations in these ways makes projects such as these more effective and impactful. It also ensures their long term sustainability. These partnerships seed creativity, expansion and diversification in local micro-businesses. They can also help move them up the value chain from small to medium-sized businesses. One day, some might even go global.

This in turn creates jobs, addressing the critical unemployment problems among the youth across Africa – a group that, without opportunity, is at risk of radicalisation or exploitation.

Big business can and should play a leading role in drawing the informal economy into the formal, because such an arrangement benefits everyone. After all, across Africa the informal economy is, in fact, big business.