Leveraging 4IR to “formalize” the informal economy - the COVID-19 imperative
28 January 2022
- 4IR platforms provide opportunities to formalize the informal sector by organizing informal workers, building trust, delivering services and upgrading skills.
- There is potential for far-reaching innovations, including the use of simple off-the-shelf computers to automate informal manufacturing.
The informal sector is Africa’s largest economic sector. The informal sector is generally considered to be a drag on productivity and is characterized by low pay and vulnerable jobs (Medina et al., 2017). Moreover, informal economic activity severely limits tax revenues, while most African countries would certainly benefit from a more stable tax base. Around 90 per cent of jobs created in Africa are in the informal sector (Benjamin and Mbaye, 2014). Hence, there is sufficient incentive for African economies to shift production from the informal to the formal sector (Medina et al., 2017).
Fourth Industrial Revolution (4IR) technologies are transforming how business is done by promoting digitization and platform economics. These new technological innovations are formalizing economies by including more people in formal systems. The financial sector has witnessed the highest level of inclusion as a result of providing mobile money services. Such services can address the many obstacles to accessing finance, such as physical distance, minimum balance requirements, little to no credit and low income flows, in a cost effective way. One example of this is the M-Pesa platform in Kenya, which has over 110,000 agents distributed across the country, ensuring that anyone can access e-money. The impact of this innovation has been immense. While financial inclusion in Kenya was at just 26 per cent in 2006, it has increased to 83 per cent of the population (Chitavi, Cohen, & Hagist, 2018). Many African countries are following in Kenya’s footsteps, generating a rapid rise in financial inclusion.
The emergence of platforms to better organize the informal sector has introduced far-reaching innovations. The Lynk platform (www.Lynk.co.ke), for example, connects businesses and households with verified domestic workers, artisans and blue collar workers in Nairobi. By September 2018, the platform had successfully “lynked” 20,000 jobs. There are currently over 365 platforms in Africa that provide a variety of services.
The COVID-19 pandemic has accelerated the process of digitization and formalization by intensifying the adoption of 4IR technologies. The biggest impact of COVID-19-driven innovations has been the linking of the formal with the informal sector. Lockdowns forced companies to look for and implement new business models, resulting in a greater inclusion of informal workers in the formal sector, especially in supply and distribution chains.
GetBoda, a logistics/courier platform in Uganda that engages informal motorbike riders, reported a 150 per cent jump in demand for delivery services within one week in April 2020 (Johnson, Dunn & van Vuuren, 2020). With demand for home deliveries increasing in the wake of the pandemic, motorbike delivery services have become a key component of the supply chain.
Financial innovation also experienced a boost – the banking sector witnessed a significant rise in mobile and agent banking during the crisis. Nigerian consumers are moving to digital financial transactions, and the majority of consumers surveyed stated that they planned to progressively use digital and mobile banking services post-crisis. Agent banking transactions that rely on 4IR technologies surged eight-fold between March and April 2020, with agents able to distribute money—including government aid—and conduct various other financial transactions (Kola-Oyeneyin, Kuyoro & Olanrewaju, 2020). The uptake of mobile money services also increased in countries previously hesitant about using them.
The COVID-19 pandemic intensified the need for humanitarian aid in some of the hardest hit countries, inspiring innovations to deliver assistance. In Kenya, for instance, mobile apps were developed to facilitate the donation of food packages for donors and notification of beneficiaries about designated collection points, which included small-scale kiosks, thus bringing informal retailers online. Many informal businesses were forced to reinvent their business models due to disruptions and move parts of their business online. Africa’s e-commerce and payments platform giant, Jumia, developed partnerships with various vendors that use its ePayment system and last mile delivery capabilities to offer contactless delivery of food and other necessities to all locations, including remote and rural areas (Johnson, Dunn & van Vuuren, 2020).
Building on the COVID-19 momentum
The COVID-19 pandemic has uncovered new perspectives about how 4IR can be leveraged and its potential to inspire new innovations. Likewise, new ways of working that have evolved in response to the pandemic have exposed ways to leverage 4IR technologies.
The provision of humanitarian assistance without the requirement for extensive logistics opens up the potential for peer-to-peer humanitarian aid delivery, i.e. individuals or groups can now supply food to those in need directly. This model has been introduced in Ethiopia (MSM, 2020). Building a peer-to-peer platform that matches individuals or groups with others and that provides logistics and payment systems can considerably reduce the costs of humanitarian aid distribution and bring informal food vendors (especially those that are home-based) and deliverers of humanitarian assistance on board. This has the potential of reducing the supply/distribution logistics costs of humanitarian aid providers and frees up funds to further support the needy.
Such peer-to-peer platforms can be further leveraged to develop innovative public-private partnerships, which can incorporate the informal sector. For example, a new delivery cooperation was set up between the Ministry of Agriculture and the Indonesian motorbike delivery app Gojek in Indonesia to provide shopping services for local communities during the pandemic, with the Ministry covering the delivery costs. This successful collaboration includes retail giants, farmers’ markets and supermarkets to provide access to a large number of vendors. Consumers can place their orders and have them delivered directly to their doorstep. This is a model that governments in Africa could also adopt and adapt.
Beyond COVID-19-inspired innovations
COVID-19-inspired innovations have expanded our perception of what is possible, thereby opening a window of opportunity to further develop 4IR innovations that target the informal sector with a focus of establishing stronger linkages with the formal sector. Some avenues for further innovations are discussed below.
1. Simple automation interfaces
Using small low-cost computers such as the Pi (see Box 1), Internet of Things (IoT) systems with integrated data acquisition and communication solutions can be manufactured at a low cost. These devices can benefit small and medium enterprises (SMEs) and informal sector actors. Woo‑Kyun et al. (2020) demonstrate how the off-the-shelf Raspberry Pi (computer board), a Pi camera and algorithms based on open source solutions can be connected to a sewing machine to film and use image processing to detect faults during the sewing process. The IoT system sounds an alarm when a defect is detected. This example illustrates the potential of adopting cost-effective Industry 4.0 solutions to improve quality at the SME and micro-enterprise level. Better integration of the informal sector and of researchers and developers offers tremendous potential to upgrade the quality of goods manufactured in the informal sector.
Box 1: Raspberry Pi
The Raspberry Pi is a low-cost computer that allows users to control electronic components for physical computing and to explore the Internet of Things (IoT). The Raspberry Pi Foundation aims to place the power of computing and digital making in the hands of people across the globe. The cost of the Raspberry Pi has always been under USD 100 (the average price is around USD 35). The Pi Zero only costs USD 5. The Foundation also provides outreach and education programmes to increase people’s access to computing and digital making.
2. Support innovation and market access
The potential of Industry 4.0 to provide information and open new markets for informal manufacturers is huge. Using internet tools, artisans can find designs they would otherwise not have access to or can even crowdsource designs. A crafts worker who wants to produce multipurpose use furniture can download designs from the internet. In Kenya, for instance, roadside artisans used this approach to design a multipurpose bench (Mireri, 2020). They also used social media tools to showcase their design which eventually went viral, leading to a flood of orders (ultimately, the artisans made additional investments in production and recruited more employees to help fulfil orders). Ironically, the slowdown in the artisans’ business due to the COVID-19 pandemic led them to think innovatively to remain afloat (Osanjo, 2020).
3. Shared services
4IR technologies provide an opportunity for roadside artisans and crafts workers to upgrade the quality of their products, to access more tools and to implement a suitable business model. For example, shared 3D printing services can help artisans build more complex components, allowing them to expand the range of their products. Moreover, Industry 4.0 services and tools can be employed anywhere, i.e. even artisans who reside and work in remote areas can access them. The Kwame Nkrumah University of Science and Technology (KNUST) in Ghana established a formal foundry and runs workshops in areas inhabited by artisans to help them improve their products (Gatune, 2016). KNUST has added 3D printers and other Industry 4.0 tools to expand its range of services.
4. Hybrid manufacturing models
New business models that leverage 4IR can also be developed. For example, rural-based artisanal food processors with expertise in resolving supply challenges (because they are farmers) can be linked with urban-based formal SME processors with expertise in business development and marketing (Gatune, 2018). In this regard, 4IR can provide the necessary tools to allow SMEs to assist artisanal processors in meeting certain standards. This can be achieved through remote quality assurance systems, web-based training and support, etc.
5. Moving towards open standards
One major challenge for both SMEs and the informal sector is the lack of standards for integrating Industry 4.0 into production processes. Weyer et al. (2015) argues that open and standardized solutions are essential if SMEs are to successfully adopt the Industry 4.0 paradigm. They advocate a ‘highly modular’ and ‘multi-vendor interoperable’ production system to reflect the diversity of solutions found on traditional SME shop floors. The emergence of open-source and cheap Industry 4.0 tools such as Raspberry Pi and Arduino can help standardize SMEs’ operations.
Taking note of unintended effects
The impact of these developments on the informal economy could have some negative consequences, however. An example, is the collaboration between Twiga Foods and the e-commerce platform Jumia in Kenya resulted from the COVID-19 pandemic. Under the current arrangement, Jumia sells bundles of Twiga’s fresh produce on its e-commerce website. Jumia’s delivery fleet picks up orders from Twiga’s sorting and distribution centres and completes the last mile, contactless delivery. Pre-COVID-19, Twiga Foods distributed foods produced by many small farmers (17,000) directly to informal food retailers (mama mboga). By selling the produce to consumers directly via the Jumia platform, the “mama mboga”, the retailer, is essentially marginalized and his or her livelihood is at risk.
A more sinister scenario would be the complete capture of the informal sector by emerging global platform monopolies. The first-mover advantage would imply that the network effect gives one big player an unassailable lead. For example, Safaricom has secured a dominant position in mobile money transfers in Kenya through its Mpesa platform. The platform has been implemented in other businesses as well, turning Safaricom into a key player in many sectors in which apps are being developed to digitize services, including banking, agriculture and media. The power of the emerging platforms means that they could extract all value created. Uber is a good example. It has used its power to squeeze margins, i.e. Uber drivers are barely breaking even (de Freytas-Tamura, 2017). The consequence has been frequent go-slows by drivers calling for better terms and conditions. Uber has been particularly adept at blunting regulations, asserting that it is a technology platform and not a transportation company and that it therefore lies outside any regulatory authority. Uber has also hired experienced lobbyists to influence legislation (Berjikian, 2019; Popper, 2015). And when all else fails, Uber even willingly violates laws (Moed, 2018).
Russo and Stasi (2016) argue that markets covered by shared economy platforms and their relationship to existing markets must be clearly defined so their new services can be effectively regulated within existing legislative frameworks. Competition law is of particular relevance in this regard.
Towards inclusive and sustainable formalization
Johnson, Dunn & van Vuuren (2020) estimate that in 2018, indigenous digital platforms in seven African countries created income-generating opportunities for 4.8 million workers. However, many workers lack social protection, highlighting the need to further develop these platforms to become more than simply a place to post and find a job or service.
Platforms’ true potential will be unleashed if their structures are improved so they are used not only to post or find a job, but also to offer other services and opportunities for upgrading, which are usually not available to informal workers, primarily because the informal sector is not organized. When developing the next generation platform that targets the informal sector, Gatune et. al. (2019) propose incorporating the following features:
- Embedding a trust system: When a trust system is embedded in the platform, clients do not have to establish a personal relationship with service providers. The platform can vet service providers and monitor them through a rating system and other means. Similarly, service providers do not need personal referrals to find work, as the platform itself serves as their referral system.
- Upskilling and quality incentive: Clients should be able to rate service providers to ensure that good and reliable service providers get more work and can charge a premium. Such a system improves the quality of services being provided and may incentivize service providers to upgrade their skills. For example, a carpenter who has only completed apprentice training can obtain certification from a Technical and Vocational Education and Training (TVET) institution to demonstrate his or her ability to deliver higher quality work.
- Greater specialization: As platforms can bring together a large number of clients and service providers, they can more effectively match buyers and providers, thereby providing opportunities for greater specialization (another form of upskilling). This can further boost productivity.
- Provision of worker services: By bringing together many small service providers and freelancers, platforms also provide an opportunity for informal workers to access numerous services associated with formal employment, including health insurance, social security, etc. Providers of various human resource services (including the government) can use platforms to develop services targeted specifically at informal workers. This decreases the vulnerability of informal workers.
- Franchising opportunity: Platforms can also function as franchise systems, facilitating investment in monitoring systems as well as shared systems, thereby further improving the informal sector’s quality and productivity.
The COVID-19 crisis has opened up new opportunities for 4IR as entire industries have been forced to rethink their business models in the wake of closures and lockdowns. The pandemic has also accelerated the establishment of linkages between the formal and informal sectors in Africa. These trends will have positive effects if formal-informal linkages can be established and combined with equitable distribution of the value created.
COVID-19 has created momentum for far-reaching innovations that target the informal sector. The demonstration effects have sparked a rethinking, and policymakers and other stakeholders are now more receptive to ideas that seemed far-fetched not too long ago. This window of opportunity ought to be seized. It involves a search to identify beneficial innovations and the development of appropriate business models to scale them. Incentives for further innovation should also be promoted and a wide array of platforms established to drive the formalization of the informal economy innovations.
- It is now abundantly clear that the COVID-19 pandemic has had an impact on nearly all aspects of our lives and has caused us to rethink “business as usual”. As we adapt to the "new normal", appropriately channeled opportunities can help us improve the way we do business and the way we live. The United Nations Industrial Development Organization's latest flagship report, the Industrial Development Report 2022, provides a comprehensive assessment of the pandemic’s impact on global manufacturing and the prospects for the future of industrialization in a post-pandemic world. The report makes a key contribution to countries' national and international strategies for an inclusive, sustainable and resilient industrial recovery to build back better from the COVID-19 pandemic.
The “informal sector” here refers to self-financed, under-capitalized, small-scale, unskilled labour-intensive production. An alternative definition is a “process of income generation” that is “unregulated by the institutions of society, in a legal and social environment in which similar activities are regulated” (Pratap and Quintin, 2006).
 Ranging from a low of between 20 per cent to 25 per cent of formal sector output in countries such as Mauritius, South Africa and Namibia, to a high of between 50 per cent to 65 per cent in countries including Benin, Tanzania and Nigeria (Medina et. al. (2017).
 According to Microsoft’s CEO, “We’ve seen two years’ worth of digital transformation in two months.” (Marr, 2020).
 This situation could change following intense lobbying, as the Central Bank has set very high capital requirements for payment banks which may slow the pace of progress in financial inclusion.
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