Discussion Paper No. 223 of 2019 on Informal Sector's Response to Shocks: Lessons from Kenya

Abstract

The informal sector, often characterized by small scale enterprises, is prone to diverse shocks that pose a threat to their survival. The sector employs most of the people in developing countries such as Kenya. Using World Bank Informal Enterprise 2013 Survey data, this study identified some of the shocks that informal enterprises face, and how the sector responds to them by adopting various coping mechanisms. The study identified three shocks: losses due to crime, harassment by government officials or police, and power outages. The enterprises responded to loss due to crime by paying for private security. Harassed businesses intended to formalize their businesses as a coping mechanism, whereas those facing power outages used generators to cope with the outages. Loses due to crime were influenced by the location of business, gender of the main owner, sector of operation, and ownership of the business location. Harassment of the enterprises was influenced by the region of operation, education level of the owner, age of the business, and ownership of the location. On the other hand, power outage shock was influenced by location, sector, age of the business, and ownership of the location. Overall, the shocks led to lower returns on investment for the informal enterprises. To enhance the enterprises’ shock coping mechanisms while reducing the incidences of the shocks, the study makes both policy and enterprise initiative recommendations. Overall, the informal enterprise owners need sensitization on risk and risk mitigating measures, especially for owners with lower levels of formal education.