Introduction

In developing countries, the formal and informal enterprises have had a co-existing relationship in all the sectors of the developing counties’ economy. Enterprises are undertakings that engage in the production and distribution of various economic goods and services. In most developing countries, the informal sector has a broader scope of informal enterprises as compared to the formal sectors of such economies. The informal sectors are categorized by the high number of unregistered enterprises that face minimal regulation by the governments. Moreover, the informal enterprises are mainly run and managed by various corporations such as co-operative societies, public and private limited companies, and various trusts and charitable organizations.  The informal economy represents a vital part of the national economy, including the labor markets of developing countries as the informal enterprises play a significant role in job creation, production of consumer goods and services and income generation within the state.

In this paper, the informal enterprises of the Kenyan will be significantly analyzed to determine both the costs and the benefits that informal entrepreneurs incur and enjoy in that economy. Also, we will be able to decide on the economic well-being of the economy due to the costs and benefits provided by the informal economy. Even though the informal enterprises dominate the economy of Kenya, the cost implications and various benefits accrued from the enterprises are less known and thus leave multiple questions that need to be answered. In connection with that, numerous analyses have been conducted by various research institutions in the country with the leading researches of the informal economy being undertaken by the World Bank and the Kenya National Bureau of Statistics.

The Scope of Kenya’s Informal Economy

Kenya’s economy is perceived to be a market-based economy that is comprised of a few infrastructure enterprises that are owned by the state with a large number of businesses being the informal enterprises. The majority of business enterprises in the economy are owned by sole proprietors, partnerships and various non-governmental organizations within the economy. The informal sector of the Kenyan economy is ubiquitous with a relatively high number of individuals being involved in the household enterprises and small-scale enterprises. Besides, according to a review of World Bank, the informal enterprises are the significant contributors of development in the Kenyan economy with nearly over 70% of the country’s development projects emanating from the informal sectors. Moreover, according to World Bank, the informal sector of the Kenyan economy is perceived to be large and dynamic with nearly 95% of the economy’s business ventures and entrepreneurs operating within the informal economy of the country. In addition to the research previously conducted, the Kenya National Bureau of Statistics estimated that 82.7% of the economy’s employment sector is represented by the informal sector of the country’s economy. Besides, most of these enterprises operate their activities in non established mechanisms and are therefore not regulated nor are they protected by the state government of Kenya.

Costs and Benefits of the Informal Sector to Entrepreneurs

The informal sector of the Kenyan economy constitutes the vital component of the various economic activities and the process of development in the country. The informal economy has continued to thrive in not only Kenya as a country but to also to most of the developing countries in the world. In Kenya, the informal economy has been associated with the various costs that the business entrepreneurs incur while operating such enterprises and also the benefits they gain from such operations. Firstly, entrepreneurs that invest in the informal sector of the economy are faced with financial constraints as they lack the commercial opportunities that are enjoyed by the formal sector of the economy. These enterprises are mostly financed by the entrepreneurs own capital. Furthermore, the informal enterprises are rarely regulated by the state government of Kenya and therefore enjoy only limited protection from such government regulations. In most instances, these enterprises are faced with competition from the multi-national corporations providing such goods and services. Besides, to the entrepreneurs, operating informally in the Kenyan economy has greatly helped in depicting and also representing the spirit if entrepreneurship and innovation in the economy by the entrepreneurs. This is due to the small scale employment efforts and various small enterprise opportunities derived into the economy. Also, the informal economy has offered multiple opportunities to the non-skilled entrepreneurs migrating to urban areas of Kenya to survive and provide for their basic needs.

Costs and Benefits provided by the Informal Sector to the Country’s Well-Being

The obvious and the obvious benefits derived from the informal economy to a country’s well-being is the creation of employment opportunities in the economy. The informal enterprises create a reasonable and large number of employment opportunities to individuals who fail to get jobs in the formal wage sectors of the economy and would have therefore remained to be a burden to the society at large. Thus the informal sector has continued to be Kenya’s major employer with the sector accounting for over 80% of employment in the country’s labor market. This has, in turn, increased the living standards of Kenyan citizens and has helped reduce the poverty levels in the Kenyan economy over time. Also, the informal sector has contributed significantly to the gross domestic product and the national product. In the previous decade, the informal economy was perceived to be adding relatively over 30% of the country’s GDP. However, over the past years, this has dramatically increased due to the continued dominance of the informal sector of the Kenyan economy. Moreover, this increase can also be attributed to the ever-expanding labor force market due to the ever-growing number of informal enterprises in Kenya’s economy.

It is undoubtedly evident that the benefits derived from the informal economy outweigh the costs the sectors bring with it to the Kenyan economy. Firstly, the informal sector has created an opportunity for tax evasion by unscrupulous individuals and companies. Besides, it has opened an avenue for smuggling of various illegal products in the country. Such vices are mainly due to the minimal regulations of the informal economy by the state government. The tax avoidance scenarios have led to a decrease in the national revenues of Kenya collected through taxation. Besides, the ever-growing informal sector has brought with it increased cases of corruption through bribery. Bribery is a significant functioning cost in the informal areas aimed at evading taxes and various customs duties imposed by the state government of Kenya.

Conclusion

It is undoubtedly evident that the informal sector of the Kenyan economy is poised to be a permanent solution to various socio-economic issues affecting the country’s economy. As indicated in the above discussions, the informal economy has dramatically helped in alienating poverty by increasing the living standards in Kenya through the creation of various job opportunities. Also, the informal economy has exhibited resilience and vibrancy and therefore is expected to lead to the country’s economic growth and development in general. Moreover, the informal sector has been able to compete favorably with the formal sector of the country’s economy. Besides, the informal economy has encouraged innovations and entrepreneurship within the country as a way of creating job opportunities and earning a living.

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