Rethinking Africa’s Informal Economy: A Pathway to Ending Poverty

Could Africa’s informal economy be an overlooked key to reducing poverty across the continent? In this episode, we examine why Africa needs a new approach to a sector that employs over 80% of its workforce. Pierre Nguimkeu, Director of the Africa Growth Initiative and Senior Fellow in Global Economy and Development at Brookings, argues that compliance is often demanded from the informal sector before value is delivered.

We also explore how Nigeria can follow the path taken by China and other countries to reduce poverty, with more than 100 million Nigerians still living in poverty.

Former Prime Minister Tony Blair says the present UK leadership has no idea on what to do to revive the economy. All this as France economy contracts in Q1, a first since after the COVID Pandemic. Plus other global Business Headlines.

Transcript

Pierre Nguimkeu, Director of the Africa Growth Initiative and Senior Fellow in Global Economy and Development at Brookings, argues for a more productive integration of Africa’s informal economy. In a recent paper, he noted that informal employment makes up 86.3% of all jobs in sub-Saharan Africa, yet it is often mischaracterized as a deviation from the norm or a problem to be fixed. This has led to forced formalisation based on Western assumptions, which may not suit African economies. Instead, he suggests focusing on ways to improve efficiency within the informal sector.

Unintended effects of enforced formalisation could be disincentivisation of growth and dampening of economic activity . In some cases, aggressive taxes could lead to slowing digital adoption and return to cash based operations.

Pierre suggests action on the structural barriers that keep informal businesses small, fragile, and unable to scale. These include limited access to short and long-term finance, high transport costs, poor market access, and difficulty finding customers, suppliers, and trustworthy partners.  This could also include simplifying dealings with government regulators so first contact feels like an opportunity, not a threat, penalty, or bureaucratic burden. He argues that the informal sector has long been viewed through a Western lens as difficult, making enforcement-driven formalisation—often aimed at taxation—another imported approach that does not fit African realities. 

A different approach can yield a better win-win by improving productivity leading to higher incomes, more extensive markets, and eventually to a larger, more stable, and a more credible base for taxation that supports further expansion of appropriate public services and investments. Also this vital correction in how we perceive and support the informal sector can deliver growth in a way that has far greater impact in denting poverty levels. But to get a material decline in poverty level, especially with the jobless and unskilled - still more is needed

Hello, this is global business insights where we bring perspectives that help to navigate the more challenging context. 

In Nigeria, painful but necessary reforms have improved the business environment. After three years in office, President Bola Ahmed Tinubu says he made the tough choices needed to put the economy on a better path. Many analysts agree the fundamentals are stronger and investor confidence has indeed improved, but the overall record is still perceived as only slightly above average because households face hardships including a severe cost-of-living squeeze. Analysts add that while reforms can fix distortions, their speed and sequencing determine who bears the cost. Rising poverty remains a major concern. In an earlier podcast, I discussed inclusiveness and poverty, and in this episode we consider some measures to address the issues. 

Nigeria’s social protection system is still developing and remains largely programme-based, relying on short-term measures such as cash transfers rather than a broad welfare framework. South Africa offers a useful contrast: its social grants provide a more dependable safety net, with more than one-third of the population—about 26 million people—almost 100% of poor South Africans - receiving monthly payments automatically when eligible. In Nigeria, support is far smaller and less consistent. Vulnerable households receive ₦75,000 in staged payments—about $50 in total—as a one-off intervention rather than a monthly benefit. The government says 9 to 10 million households have been reached so far, with a target of 15 million households, or roughly 34 million people.

But consider the scale of the poverty issue: Nigeria by the end of 2026 could end up with an estimated 140 million people living in poverty – according to some estimates. This means less than a quarter of the poor are currently reached—and even then, only briefly and inadequately.

The World Bank also reports that Nigeria spends just 0.14% of its GDP on social protection. That is far below the global average of 1.5%, and significantly lower than Sub-Saharan Africa’s 1.1%.  South Africa, by contrast, spends about 3.5% of GDP on social grants alone.

Learning from experiences in say a China that has been successful in drastically reducing poverty, three pillars are essential.  First … Pro-poor economic growth is needed meaning reforms must directly - not indirectly benefit low-income communities. That could include ideas like suspending casualisation of junior staff for large companies in stronger sectors like financial services, enhancing support for agriculture, beefing up security in rural areas to help food production and transportation, reducing food transport costs, and finding more ways to encourage other labour-intensive sectors.  

The central bank should urgently promote a better approach by institutionalising more effective support for poor communities through microcredit. It need not act as a commercial lender, but it can shape the system to favour microcredit. One option is for the Central Bank of Nigeria to allocate 10% of its cash reserves to small-business lending under workable but comprehensive credit rules. Delivery of more lending to alleviate poverty must be fraud-proof and targeted at rural areas and high-value opportunities, with training funded to help small businesses make the most of it.

Second, serious funding commitment calls for a step change in investment.  We could be talking of about $40 billion for extensive infrastructure (roads, rail, water, basic utilities etc) especially impacting rural areas and poverty programmes and annual spend of around $5 billion annually for cash transfers to support the aged and vulnerable poor as the country transitions from one-off payments to adequate monthly support. Funding sources could include from Privatization of state assets including NNPCL, reducing cost of governance, redirecting oil price windfalls and introducing targeted “end-poverty” taxes on high earners and large corporations

Finally - also key is having stronger institutions and accountability with well understood and tracked milestones. Programmes must be digitized, fraud-resistant and driven by deep analytics down to the community level.   Clear national targets are key —for example – committing to halt the rise in poverty immediately, reducing poverty by 30% within 5 years and achieving  single-digit percentage poverty levels within 20 years. Let me summarise … ending poverty will not happen by just expecting a business friendly environment to lift up the poor. Supporting the informal sector will greatly help – but more impactful will be a structured process that delivers significant drops in poverty – which must be intentional and elaborate in scale and depth of analysis of poor communities and coverage of grants, transfers and interventions. Efforts must also be tailored to African realities as the old model fails more vulnerable Africans.

Still on Africa, Petra Diamonds said it was cutting jobs across the group and placing its Finsch mine under bankruptcy protection. This was as it sought to restructure operations to cope with the Middle East turmoil, a stronger South African rand, and a weak diamond market. Petra Diamonds, which employs more than 4,000 people, did not say how many jobs would go but is already talking to unions.

The tale of rising inflation continues to hit more African nations. Kenya's inflation rose sharply ‌to 6.7% year-on-year ⁠in May from 5.6% in April, also hitting its highest in more than two years largely due ​to fuel price hikes linked to ​the Iran war.

Ghana’s handling of Chinese-backed energy projects could guide other African countries seeking better returns from major infrastructure, according to new research from the Energy for Growth Hub. The study says stronger institutions will determine whether future Chinese-backed projects drive development, improve project outcomnes or become costly liabilities. It also finds that many African governments lack the technical, financial, and legal capacity to negotiate effectively with Chinese lenders and contractors. 

Now looking at markets, as we approach the end of the first half of the year. Global markets are becoming more divergent, with US equities supported by optimism around AI and technology despite continued concern over high energy costs and Iran war. However, the rebound is still not broad-based. Private Credit also looks troubled.

While in Europe, analysts are more concerned that the impact of higher costs of energy will linger for longer – given the higher vulnerability from imported energy.  The economy of France  unexpectedly shrank at the start of the year as GDP fell 0.1% in Q1. It was also the first quarterly contraction since the Covid pandemic raising concerns over its resilience to the fallout from the Iran war.

In the UK, Prime Minister Sir Keir Starmer has hit back after Sir Tony Blair, former PM, said his government lacks a “coherent plan” for growth. The Institute of Directors in the UK also warned that the recently passed Employment Rights Act is hurting the economy with 86% of leaders surveyed saying it would damage growth. Nearly two-thirds said they were less likely to hire, and more than half more likely to invest in automation. Some of Labour’s reforms are already affecting hiring, with firms cutting recruitment and reshaping roles to manage higher costs and risks. The IoD wants employers with fewer than 250 staff exempted from trade union access provisions.

To some technology news … At Taiwan's annual Computex trade show next week, the spotlight ​is likely to be dominated, as usual, by Nvidia  and its products, but also by the island's central and growing role ‌in AI infrastructure. Nvidia CEO Jensen Huang, said on Wednesday that his company would spend as much as $150 billion a year in Taiwan, which he called the epicentre of the AI revolution.

Looking at oil markets … Wall street stocks edged up while oil prices slid heading for ​a weekly drop. Traders are still waiting for more clarity on efforts to reopen the Strait of Hormuz and extend a U.S.-Iran ceasefire. The United States and Iran had agreed to extend their ceasefire and lift shipping restrictions, though Trump was yet to give the nod to the deal and Iranian state media said it had not been finalised. Brent oil benchmark fell just over 19% in May, its worst month since March 2020. Brent is down to under $92/barrel – that was intraday yesterday.

Still on oil, inventories remain low, and June and July will be critical even if the Strait of Hormuz reopens. Demand has eased but remains strong, and there is optimism that supply bottlenecks will gradually clear. Production and investment could accelerate to meet demand and rebuild stocks, especially in the UAE, the US, and Saudi Arabia as OPEC allows higher output for those with spare capacity. New infrastructure to bypass the Strait of Hormuz is also expanding. Shortages are often followed by gluts, but how quickly supply normalises is highly uncertain. The likeliest scenario is Brent staying above $80 for up to six months, though that remains subject to many unknowns.

Well that’s it on this special episode of global business insights. We are now on Spotify, Apple podcasts and most popular podcast platforms so do please support us. This is Bode ososami, thanks for watching and please follow and hit the notification button. Bye Bye.