This is at the heart of the failure of many African countries to radically transform their economies in the same way countries such as South Korea, Singapore and Taiwan transfer their economies from the same level of their African peers to leading emerging markets and developed countries within one generation.
Africans in the informal sector mostly sell cheap imported goods. More recently they have been selling cheap products from China.
The significance of the informal economy in sub-Saharan Africa is shown by figures from the International Monetary Fund (IMF), which pins the informal economy average around 38percent of GDP in most African countries. The share of employment in the informal sector in Africa averages 60 percent of the total non-agricultural employment, 52 percent in North Africa.
Africa’s economic structure is based on a large informal economy and a raw material export private sector, combined with a substantial public sector, which comes from the colonial period.
Indigenous people during colonialism were not part of the formal economy, unless occupying low-level jobs in the public sector, as manual labourers in settler or foreign-owned mines and farms. The overwhelmingly number of indigenous people were eking a living in the informal sector in towns and rural areas.
Sadly, post-independence African governments have been unable to transform the colonial inherited economic structure, except for replacing settlers in the public sector.
As many nationalised and indigenisation companies collapsed under corruption, mismanagement and waste, the informalisation of African economies continued.
The failure of many African economies in the 1980s caused the collapse of many private and state-owned companies, including newly nationalised and indigenised ones.
The World Bank, IMF and Western donors in the 1980s insisted that in return for financial aid, African countries adopt structural adjustment programmes which slash their public services, leading to further company closures and increasing the informalisation of African economies.
In East Asian developmental states the informal sector moves up the value chain to manufacturing diverse products, providing the sophisticated inputs to the products of local companies, and exports to competitive global markets.
The manufacturing of new products and adding value to existing products by creating more sophisticated products from raw materials structurally changed these economies, increasing productivity across the economies, creating new jobs and new wealth for more people. It also reduced poverty more broadly.
The transformation of these East Asian developmental states’ economies was not random. They were carefully planned through the use of long-term industrial policies, establishing supporting entrepreneurial institutions and providing cheap finance and industry-relevant vocational, technical and business training.
Sadly, very few African countries have dedicatedly focused on using the informal sector as a stepladder to value-add focused economic transformation, in spite of the fact that the informal sector presents the largest sector in almost all African countries.
Africa’s inability to transform its informal economy to produce home-grown, value-added, and diversified products, have led to lost productivity, lost growth and lost opportunities to create new wealth.
Many African countries have policies to develop the small and medium-sized businesses, but these are either poorly thought out, ad hoc or worked out in isolation from or without an overall national industrialisation strategy.
SMME policies are often determined by multilateral institutions such as the World Bank and IMF, or proposed by industrial country governments and agencies as part of foreign development assistance programmes.
These policies are typically not on getting those in the African informal sector to start producing new industry-needed products.
African governments must orient their informal sectors to produce products their country needs, but do not produce, produce the inputs for local public and private companies, and produce for exports.
African governments must adopt long-term industrialisation policies, which decide which new infant industries will be created and current ones up-scaled, based on evidence-based domestic, Africa-wide and global market analysis.
Using industrial policies, African governments must decide on which relevant products will be produced by the local informal sector. The new industrial policies must make the informal sector produce products and inputs for state-owned companies, large local private companies and foreign companies.
Regionally, African countries could agree on regional industrial policies, whereby one African country can produce the value-added manufacturing products, for export to another African country, which that particular African country does not produce.
African governments must insist that state-owned companies and foreign investors use local suppliers. Public sector-training must provide the informal sector with the technical, vocational and management skills to produce new kinds of products to replace foreign imports and to supply the needs of state-owned companies and foreign companies and for export.
African governments must provide accessible finance to fund the transformation of the informal sector from selling imported products to producing themselves for the needs of the country. African governments must insist that pledged funding from multilateral organisations, Western and emerging powers go into the transformation of Africa’s informal sector, based on an African country’s own home-grown and country-appropriate industrialisation strategies.
When African countries agree on development aid with industrial or emerging market countries, they must make providing training, finance and technological transfer to the informal sector, to make them produce value-added products, part of the agreements.
In their trade deals with both industrial and emerging market countries, African governments must insist on having the informal sector businesses be part of the supply chains of foreign companies.
African countries must make it easier, less costly and less bureaucratic for businesses in the informal sector to register.
African governments must make access to finance, training and entrepreneurial supporting institutions easier.
Traders in the informal sector must club together, either as larger co-operative companies, associations or trusts to better leverage resources, markets and government policies.
William Gumede is chairman of the Democracy Works Foundation. His latest book is Restless Nation: Making Sense of Troubled Times