GROWTH TRAJECTORY AND INFORMAL SECTOR BUSINESSES IN NIGERIA: THE CASE OF ENUGU STATE

Trayectoria de crecimiento y negocios del sector informal en Nigeria: El caso del estado de Enugu

ABSTRACT

The informal sector has become the bedrock for employment creation. However, its capacity for growth and production of goods and services remains doubtful. This study investigated the growth path of businesses in the informal sector and factors that sustain this growth trajectory in Enugu State, Nigeria. A sample of 500 respondents was chosen from two communities in each of the two local government areas from the three senatorial zones within Enugu State. The sampling techniques employed were purposive and stratified random sampling. Survey and quantitative research techniques were adopted. Results did not confirm a vertical growth trajectory of informal sector businesses but confirmed that economic, demographic, and environmental factors drive the informal sector horizontal growth trajectory in Enugu State. Therefore, we recommend a paradigm shift that curbs corruption, allows the gains from growth to trickle down, creates access to finance, and provides critical infrastructure to facilitate the vertical integration of informal sector businesses with the formal sector for improved productive capacity.

Keywords: growth path; informal sector; economic growth; productive capacity; inclusive growth.

RESUMEN

El sector informal se ha convertido en la base para la creación de empleo. Sin embargo, su capacidad de crecimiento y producción de bienes y servicios sigue siendo dudosa. Este estudio investigó el camino de crecimiento de las empresas del sector informal y los factores que sustentan esta trayectoria de crecimiento en el estado de Enugu. Se seleccionó una muestra de 500 encuestados de dos comunidades de cada una de las dos áreas de gobierno local de las tres zonas senatoriales del estado de Enugu. Las técnicas de muestreo empleadas fueron muestreo aleatorio intencional y estratificado. Se adoptó la técnica de investigación cuantitativa por encuesta. Los resultados no confirmaron la trayectoria de crecimiento vertical del sector informal en el estado de Enugu, pero confirman que los factores económicos, demográficos y medioambientales impulsan la trayectoria de crecimiento horizontal de los sectores informales en el estado del Enugu. Por lo tanto, recomendamos un cambio de paradigma que frene la corrupción, permita reducir los beneficios del crecimiento, crea acceso a la financiación y proporciona infraestructuras críticas a fin de facilitar la integración vertical del sector informal con el sector formal, para mejorar la capacidad productiva.

Palabras clave: camino de crecimiento; sector informal; crecimiento económico; capacidad productiva; crecimiento inclusivo.

RESUMO

O setor informal tornou-se base para a geração de emprego, mas sua capacidade de crescimento e produção de bens e serviços ainda deixa dúvidas. Este estudo investigou a trajetória de crescimento das empresas do setor informal e os fatores que sustentam essa trajetória de desenvolvimento no Estado de Enugu, na Nigéria, a partir de uma amostra de 500 entrevistados oriundos de duas comunidades em cada uma das duas áreas de governo local das três zonas senatorias no estado. As técnicas de amostragem empregadas foram a amostragem intencional e a estratificada, sendo que a pesquisa adotou uma abordagem quantitativa e o método survey. Os resultados não confirmaram uma trajetória de crescimento vertical do setor informal no Estado de Enugu, mas confirmaram que fatores econômicos, demográficos e ambientais impulsionam o crescimento horizontal desse setor na região. Recomendamos, portanto, uma mudança de paradigma que possa conter a corrupção, permitir que os ganhos do crescimento sejam compartilhados de maneira a beneficiar todas as pessoas participantes do setor, criar acesso a financiamento e fornecer infraestruturas essenciais, facilitando a integração vertical do setor informal ao formal e melhorando a capacidade produtiva.

Palavras-chave: trajetória de crescimento; setor informal; crescimento econômico; capacidade produtiva; crescimento inclusivo.

INTRODUCTION

This study is motivated by the government’s increasing deficit financing of its capital and recurrent expenditure over many decades. We believe that the large informal sector holds the potential to reverse this trend and assist in domestic resource mobilization for economic development rather than borrowing.

The informal economy sometimes referred to as the informal sector or shadow economy, is a globally recognized phenomenon. Moyo (2022) defines the informal sector as any economic activities that contribute to the GDP but are not officially reported. According to the International Labour Organisation (ILO, 2013a) and Fourie (2019), the informal sector encompasses economic activity, employment, and workers that are not regulated or secured by the state. It is significantly larger than the formal sector in numerous emerging nations. According to Moyo, (2022), two billion of the world’s employed population aged 15 and over work informally, representing 61.2 percent of global employment”(p.481). This number is significant in industrialized economies but is more common in emerging and developing nations (Mohammed et al., 2015).

According to Abada et al. (2021), most people in Sub-Saharan Africa work in the unorganized sector. For the impoverished, the unskilled, and the socially and economically disadvantaged, it is a key source of income. In addition to being a substantial employer, especially for those living in rural regions, the informal sector substantially contributes to the GDP of developing nations (Abada et al., 2021). Moyo (2022) states that “the informal sector contributes about 55 percent of Sub-Saharan Africa’s GDP and 80% of the labour force.” For Moyo (2022), these figures make the sector “the main driver of growth in the continent”(p. 481). The informal economy in Africa, and indeed Nigeria, has grown so big that it can no longer be ignored in the debate of transitioning from a consumer-oriented economy to a production-based economy. The World Bank (2011) views the informal sector as “a social safety net for the poor and a training ground for budding entrepreneurs and hence a trampoline to formality.” Table 1 shows the size of the informal sector in some selected developed and developing countries. Countries selected from Africa came from each of the regions (Southern Africa, Northern Africa, Western Africa, and Eastern Africa). It is evident that Africa has a high informal sector size, especially Nigeria and Zimbabwe. With inclusive growth that transforms this large informal sector into a formal sector, the size of the informal sector would shrink over time. Furthermore, Slonimczyk (2022) reported that eliminating informality would necessitate stronger enforcement, more sensible regulations, and economic expansion. The study also found that one way to achieve upward mobility is through informal entrepreneurship.

Table 1
Informal Sector Size for some Selected Countries in Year 2020

Countries	USA	Japan	United Kingdom	Hong Kong	South Africa	Cameroon	Morocco	Zambia	Nigeria	Tanzania
Informal Sector Size (%ofGDP)	7.3	9.6	10.3	13.6	28.8	29.9	31.7	38.7	57.7	65.1

World Bank (2021b)

The researchers live in Enugu State, which is one of the considerations for choosing Enugu as a case study for this research because it minimized cost, enabled the conduct of this study in real time, and facilitated the meeting of the respondents for one-on-one correspondence. The second consideration for the choice of Enugu was that Enugu State has been adjudged to be peaceful and progressive and a safe haven for investment. An expectation from this congenial atmosphere in Enugu State is that businesses would grow, including those in the informal sector, making a vertical integration with the formal sector. However, the National Bureau of Statistics (NBS) report (2021) revealed that the unemployment rate in Enugu State was 6.5 %, while the economic growth rate and rate of poverty were -1.9 % and 58.19%, respectively. These data are worrisome and put doubt on whether the informal sector within Enugu State has experienced vertical growth over the years. According to the NBS (2021), the growth rate of Nigeria’s gross domestic product (GDP) stood at about 3.06 %. From Figure 1, this good GDP performance with a less steep upward trend could positively impact the growth trajectory of the informal sector if it actually trickled down.

Figure 1
Nigeria’s Growth Rate from 1980 - 2021

However, Nigeria’s rising poverty and unemployment levels cast doubts on the trickle-down ability of growth to the informal sector and the possibility of vertical mobility of the informal sector. In a study to examine the possibility of vertical integration of informal and formal jobs, Rajesh et al. (2020) employed longitudinal data and concluded that “lower-tier informal workers have limited upward transition possibilities.” Similarly, Khurrum and Friedrich (2020), using ARDL for Pakistan, found that the informal economy had a positive effect on the formal sector in the long run but a negative effect in the short run. Ulyssea (2020) found that the share of informal firms decreases as firms grow larger. Conversely, Moyo (2022) observed that increasing levels of poverty, poor levels of economic growth, firm size, access to finance and infrastructure, and weak employment conditions are factors contributing to the proliferation of the informal sector in many countries. Ernest and Olawande (2020) assert that per capita GDP, bureaucratic hurdles, disparity in income, high tax burdens, unemployment corruption, and inflation are factors that impact the size of the informal sector in Nigeria and SA. Overall, these studies identified factors that could cause the informal sector to transit or make vertical mobility toward the formal sector. However, the crux of this study is to determine if informal sector businesses in Enugu State are making this vertical move toward formality or making a horizontal move, which implies an increase in the proliferation or size of the informal sector. This study tries to fill this gap because there are already many empirical studies on the factors that determine the vertical or horizontal trajectories of informal businesses.

Therefore, the specific objective of this study is to assess the growth trajectory of informal businesses in Enugu State, a topic that has been neglected in previous empirical investigations in Nigeria and Enugu State in particular. In order to achieve the specific objectives above, the hypotheses formulated throughout the next sections will explore whether the growth of the informal sector businesses in Enugu State, Nigeria, is vertical or horizontal.

LITERATURE REVIEW

The two schools of thought that have dominated discussions of informality have been theoretically articulated by Norman Loayza, a Lead Economist at the World Bank (2021a) and expert in informality studies. One school of thought suggested that the absence of growth and inadequate measures to safeguard workers is the reason behind informality. The second school of thought contends that weak governance, whether through overbearing regulations, poor government services, or a mix of the two, is the cause of informality. Therefore, a synthesis between these two schools of thought was suggested by the World Bank (2021b). It focused on the trade-offs that social and economic agents must make to avoid informality. Policymakers, for example, encounter a trade-off between taxation for public services and the likelihood of tax evasion. Similarly, business owners face a trade-off between high relative labor costs in the formal and informal sectors.

The two schools of thought above lay credence to the Dualist School, primarily articulated by ILO (2013a) and Hart (2012), which serves as the foundation of this research. According to this perspective, the informal sector is a separate economic sector that serves lower-class urban residents by offering jobs, products, and services. The Dualists contend that since formal and informal activities function “as distinct separate sector of the economy,” there is little connection between them (Chen, 2012, p. 5). Like the Lewis Model, this model also assumes that the contemporary economy can provide capital to match these untrained workers. Consequently, the modern sector tends to absorb the subsistence sector in the long run. The advancement in an economy would result from the reallocation of unskilled labor from the traditional sector to the contemporary sector (formal sector), which raises productivity and lowers consumer prices. Consumer demand would rise as a result, and capitalists would make more money. Capitalists would reinvest profits to boost output and revenues, which ultimately increases unskilled laborer demand from the formal economy and eventually leads to convergence of the informal and formal economies, giving rise to a modern economy with more job opportunities and rising per capita income. According to the Lewis model, this situation is possible under the conditions of full employment of workers, causing the disappearance of the informal economy.

Empirical literature review

Much empirical literature has investigated the causes of vertical or horizontal growth trajectories of informal businesses. For instance, Moyo (2022), adopting the World Bank enterprise survey data extracted between 2009 and 2018, examined the factors that affect the likelihood of vertical growth of the informal sector toward formalization using the Probit Model. Results indicate that young firms owned by individuals with high levels of education are more likely to be formalized. This study identifies the high level of education of informal business owners as a factor responsible for the formalization of informal business. In 2021, the World Bank conducted a survey of businesses and discovered that roughly 18% of them cited the court system and 39% corruption as the two main obstacles to business formalization, while 28% said that businesses should offer gifts to public officials to influence them to take action. The study by Moyo (2022) also found that large size (business growth/expansion) of informal businesses leads to formalization. However, the study by Moyo (2022) contradicts that of Ulyssea (2020), who found that the size (large) of informal firms does not cause vertical mobility. In a study of emerging and transition economies, Slonimczyk (2022) found that reducing informality requires better enforcement, more reasonable regulation, and economic growth. The study further observed that informal entrepreneurship is a source of upward mobility and reasonable regulation.

Another factor considered as a step toward formalization is reflected in the observation of Kundt (2017), who asserted that formalization increases tax revenue and gives the government more authority over the quality of jobs generated in the economy. Ulysssea (2020) also discusses the issue of formalization and taxes, concluding that formalization can be induced by a reduction in the tax burden (p. 526). In the study of Bangladesh by Giorgi et al. (2018) and the study of Colombia by Galiani et al. (2017), formalization depended on business growth and happened with a handful of informal businesses.

To explore the causes of numerical (horizontal) growth of informal businesses, Moyo (2022) observed that increasing levels of poverty, poor levels of economic growth, firm size, increasing population, migration from rural to urban areas, the youth bulge, and access to finance and infrastructure contribute to the growth of the informal sector in many countries. The size of the informal sector is also a direct indicator of the failure of socio-economic policies, mismanagement of economic resources, and excessive regulation. Slonimczyk (2022) also found that informality is a rational response to overly stringent regulations, low institutional quality, escape from extortion by corrupt officials, and the last resort for excluded workers. Zylfijaj et al. (2020) used firm-level data for 243 informal firms in Kosovo to investigate if informal businesses follow vertical trajectories toward the formal sector. The findings support the study by Slonimczyk (2022) and show that institutional environmental variables like corruption, ineffective tax administration, and weak judicial systems significantly hinder formalization. Using a panel data regression model, Gengzhi et al. (2020) investigated the factors that impact the urban informal sector in China. According to their model, globalization, urban migration, unemployment, and tertiarization of industries are the key factors contributing to China’s urban informal economies. The study supported the growing notion that none of the major theories of informality can adequately describe informal economies. Rather, the theories should be viewed as complementary rather than conflicting alternatives. Similarly, Rajesh et al. (2020) found that workers in the lower-tier informal sector are in a “dead-end” work position and have few opportunities for upward mobility, regardless of whether they are employed for wages or as independent contractors. This study tries to replicate the study by Rajesh et al. (2020) by investigating the growth trajectory of the informal sector in Enugu State. The idea is to find out if informal sector businesses can register their business, experience growth in business capital, pay their taxes, expand their businesses, and employ some people. These are considered as they indicate whether their growth is vertical or horizontal. The relationship between Pakistan’s developing economy and the informal sector was investigated by Khurrum and Friedrich (2020), who found that the informal sector has a significantly favorable long-term impact while having a negative short-term impact, according to estimated results derived using the autoregressive distributed lag (ARDL) bounds testing approach. Ernest and Olawande (2020) found that income disparity, excessive tax burdens, administrative roadblocks from the government, high-inflation trends, insufficient control over nepotism, GDP per capita, and an absence of social protection are factors influencing the informal sector in both South Africa and Nigeria.

This study is timely. The findings of this study are necessary for a paradigm shift in how policymakers and government agencies approach the informal sector. This study is valuable now that the present administration in Nigeria finds it difficult to fulfill its financial obligations to the citizens concerning capital projects, infrastructure, and basic amenities. Repositioning and revitalizing the large informal sector will be the right step toward domestic resource mobilization needed to finance developmental projects and the public deficit instead of resorting to borrowing.

METHODOLOGY

Research design

This study adopted the survey method, considered the best fit strategy to gather information on human experiences and using these experiences to improve human comfort. It also employs a case study, as recommended by Denscombe (2014). Case studies are suitable for qualitative research and small scale in-depth studies, like this study. The survey was conducted based on a questionnaire and quantitative approaches were also considered in the research design. We were interested in finding informal businesses that started paying taxes, got registered, and experienced expansion of their businesses either in capital size or in establishing more branches of their businesses and in terms of the number of employees. These formed part of the questions that helped us to determine, via Logit regression, the implication of these variables in how informal businesses in the Enugu State have grown.

Research population and area of study

Enugu State is one of the five states in the Geopolitical Zone of Nigeria known as South-East. Other Geopolitical Zones are the South-South, South-West, North-West, North-East and North-Central. Enugu State has seventeen Local Government Areas (LGAs) and three senatorial zones. There are five local governments in Enugu West senatorial Zone, and they include: Udi, Oji River, Ezeagu, Awgwu, and Aninri. Furthermore, six LGAs, namely Uzo-Uwani, Nsukka, Udenu, Igboeze North, Igbo-Etiti, and Igboeze South, in Enugu-North Senatorial Zone; and six LGAs in the senatorial zone of Enugu East: Isi Uzo, Enugu North, Nkanu West, Enugu East, Enugu South, and Nkanu East.

The informal businesses in Enugu State, such as small manufacturers, small and micro enterprises, subsistence enterprises, small-scale farmers, and service providers, make up the population of the study. According to the survey conducted by the Small and Medium Enterprises Development Agency of Nigeria in conjunction with National Bureau of Statistics (SMEDAN/NBS, 2021) in Enugu State, these entities sum 1,441,047 businesses. This number was used as a parameter to establish the population of the study. However, we recognize the existence of many informal businesses in the state that have not yet been identified by the agency. Therefore, we established a sample size of 500 businesses, which is an adequate number for a population that surpasses the number in SMEDAN’s database.

Sampling size and sampling techniques

A sample size is a set number of components drawn from a population that are typical of the population (Gujarati & Porter, 2009; Ndagi, 2007). According to Gujarati and Porter (2009), there are several sampling strategies such as probabilistic (simple, random sampling, systematic random sampling, stratified random sampling, cluster sampling) and non-probabilistic sampling (convenience, volunteer, quota, snowball, purposive sampling) techniques. This study has a sample frame of both the urban and rural areas within Enugu State. Both male and female individuals engaged in informal businesses constitute the sample units. The study adopted purposive and stratified random sampling techniques as tools to draw the study’s sample size. We adopted the purposive sampling strategy because, according to Denscombe (2014), it allows for discretion when choosing respondents and is also suitable for small scale exploratory research. In the stratified random sampling, we chose Enugu State out of the 36 States in Nigeria and one of the states in South East geopolitical zones using stratified random sampling, proximity, and other considerations.

Figure 2 shows the layers of selection that culminated in the selection of the respondents. Furthermore, since Enugu State has three (3) senatorial zones comprising Enugu West, Enugu East, and Enugu North, we chose two LGAs from each of the three (3) senatorial zones.

Figure 2
Distribution of Copies of the Questionnaire

We also chose one rural community and one urban city from each local government selected. Finally, through random and purposive sampling techniques, we chose 35 respondents from each of the 6 rural communities and 48 respondents from each of the 6 urban cities. The reason for conceding more numbers to the urban cities is to accommodate the urban migration of informal businesses. Using Kothari’s formula, the sample size was settled as 384. However, using a purposive sampling technique, we brought the sample size to 500. This decision was made to accommodate many informal sector businesses that are not yet in the SMEDAN database, as discussed above.

Research instruments and method of data collection

The study used survey research and case study design. The primary tool used to collect data was the questionnaire. It was used because it allowed us to collect information from a sizable and varied sample, offering a more comprehensive picture of the intended audience. Five hundred (500) copies of the questionnaire were applied, corresponding to the number of respondents. Three research assistants were hired and trained on the essential information and questionnaire usage, and the questionnaire was distributed through hand delivery by our trained research assistants in an effort to increase the survey’s efficacy. The questionnaire has three parts comprising personal information of the respondents, the growth path of informal businesses, and factors that enable the identified growth path (if vertical or horizontal) of informal businesses.

Reliability and validity of the research instruments

A closed-ended questionnaire was adopted to ensure that the instrument to gather primary data met acceptable standards. To improve the validity of its content, this research instrument was reviewed by other professionals. In order to maximize the instrument’s dependability, we ensured that respondents were provided with a clear and understandable questionnaire with the help of evaluation and assessment experts. To ensure that the instrument measures the intended information, a pilot study was carried out to assess the research instrument’s reliability and identify any potential defects. For the pilot trial, 50 copies of the questionnaire were used, and Cronbach Alpha was used to establish the instrument’s reliability, as shown in Tables 2 and 3.

Table 2
Cronbach Alpha Test of Reliability for 1st Set of Likert Questions

Cronbach’s Alpha	Cronbach’s Alpha Based on Standardized Items	N of Items
.780	.786	7

Source: Authors’ computation using SPSS, 26

Table 3
Cronbach Alpha Test of Reliability for 2nd Set of Likert Questions

Cronbach’s Alpha	Cronbach’s Alpha Based on Standardized Items	N of Items
.755	.759	5

Source: Authors’ computation using SPSS, 26

Tables 2 and 3 represent the reliability test for the Likert scale questions. The Cronbach Alpha statistic in Tables 2 and 3 are greater than the 0.7 benchmark and indicate that the instrument for data collection is reliable and able to measure what it purports to measure. This confirmation propelled the production of 520 copies of the questionnaire distributed to the respondents from where 500 copies of correctly filled questionnaire were used for analysis.

Model specification

This study investigated the informal sector growth path in Enugu State and the factors that influenced this trajectory. The Logit Model was used to analyze the research hypotheses. The correlation between one or more (continuous or categorical) explanatory variables and one or more binary dependent variables was investigated using logistic regression analysis. Equations 3.1 and 3.2 represent the natural log transformation of the logit model, which is based on Gujarati and Porter’s (2009) estimate methodology. The Dualistic theory served as the model’s foundation.

(3.1) $${\mathrm{L}}_{\mathrm{t}}=\ln \left(\frac{pi}{1-pi}\right)={\mathrm{z}}_{\mathrm{t}}$$

(3.2) $${\mathrm{\Omega }}_{\mathrm{t}}=\ln \left(\frac{pi}{1-pi}\right)={\mathrm{z}}_{\mathrm{t}}$$

(3.3) $${\mathrm{z}}_{\mathrm{t}}={\beta }_0+\beta {\mathrm{j}}^{\sum _{j=1}^{k}xi}+{\mu }_{\mathrm{i}}$$

This suggests that both in ‘Xs’ in equation (3.3) and in the parameters, ‘L’ in equation (3.1), the log of the odds ratio is linear. Additionally, it should be mentioned that Z changes from - ∞ to + ∞ when P ranges from 0 to 1. The study’s logit model is shown in the following equations (3.4) and (3.5):

(3.4) $${\mathrm{L}}_{\mathrm{t}}=\ln \left(\frac{pi}{1-pi}\right)=\mathrm{f}({\mathrm{z}}_1,{\mathrm{Z}}_2,{\mathrm{Z}}_3,{\mathrm{Z}}_4,\mathrm{Z}5,\mathrm{Z}6)$$

(3.5) $${\mathrm{\Omega }}_{\mathrm{t}}=\ln \left(\frac{pi}{1-p^i}\right)=\mathrm{f}({\mathrm{y}}_1,{\mathrm{y}}_2,{\mathrm{y}}_3,{\mathrm{y}}_4,{\mathrm{y}}_5,{\mathrm{y}}_6,{\mathrm{y}}_7,{\mathrm{y}}_8,{\mathrm{y}}_9,{\mathrm{y}}_{10},{\mathrm{y}}_{11})$$

Where: Pi represents the binary dependent variable. Pi=1 represents ‘growth in start-up capital of informal sector businesses.’ Pi = 0 represents ‘if there is no growth in start-up capital of informal sector businesses.’ Galiani et al. (2017) identified business growth as one potent instrument for formalization.

For hypothesis one represented by equation 3.4, the explanatory variables captured by Z1, which represents informal business owner now pays tax regularly, Z2 represents informal business now registered with CAC, Z3 = I have access to good road, infrastructure, health care, power supply, Z4 = I am now able to pay my workers and cover other business expenses from my business revenue, Z5 = I have office/shop/business address/complimentary cards/letter head papers.

Similarly, for hypothesis two represented by equation 3.5, y1 represents high tax burden in the formal sector, y2 is economic backwardness, y3 is increased unemployment, y4 is rising poverty level, y5 is insecurity, y6 is lack of social protection, y7 is external competitive pressure, y8 is High regulation, y9 is Lack of education/skill development/ training, y10 is growing population, y11 is Urbanization. Some of these explanatory variables have been identified by Moyo (2022).

Justification of the model

According to Juan et al. (2016), the Logit model, unlike linear regression or general linear models, does not require many of the same conditions, like a linear relationship between a dependent and independent variable, the distribution of the independent variable to be normal or homoscedastic, or the use of variables supplied using a metric system of measures. It is applied when the prediction is binary, i.e., 0 or 1. The dependent variable is informal sector growth proxied by growth in start-up capital, while the independent variables are as listed above (y’s and z’s).

RESULTS

We first present the descriptive properties of the variables, such as the respondents’ demographic information.

From Table 4 it is observed that there are 323 males, which represents 64.6 % of the total respondents. However, 177 of the respondents are females, and they represent 35.2 % of the total number of respondents, which is 500. This indicates that the informal business is dominated by men rather than women.

Table 4
Gender of 500 Respondents of the Total Sample Size

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Male	323	64.2	64.6	64.6
	Female	177	35.2	35.4	100
	Total	500	99.4	100
Missing	System	3	0.6
Total		503	100

Source: Authors’ computation using SPSS, 26

result from the descriptive analysis shown in Table 5 indicates that youths are predominant in the informal sector. This could be attributed to the rising number of graduates without gainful employment.

Table 5
Age of 500 Respondents of the Total Sample Size

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	21 to 35	215	42.7	43	43
	36 to 45	210	41.7	42	85
	46 to 65	75	14.9	15	100
	Total	500	99.4	100
Missing	System	3	0.6
Total		503	100

Source: Authors’ computation using SPSS, 26

In Table 6 we present the respondents’ level of education. It is observed that respondents with HND/B.Sc. dominated other categories scoring 90.2 % of the total respondents. This observation reveals that graduates of higher institutions now find respite in the informal sector against the notion that the sector is occupied by the unskilled or uneducated population. This brings the need for governments to take this sector seriously. With the right investments, the innovativeness of the youth/graduates and their energies could be harnessed into positive resources for national development.

Table 6
Level of Educational of 500 Respondents of the Total Sample Size

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	SSCE/NECO	49	9.7	9.8	9.8
	B.SC/ HND	451	89.7	90.2	100
	Total	500	99.4	100
Missing	System	3	0.6
Total		503	100

Source: Authors’ computation using SPSS, 26

Table 7 examined the marital status of the respondents, which is thought to have some implications on the growth path of informal businesses in Enugu State, Nigeria. 394 respondents corresponding to 78.3 % of the total respondents, are married, while 106 respondents corresponding to 21.1 % of the total respondents, are single. There are more married respondents than single respondents, suggesting that married persons without jobs are more prone to starting informal businesses than their single counterparts. With the increasing need to feed and provide for family needs, married people find it more expedient to engage in informal businesses than single persons.

Table 7
Marital Status of 500 Respondents of the Total Sample Size

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Married	394	78.3	78.8	78.8
	Single	106	21.1	21.2	100
	Total	500	99.4	100
Incompletas	System	3	0.6
Total		503	100

Source: Authors’ computation using SPSS, 26

Table 8 presents the employment status of the respondents. As observed, 99.4 % of the respondents are self-employed. The remaining 0.6 % of the respondents belong to the wage employed category. Despite the fact that 99.4 % of the respondents are self-employed, they belong to the lower-tier informal businesses employing zero to less than 5 employees as could be seen in Table 8.

Table 8
Occupational Status of 500 Respondents of the Total Sample Size

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	self-employed	497	98.8	99.4	99.4
	wage employed	3	0.6	0.6	100
	Total	500	99.4	100
Missing		3	0.6
Total		503	100

Source: Authors’ computation using SPSS, 26

Table 9 buttresses the fact that informal businesses in Enugu State have not started experiencing a vertical growth trajectory that sees them move to higher tier informal businesses that could easily metamorphose into formal businesses.

Table 9
Informal Sector Tier Classification of 500 Respondents of the Total Sample Size

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	lower tier informality < 5	500	99.4	100	100
Missing		3	0.6
Total		503	100

Source: Authors’ computation using SPSS, 26

Table 10
Omnibus Tests of Model Coefficients

		Chi-square	df	Sig.
Step 1	Step	7.481	11	0.154
	Block	7.481	11	0.154
	Model	7.481	11	0.154

Source: Authors’ computation using SPSS, 26

Figure 3 describes the nexus among gender, marital status, tier of operation, and growth of start-up capital of businesses found among the respondents. It is observed that the number of married male respondents operating within the lower tier informal sector whose start-up capital increased was 160. Similarly, the number of married male respondents operating within the lower tier informal sector whose start-up capital did not increase since they started businesses were 140 respondents. Conversely, the number of married female respondents operating within the lower tier informal sector whose start-up capital increased was 45 respondents, while married female respondents operating within the lower tier informal sector whose start-up capital did not increase was 35 respondents.

Figure 3
Start-up Capital, Gender, Informal Tier Classification and Marital Status of Respondents

Conversely, just as observed in Figure 3, the number of single male respondents operating within the lower tier informal sector whose start-up capital increased was 10, while the number of single male respondents operating within the lower tier informal sector whose start-up capital did not increase was 5 respondents. Similarly, the number of single female respondents operating within the lower tier informal sector whose start-up capital increased was 50, while the number of single female respondents operating within the lower tier informal sector whose start-up capital did not increase was 47. It is noted that there has been a marginal increase in start-up capital of informal business owners, but the increase has not been able to take them out of the lower tier informal businesses. The pertinent point to note is that these informal sector businesses still operate within the lower tier informal sector so the prospects of vertical linkage with the formal sector are not bright.

Evaluation of research hypotheses

In order to investigate whether the growth trajectory of informal sector businesses in Enugu State is vertical, we used the Logit Model as the estimation technique. The odd ratio of the Logit model is used to determine this cause-and-effect relationship.

Logit Regression 1: Alternative hypothesis: The trajectory of growth in the informal sector is vertical

Table 11 indicates that we reject the alternative hypothesis and accept the null hypothesis that the trajectory of growth in the informal sector is not vertical. This conclusion is made because the model as a whole is not significant at the 5% level of significance.

Table 11
Hypothesis One - Logistic Regression

		B	S.E.	Wald	df	Sig.	Exp(B)
Step 1a	I am able to pay my workers and cover other business expenses from my business revenue	.072	.178	.165	1	.685	1.075
	I pay my tax regularly to the government from my business	-.113	.154	.539	1	.463	.893
	I am registered with Corporate Affairs Commission	-.264	.188	1.967	1	.161	.768
	I have office/shop/business address/complementary cards/letter head papers	-.161	.187	.740	1	.390	.852
	I enjoy access to good road, infrastructure, health care, power supply	-.242	.387	.520	1	.163	.642
	Constant	.003	.684	.000	1	.996	1.003

Variable(s) considered in step 1: I am able to pay my workers and cover other business expenses from my business revenue, I pay tax regularly to the government from my business, I am registered with corporate affairs commission, I have office/shop/business address/complimentary cards/letter head papers, I have access to good road, infrastructure, health care, power supply.Source: Authors’ computation using SPSS, 26

As observed in Table 11, all the variables used to proxy vertical growth trajectory of informal sector businesses do not significantly impact the start-up capital of informal sector businesses in Enugu State but have non-significant negative impact on start-up capital of informal sector businesses in Enugu State. This further confirms that informal sector businesses in Enugu State do not experience a vertical growth trajectory toward the formal sector. The implications of these findings are further discussed in the section for discussion of findings. However, suffice it to say that confirmation of non-vertical growth does not imply an absence of growth. The informal sector could experience growth in size (horizontal), which is inevitable as unemployment and poverty levels soar higher, as is the case with Nigeria and Enugu State in particular. This is expected given the negative GDP recorded in Enugu in the last two years.

Logit Regression 2: The Alternative Hypothesis: Economic, environmental, and demographic factors drive growth in size (horizontal) of the informal economy or prevalence of informal economy in Enugu State

As observed in Table 12, the null hypothesis is rejected, while the alternate hypothesis is accepted. This is because the model is significant at 5% (0.032). Therefore, we conclude that economic, environmental, and demographic factors drive the prevalence or horizontal growth of the informal economy in Enugu State.

Table 12
Omnibus Tests of Model Coefficients

		Chi-square	df	Sig.
Step 1	Step	6.148	11	.032
	Block	6.148	11	.032
	Model	6.148	11	.032

Source: Authors’ computation using SPSS, 26

Table 13
Hypothesis Two - Logistic Regression

		B	S.E.	Wald	df	Sig.	Exp(B)
Step 1a	high tax burden in the informal sector	.317	.218	2.118	1	.046	1.373
	economic down turn	.915	.259	.134	1	.014	1.510
	increased unemployment	.078	.374	2.044	1	.034	2.082
	rising poverty level	.706	.364	3.765	1	.052	2.025
	low private income	.095	.270	.123	1	.045	1.099
	Insecurity	-.203	.327	.386	1	.535	.816
	high regulation	.030	.295	.010	1	.059	1.031
	external competitive pressure	.227	.299	.577	1	.448	1.255
	lack of social protection/ safety nets	-.222	.334	.443	1	.506	.801
	lack of education/skill development/ training	.159	.246	.417	1	.051	1.253
	growth in population	.473	.552	.735	1	.031	1.605
	urbanization (migration from rural to urban settlement)	.768	.564	1.852	1	.014	1.464
	Constant	-2.324	5.126	.206	1	.650	.098

Note: Variable(s) considered in step 1: high tax burden in the informal sector, economic down time, rising unemployment, rising poverty level, low private income, insecurity, lack of social protection/ safety nets external competitive pressure, high regulation, lack of education/skill development/ training, growth in population, urbanization (migration from rural to urban settlement).Source: Authors’ computation using SPSS, 26

The result shown in Table 12 contains variables that cause the informal sector to be resilient and grow in numerical size. As observed from Table 12, high tax burden, economic down turn, rising unemployment, rising poverty level, and low private income all have positive and significant relationships with starting informal sector business. This implies that they determine the horizontal growth of the informal economy in Enugu State. With respect to the quantitative measure of the impact of these variables on the horizontal growth of the informal economy in Enugu State, Table 12 furthermore indicates that high tax burden, economic down turn, rising unemployment, rising poverty level, and low private income have more odds or probability of causing informal businesses to spring up by 37.33% (1.373-1), 51% (1.510-1), 108.2% (2.082-1), 102.5% (2.025-1) and 9.9% (1.099-1) respectively than they would decrease it. Because high tax burden, economic down time, rising unemployment, rising poverty level, and low private income have significant relationships with starting informal businesses, these economic factors are major determinants of informal sector prevalence in Enugu State. This result conforms to the a priori economic expectation. As individuals who are able and willing to work find no work, instead of dying of hunger or resorting to crime, they start businesses, no matter how small, to earn a living. This explains the proliferation of small businesses in every nook and cranny of major cities in Enugu State. Sometimes, the government believes that these businesses deface the esthetic beauty of the State and so clamp down on them or evacuate them, sometimes to no destination. This government action shows that the government is yet to see the informal sector as a veritable source of revenue. Poverty has the same effect on the prevalence of informal sector businesses as unemployment does. Low economic down turn is consistent with recession or low demand caused by cash crunch. Businesses struggle to survive while laying off workers as one of the ways to remain afloat. This causes unemployment and poverty, which also causes low demand. This spiral continues to force individuals who are out of jobs and cannot feed or provide their basic needs to resort to informal businesses. Nothing chokes upcoming businesses more than high taxation and multiple taxation. It kills the productivity and entrepreneurial spirit of the youth. When a young business trying to break-even, without any form of support from the government, is taxed beyond their profit or capacity, it could lead to discouragement to continue the business or evade taxes by remaining informal.

Similarly, a lack of education/skill development/training, growth in population, and urbanization relate positively to starting informal businesses. It further shows that a lack of education/skill development/ training, growth in population, and urbanization have more odds or probability of causing informal businesses to spring up by 25.3% (1.253-1), 60.5% (1.605-1), and 46.4% (1.464-1) respectively than they would decrease it. Lack of education/skill development/training, growth in population, and urbanization have a significant impact on starting informal businesses. This implies that they are also factors that determine prevalence of the informal sector in Enugu State. Population growth makes competition over the few available jobs very intense, and those unable to find work resort to informal businesses. Similarly, as individuals seek greener pastures in urban cities believed to have more opportunities, these urban cities become congested, and available job spaces fill up. The realities of hunger and unemployment force individuals to take on informal business.

The result presented in Table 12 further indicates that high regulation and external competitive pressure relate to starting informal businesses positively, while insecurity and a lack of social protection/safety nets relate negatively to starting informal businesses. Specifically, high regulation and external competitive pressure have more odds or probability of increasing informal businesses by 3.1% (1.031-1) and 25.5% (1.255-1) than they would decrease it. Conversely, insecurity and lack of social protection/safety nets have more odds or probability of decreasing informal businesses by 18.4% (1-0.816) and 19.9% (1-0.801) than they would increase it. Overall, only high regulation significantly determined the prevalence of informal sector businesses amongst other environmental factors. This suggests that informal sector business owners are very weary of excessive regulation from the government as is the case with formal businesses. This excessive regulation comes in various forms, including multiple taxation and a cumbersome business registration process. This result validated the study by Oduh (2008), who investigated the size and factors influencing the informal sector in Nigeria from 1970 to 2005. The study found that Nigeria’s main causes of informality are the government’s economic control, high tax burdens, high black market premiums, and declining income.

DISCUSSION OF FINDINGS

In this section, we discuss the major findings of this study. First, we found that the informal economy in Enugu State is dominated by graduates of higher institutions. These graduates are youths who have the capacity to innovate. Moyo (2022) also found that firms more likely to formalize are young firms owned by individuals with high levels of education. This study identified a high level of education of informal business owners as a factor responsible for the formalization of informal business. They are more able to nurture their entrepreneurial spirit. Slonimczyk (2022) observed that informal entrepreneurship is a source of upward mobility. This implies that there is the possibility of upward mobility if the government and the organized private sector tap this resource well. Therefore, if this surge of unemployed youth, who earn a living in the informal economy are motivated and provided the enabling environment to put their innovative abilities and entrepreneurial spirits to good use, there will be tremendous business development in Enugu State.

Secondly, the informal economy in Enugu State still operates at the lower tier. This means that they are still struggling to survive. There has to be a movement from the lower tier to the upper tier informal economy for there to be a possibility of integration into the formal economy. As observed from the results obtained from the first hypothesis, all indicators of upward or vertical trajectory toward the formal sector were not significant. This indicates that the informal economy still avoids being known by government agencies (CAC registration). Their start-up capital has not grown to a level where it can employ others or expand to other localities. They prefer to operate with unknown addresses in order to avoid taxes. In order to evade taxes, they move from one location to the other.

Table 4.10 indicates that economic and demographic factors are the most implicated factors that drive the prevalence (horizontal trajectory) of informal sector businesses in Enugu State. Rising unemployment, rising poverty level, rising population, and urbanization are most prominent and significant, accounting for 108.2%, 102.5%, 60.5%, and 46.4% in horizontal trajectory of informal sector businesses, respectively. These findings align with Aysit and Zeynel (2015) and Gengzhi et al. (2020), who recognized urbanization and unemployment as drivers of informal sector businesses in China. China was able to transform its informal sector into a formal sector through assistance given to informal sector business owners in the form of research and innovation grants, providing an enabling environment and infrastructure for these businesses to thrive. In Nigeria, small businesses cannot generate their own power, and there is inadequate or poor basic infrastructure to drive their business.

In Table 4.8, we reject that businesses in the informal economy have a vertical growth trajectory in Enugu State. This study aligns with Slonimczyk (2022), who also found that reducing informality requires better enforcement, more reasonable regulation, and economic growth. Our result further confirms the study by Rajesh et al. (2020), who concluded that lower-tier informal workers, whether in self-employment or wage employment, have limited upward transition possibilities and are in a ‘dead-end’ work status. This result is not surprising, but it is an eye opener for governments to change their strategy and policies toward informal sector business growth in Enugu State. One obvious implication of this result is that either the government’s policies toward improving the informal sector are not genuinely implemented or they are only implemented on paper. Given the wide spread corruption in policy implementation, it will not be surprising to learn that those who benefitted from policies in this sector are not the real informal sector business owners but the family of the policy implementers. This result aligns with the Dual theory, which postulated that informality is a permanent phenomenon and is confirmed for Enugu State. There is no tendency for transition or upward movement. Empirical evidence from the works of Ghanain Vertovec (2004), and ILO (2013a) examining Kenya also confirmed that, although the informal economy contributed to creating jobs, generating revenue, and lessening extreme poverty, it was actually developing horizontally (in terms of numbers) rather than vertically to merge with the formal sector.

Nigeria has been running a deficit budget for decades now. This means that Nigeria has been borrowing both locally and internationally to sustain the economy, especially its capital projects. Nigeria could end this spiral deficit budget if it could mobilize domestic resources for development (Uzoechina et al., 2021). We argue that the non-significance of drivers of the informal economy transition to the formal economy strongly suggests that government policies toward the informal economy have not produced the desired results. As posited by Abada et al. (2021), the informal economy is critical in mobilization of domestic resource for development and this study supports this. Therefore, we advocate for a drastic change in strategy to impact the informal economy positively.

CONCLUSION

Undoubtedly, a defining characteristic of African economies is the existence of a sizable informal sector, which continues to expand daily. This starkly contrasts with the traditional theories of development, which postulated that the informal economy’s resilience in developing nations was caused by inadequate growth and would eventually disappear with continuous economic expansion (Leandro et al., 2017). This research confirms that, despite rapid expansion, the informal economy is still a pervasive and persistent feature in many emerging nations, confirming the earlier observation of Rajesh et al. (2020). In reality, experiences from Africa show that, despite rising unemployment and poverty rates and the adjustments and policy reforms, the informal sector is expanding.

Due to Nigeria’s rising levels of unemployment and poverty, it may not be possible for this sector to transition to the formal sector and become part of the productive base of the Nigerian economy. In Africa, the majority of people rely heavily on the informal sector for their means of subsistence. This sector is primarily made up of small family businesses, which account for the majority of jobs and output in Enugu State’s economy. It is no longer possible to overlook the importance of the informal sector to the Nigerian economy in general and Enugu State in particular. The sooner this is acknowledged, the better for mobilizing domestic resources through the expansion and formalization of the informal sector. Yusuf (2011) and Sakanko and Ewugi (2017) posit that over 70% of employment in metropolitan areas of Nigeria is generated by the informal economy, which is adjudged the third largest in Africa. Nigeria should turn this to its advantage.

RECOMMENDATIONS

Since the growth trajectory in Enugu state was found to be horizontal and not vertical, we recommend that efforts toward formalization must start with addressing the issues causing the proliferation of informal sector businesses by curbing corruption, allowing the gains from growth to trickle down, creating access to finance and providing critical infrastructure.

• Evaluated through a double-anonymized peer review.
• The reviewers did not authorize disclosure of their identity
• The Peer Review Report is available at this link

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Edited by

• Guest editor:
  Ayodotun Stephen Ibidunni, Ebes Esho, Ogechi Adeola e Alexandre de Almeida Faria

Publication Dates

• Publication in this collection
  20 Jan 2025
• Date of issue
  2025

History

• Received
  15 Dec 2023
• Accepted
  22 Aug 2024