What you need to know:
- The pandemic has disrupted supply chains and lowered demand for goods and services.
- The government should enact parallel policy measures to prop or cushion the economy.
According to the Kenya National Bureau of Statistics (KNBS), the informal sector provided 80 per cent of all employment in Kenya before the Covid-19 pandemic struck. Recent estimates in the 2020 economic survey show that the informal sector provided about 90 per cent of all employment in Kenya.
Most of these enterprises are owned by women, with estimates from the International Labour Organization as high as 88 per cent. These owners tend to be the most vulnerable even in the best of times, with limited access to financial and other related services, a problem made only worse by the Covid-19 pandemic.
The pandemic has disrupted supply chains and lowered demand for goods and services. Mid last year, Kenya adopted a phased approach to economic reopening; small-scale enterprises and informal enterprises that had initially closed down struggled to comply with rather tough Covid-19 reopening guidelines.
The government reopened learning institutions in January and the economic projections indicated that Kenya was well on the recovery path with projections indicating a strong rebound at 6.9 per cent GDP growth rate in 2021. Unfortunately, the positive projection is at risk unless deliberate steps to mitigate the unintended economic impacts of Covid-19 mitigation measures are put in place.
At the end of March, statistics showed that Kenya was in a third and more aggressive wave of the pandemic with virus positivity rate at over 20 per cent. Nairobi and its adjacent counties have been reported to account for more than 50 per cent of the cases, and, as a consequence, the government reinstated the lockdown and strict social distancing measures.
While informal enterprises can still operate under strict health guidelines, the ensuing low demand and limitations to take-away service for restaurants has effectively closed these businesses. While the government has attempted to limit the cost of Covid-19 to the formal economy, little of this support reaches informal settlements. By May last year, only 17 per cent of informal entrepreneurs in Dandora had received any government support and only 5 per cent had received aid from NGOs.
Cushioning the informal sector
In light of this, we conducted a study of the economic importance of cushioning the informal sector with cash grants. In the study, we gave small grants equivalent to one month’s profit to randomly selected informal women-owned enterprises in Dandora, a peri-urban settlement in Nairobi.
Another group (also randomly selected) did not receive the grants. A number of periodical follow-up surveys were conducted after a couple of months to evaluate the impacts of the cash grants. The results were striking. First, business profits for those enterprises that received the cash grants increased by 38 per cent relative to those that did not. This restored approximately one-third of the initial decline in profits observed between January and May.
A second result was that household food expenditures by entrepreneurs that received the grants rose by 7 per cent. Some of the gains from the grants were re-invested in the business, as businesses recorded a rise in inventory spending. Additionally, the grants had an impact on Covid-19 mitigation spending. Spending on personal protective equipment such as masks increased by more than 22 per cent on average, and caused an index of mitigation practices such as hand washing to increase.
The study implies that entrepreneurs that received the grants were more proactive in taking measures to protect themselves and their customers than those who did not; though this finding was only limited to those entrepreneurs that believed that Covid-19 was deadly and mitigations measures were necessary for prevention. Hence the need for continued efforts to sensitize the public on the virus.
To balance between measures to protect lives and livelihoods during a pandemic, it’s important that when enacting lockdowns that protect lives but endanger livelihoods, the government should enact parallel policy measures to prop or cushion the economy — both formal and informal. This research has squarely illustrated the importance of deliberate efforts such as cash grants to cushion the informal sector, which usually cannot access formal enterprise development policy initiatives and interventions.
Cash grants to informal sector entrepreneurs have proved to be a critical tool for reviving, revamping, and stabilising the informal sector in Dandora. This has the potential to lead to overall economy-wide benefits as the informal sector remains key.
Urgent efforts are required to explore practical and effective solutions to reach informal enterprises with government support as the economy struggles to remain on track during the current third and more aggressive wave of the pandemic.
Prof Donovan teaches economics at The Yale University, School of Management ([email protected] )
Ms Oluoch-Aridi is the regional research programs manager for the University of Notre Dames Ford Program ([email protected] )