Cash Payments to Informal Sector Enterprises can Speed Economic Recovery during the COVID-19 Pandemic

By Joy Kiiru, Kevin Donovan and Jackline Oluoch-Aridi

According to the Kenya National Bureau of Statistics (KNBS), the informal sector provided 80% of all employment in Kenya before the Covid-19 pandemic struck. More recent statistics such as the 2020 economic survey show that informal enterprises provided about 90% of all employment. This new scenario is explained by massive job losses during the pandemic as more households and individuals joined informal entrepreneurship. Statistics also indicate that 88% of informal enterprises in Kenya are owned by women, while ILO statistics indicate that 63% of street vendors in Kenya are women.  Self-employment in informal enterprise increases vulnerability while reducing access to finance and services. The situation is worse during the current Covid-19 pandemic.

The pandemic has not only disrupted supply chains, but has also been accompanied with low demand for goods and services primarily due to low incomes.  By mid-2020 Kenya adopted a phased approach to economic reopening; small scale enterprises and informal enterprises that had initially closed down struggled to comply with rather expensive Covid-19 business reopening guidelines; resulting to massive injection of resources by the informal sector to facilitate reopening despite the harsh economic realities. The Government reopened learning institutions in January 2021 and the economic projections indicated that Kenya was well on the recovery path with projections showing up to 6.9% GDP growth rate in 2021. Unfortunately, the positive economic projection is currently at risk unless deliberate measures to mitigate the unintended impacts of the covid-19 closures are put in place to cushion the economy. 

At the end of March 2021, statistics showed that Kenya was in a third and more aggressive phase of the Covid-19 pandemic   with virus positivity rate in the general population estimated at over 20%. Nairobi and its adjacent counties have been reported to account for more than 50% of the Covid cases and as a consequence the Government reinstated a new lockdown and strict social distancing measures. While small informal enterprises can still operate albeit under strict public health guidelines, the ensuing low demand owing to the lockdown in the hospitality industry has rendered those entities almost closed entirely as services are limited to take-away basis only. These closures amount to unfortunate disruptions especially when small scale entrepreneurs previously injected massive resources to comply with earlier public health regulations conditional for reopening.

Public support to the informal sector has been wavering. A recent study of the informal enterprise sector found that by May 2020 only 17% of informal entrepreneurs in Dandora had received any government related support while only 5% of entrepreneurs had received any other support from non-governmental organizations. More evidence from a rigorous research titled “Cash Transfers as a Response to COVID-19: Experimental Evidence from Kenya” by Economists Wyatt Brooks and others point to the overall economic importance of cushioning the informal sector with cash grants. In the social experiment, researchers gave small grants equivalent to one month’s profit (Kshs 5000) to informal women-owned enterprises in Dandora; a peri-urban settlement in Nairobi.  Another group (comparison group) 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 percent relative to those that did not. The cash grants albeit small seem to hold a multiplier effect in that approximately one-third of the initial decline in profits observed between January and May was restored. A second result was that household food expenditures by entrepreneurs that received the grants rose by 7 percent. Some of the gains from the grants were re-invested in the business, as businesses recorded a rise in inventory spending. Thirdly the results indicate that on average, those firms that received the grants were 5 percentage points more likely to reopen and remain open an additional half hour per day; compared to those that did not receive the grants. Lastly, the cash grants also directly resulted to massive re-opening of firms that had temporarily closed due to COVID-19; furthermore results showed that a firm that had temporarily closed was 65 percentage points more likely to reopen if it received the cash grant.

Additionally, the cash grants also had an impact on Covid-19 mitigation spending. Spending on personal protective equipment such as masks increased by more than 22 percent 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 proactive in taking measures to protect themselves and their customers; though this finding was only limited to those entrepreneurs that believed that Corona virus was deadly and mitigations measures were necessary for prevention. Hence the need for continued public sensitization on the virus.

While acknowledging that the balance between measures to save lives during a pandemic and livelihoods is important, emphasizing more over either lives versus livelihoods without adequate safety nets is equally futile. The Government should have deliberate policy measures to prop or cushion the economy especially when lives are at risk unless the economy is completely disrupted. This research has squarely illustrated the importance of deliberate efforts such as cash grants to cushion the informal sector that’s usually out of reach of formal enterprise development policy initiatives and interventions.  Cash grants to informal sector entrepreneurs have proved to be a critical tool for reviving, revamping and stabilizing the informal sector. This leads to overall economy wide benefits as the informal sector remains a key sector that supports the livelihoods for a majority of Kenyans. Urgent efforts are required to explore practical and effective ways of coordination 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 COVID-19 pandemic in Kenya.

The featured research was funded by J-PAL Jobs and Opportunity Initiative (JOI). J-PAL is a global research organization Based at the Massachusetts Institute of Technology (MIT).

Joy Kiiru is Senior lecturer, at the University of Nairobi and part time Policy and Research Advisor at J-PAL (jmueni@uonbi.ac.ke or jkiiru@povertyactionlab.org )

Kevin Donovan is Professor of Economics at The Yale School of Management (kevin.donovan@yale.edu )

Jackline Oluoch-Aridi is the Regional Research Programs Manager for the University of Notre Dames Ford Program and a post-doctoral  Research Fellow  at Strathmore University Business School (Jackline.A.Oluoch-Aridi.1@nd.edu )