Formal sector growth 'slow', report shows

Kenya must do more to assist informal business formalise if it is to improve economic growth, a World Bank report and economic data show.

The World Bank 2016 Economic Update released recently pointed out that while young companies contribute in a large way to the creation of jobs, the formation of new companies in Kenya is slow.

The report says that such informality is likely “to trap people into poverty.

Older, more established companies tend to hire more permanent workers, but such companies make up only one quarter of all non-agricultural jobs in the country according to the report.

The most productive companies in the country were not creating jobs, and a negative relationship existed between job creation and productivity, meaning that the least productive firms tended to create more employment. 

While more people are doing jobs, the jobs are not becoming more productive.

Young firms are businesses that are five years old or less.

According to data from the Kenya National Bureau of Statistics, over the five years from 2010 to 2014, the split between workers in the formal and informal sectors in Kenya remained largely unchanged.

In 2010, 18 per cent of all workers worked in the formal economy while 82 per cent worked in the informal sector. In 2014, 17 per cent of all workers worked in the formal sector while 83 per cent worked in the informal sector.

BROAD SKILLS

Over the five years, 354,000 workers were added to Kenya’s formal economy, while 4.8 million workers were added to the informal sector, more than 13 times as many as formal sector workers.

According to a 2015 report by the United Nations Economic Commission for Africa, the high rates of informality in African countries such as Kenya are due to a large supply of labour.

Added to that is an absence of social safety nets that would enable workers to leave the labour force, perhaps to improve their job skills. The report says that such informality is likely “to trap people into poverty”.

The World Bank report outlines a number of solutions to low productivity of Kenyan businesses. First, Kenya should improve the skill levels of many of its adults who may be educated but are functionally illiterate.  Many workers lack opportunities to improve their skills after school.

In addition, many workers lack what the report refers to as “broad skills,” such as marketing, accounting and business management, in addition to technology and credit facilities.  

The government can also assist to bring together formal and informal businesses, suppliers and customers, and use technological solutions to connect companies.

Assistance can also be given to workers while having regard for their social circumstances. For example, low-skilled male workers in low productivity jobs can receive on the job training, while female low-skilled workers can receive help with child care.

Labour productivity is measured in Gross Domestic Product (GDP) per employee.  From 2009 to 2014, Kenya’s GDP at market prices increased from Sh2.39 trillion to Sh5.36 trillion.

Over the same period nominal GDP per employee increased from Sh22,296 to Sh31,185 at market prices.

The share of GDP spent on capital formation, or the creation or acquisition of buildings, machinery and equipment, increased from 19.4 per cent to 22.6 per cent from 2009 to 2014.

In Kenya, the informal sector remains by far the largest employer, a review of employment data by Nation Newsplex and the Institute of Economic Affairs shows.

According to data from the Kenya National Bureau of Statistics, it has employed 82 to 83 per cent of all workers in the country since 2010, and in 2014, employed 14.2 million workers.

The formal sector, on the other hand employed 2.37 million or 17 per cent of workers.

In 2014, the private sector employed two thirds of Kenya’s workers (67 per cent). About a third was taken up by public sector workers and another four per cent who are self-employed or unpaid family workers.