A Message to the ‘Hippos’: Informal Economy Is Not Africa’s Development Strategy

Something remarkably optimistic is unfolding as Africa’s informal economy is rediscovered. For decades, informal traders, street vendors, domestic workers, casual labourers, home-based producers and small businesses were largely treated as evidence of economic weakness and underdevelopment. Increasingly, however, they are being presented as evidence of entrepreneurial dynamism, resilience, innovation and even an enormous reservoir of untapped wealth.

The language has shifted: unemployment is recast as entrepreneurship, precarious livelihoods as flexibility, and informality as an opportunity waiting to be formalised, financed and transformed into productive enterprise. This optimism warrants considerably more scrutiny.

The informal economy is too important to be romanticised. The central question is not whether informal workers are entrepreneurial. Many undoubtedly are. The more important question is what their entrepreneurship reveals about the economy they operate in. Consider a person selling food by a busy road because no adequately remunerated formal employment is available.

She may work extraordinarily hard, understand her customers, manage her limited resources carefully and develop a loyal clientele. She may be an excellent entrepreneur. Yet her entrepreneurship does not demonstrate that the economy is generating sufficient productive employment. It may instead show that the formal economy is failing to create enough secure and productive opportunities for the people who need them.

This distinction matters because economic activity is not the same as economic transformation.

A person earning an income is not necessarily accumulating wealth. A business generating sales is not necessarily producing a substantial surplus. Employment is not necessarily productive, and productivity growth does not automatically translate into capital accumulation or broad-based prosperity. A large informal economy is therefore not, by itself, evidence of a large stock of hidden productive wealth. It may indicate considerable economic activity, but it may also reveal how far households have been compelled to build livelihoods around a ‘hand-to-mouth’ economy that does not generate enough secure and productive employment.

This is why the increasingly popular description of Africa’s informal economy as a “diamond mine” of untapped wealth warrants caution. Before asking how this supposed wealth can be “unlocked”, we should ask a more basic question: what exactly is being mined? If millions of people sell goods and services in low-margin markets because they cannot find secure employment, where precisely is the accumulated wealth?

Much of the income generated through informal activity is immediately spent on food, rent, transport, education, household reproduction and replacement stock. Such expenditure is economically important and may sustain families and local markets, but it should not automatically be described as capital accumulation. Economic activity is valuable, but economic value and accumulated productive wealth are not synonymous.

The same problem arises with enthusiasm for expanding access to finance

The conventional policy story is familiar: informal entrepreneurs lack access to credit; finance is provided; businesses invest and expand; new jobs follow; and formalisation eventually occurs. Sometimes this sequence works. But finance cannot manufacture purchasing power where markets are weak, create productive infrastructure where it is absent, or automatically provide firms with technology, skills, economies of scale and access to larger markets.

Where demand is weak and margins are narrow, additional borrowing can increase financial exposure without producing durable enterprise growth. The relevant question is therefore not simply whether informal entrepreneurs can borrow, but whether the surrounding economy gives them a realistic opportunity to use finance productively.

This is where the debate about informality needs to move beyond the individual entrepreneur. A street trader cannot determine an economy’s level of industrialisation. A township business cannot create national purchasing power on its own. A household enterprise cannot build a manufacturing ecosystem. People make choices within economic structures they did not create. A person can therefore be highly entrepreneurial and still operate in an economy characterised by weak demand, inadequate infrastructure, limited access to productive assets and insufficient formal employment. Agency and structural constraint are not opposites; they frequently coexist.

South Africa offers a particularly useful illustration. Stats SA reported that informal-sector employment accounted for 19.5% of total employment in the fourth quarter of 2024, representing approximately 3.3 million workers. By the first quarter of 2025, informal-sector employment had increased, while the formal sector shed hundreds of thousands of jobs. More recent evidence shows that informal employment remains substantial, highly volatile and disproportionately important for younger workers.

These figures demonstrate the enormous economic and social significance of informal activity, but they do not establish that the informal sector has the same productive weight as the formal economy. Indeed, the contrast between its employment contribution and its contribution to measured output should prompt a more careful examination of productivity, incomes, working conditions and value capture.

Nothing about the people represented in these statistics is economically trivial. Informal workers feed households, provide goods and services, circulate money through communities and fill gaps left by inadequate formal provision. They demonstrate considerable ingenuity in difficult circumstances. But their economic importance should not be mistaken for evidence that the economy has solved its development problem. The scale of informality may instead indicate how many people the economy cannot absorb into sufficiently productive, protected and adequately remunerated employment.

The reasons people enter informal activity reinforce this point. Unemployment is a leading reason for starting informal businesses in South Africa, while entrepreneurs also report constraints related to licensing, marketing and access to suitable trading sites. These findings do not suggest that informal operators lack initiative. They demonstrate that initiative is exercised within a labour market that does not provide sufficient formal opportunities. Informal enterprise can therefore be an active and rational response to exclusion, rather than evidence that exclusion itself has somehow become a development strategy.

This is why the concept of the “survivalist entrepreneur” needs greater precision. Some informal businesses have genuine prospects for expansion, technological upgrading and job creation. Others exist primarily to maintain household income or consumption under constrained employment and market conditions. The latter may lack the margins, capital, demand or productivity to support sustained accumulation. Calling both groups entrepreneurs is not necessarily wrong, but treating them as economically equivalent can lead to serious policy mistakes. A business capable of upgrading requires productive investment and market opportunities. A worker whose activity merely keeps a household afloat may require income security, social protection and a pathway into more secure employment.

The evidence from Tanzania is particularly instructive because it prevents us from making the opposite mistake of dismissing the informal economy altogether. Xincshen Diao and colleagues found that informal firms contributed more than one percentage point to economy-wide labour-productivity growth. This is important evidence that informality and productive dynamism are not mutually exclusive. Yet 94% of that contribution came from a very small subset of relatively productive “in-between” firms.

The lesson is therefore not that informality is economically irrelevant, nor that the informal economy as a whole constitutes a latent industrial powerhouse. The lesson is that informality is heterogeneous and that policy must identify which enterprises have credible prospects for upgrading, while recognising that many informal workers face fundamentally different constraints.

Caution should also apply to formalisation

Registration can matter. Legal recognition can matter. Labour rights, social protection and access to formal institutions can materially improve people’s lives, but registration does not create demand. A licence does not create industrial capacity. A tax number does not create technological capability. Digital payments do not automatically boost productivity. Formalisation can improve the institutional or legal position of a worker or firm without altering the economic structure in which that worker or firm operates.

The ILO’s Recommendation No. 204 links the transition from informal to formal economic activity with decent work, social protection, productive employment, productive investment and structural transformation. The problem therefore does not lie in formalisation itself. It arises when formalisation is treated as a substitute for the broader policies required to create productive economic opportunities. A development strategy centred primarily on registration, compliance, finance and entrepreneurship training risks asking individuals to formalise without addressing the economic conditions that determine whether their businesses can survive and grow.

The issue also has a broader political-economic dimension. Informal workers do not exist outside the formal economy. They may supply formal firms, distribute formal-sector products, operate as subcontractors, or occupy low-value positions within wider production networks and global value chains. In these relationships, one part of the production system can create value while another captures it. Risk can move in the same direction. A formal firm may retain more profitable functions while shifting commercial risk, employment insecurity and weak bargaining power onto informal suppliers or workers. The formal–informal boundary is not always a wall separating two independent economies. It can instead represent different positions within the same economic system.

The policy implications are significant. Not every informal worker requires the same intervention, and not every informal enterprise should be approached through the same formalisation programme. Enterprises demonstrating market demand, employment growth, productivity gains or technological potential may require assistance with equipment, infrastructure, skills, procurement, technology adoption and access to larger markets. Workers whose activities primarily sustain household consumption may require a different package, including social protection, accessible public services, safe working environments, labour rights, childcare, transport and income support, along with realistic pathways into productive employment where these exist.

Productive upgrading also requires attention to the wider economic environment. Reliable electricity, transport infrastructure, serviced production and trading spaces, technical training, market information, public procurement and technology extension can materially alter the conditions under which firms operate. These interventions are fundamentally different from a policy that simply reduces registration costs and expects productivity to follow. Enterprise capability cannot be separated from the capabilities of the surrounding economy.

Formal status does not necessarily eliminate precarity. Brazil’s sugarcane plantations, for example, show that formalisation can expand access to social protection even as insecure and discontinuous employment relationships remain embedded in the organisation of production. The broader lesson is not that formalisation creates precarity, but that formal status alone cannot guarantee secure work. If the organisation of production continues to shift uncertainty and risk onto workers, formalisation may improve some aspects of employment without resolving the underlying insecurity.

Let the cheetahs run, but change the terrain

The larger development challenge is therefore structural. Africa does not suffer from a shortage of economic activity.

The question we should ask is not simply how to “unlock” Africa’s informal economy. We should also question why Africa requires such a large informal labour reserve in the first place, who benefits from its reproduction, and what structural changes would make survivalist informality progressively less necessary. That question shifts the debate from development mythology to development policy. It directs attention to productive investment, industrialisation, employment creation, infrastructure, social protection, bargaining power, and the organisation of production, rather than assuming that millions of small-scale economic activities can collectively substitute for structural transformation.

None of this means ignoring informal businesses. Quite the opposite. They should be understood more carefully and supported in line with their actual economic circumstances. Productive informal firms should not be dismissed simply because they are informal, while survivalist workers should not be treated as failed entrepreneurs who merely need more credit or another business-development workshop. The appropriate response depends on whether the activity has realistic prospects for upgrading, whether workers are protected, whether value is retained and reinvested, and whether the wider economy is creating opportunities to move into more productive forms of employment.

Ultimately, the informal economy is neither Africa’s hidden treasure waiting to be discovered nor an economic space devoid of productive potential. It is a heterogeneous part of the economy that reflects both workers' ingenuity and the structural constraints they face. Its persistence tells us something important about the state of African economies: people can create livelihoods when productive alternatives remain inadequate.

That ingenuity deserves recognition. But it should not be used as an excuse to accept the conditions that make such ingenuity necessary.

Development policy should therefore stop “mining” poverty for entrepreneurial potential. The objective should instead be to build economies in which people can move from survival to security, from low productivity to higher productivity, from precarious work to decent work, and from fragmented economic activity towards genuine accumulation and broad-based prosperity. Success should not be measured by how many people can survive outside the formal economy, or simply by how many enterprises can be registered, but by whether economies are creating productive capabilities, secure livelihoods, bargaining power, and a sufficiently broad distribution of the gains from economic activity.

George Ayittey’s influential distinction between Africa’s “Cheetah Generation” and “Hippo Generation” provides a useful way to think about this tension. Ayittey used the Cheetah to describe Africans who are entrepreneurial, impatient with corruption and unwilling to wait for governments to solve every problem, while the Hippo represented entrenched elites resistant to meaningful change.

The push of the informal economy as “a path to expanding opportunities” favours the Hippo’s mindset, which is not oriented toward growing the post-colonial African state. Since the Hippo has always opposed change and destroyed people’s sustenance, he now pretends that his mess (survivalist, informal economy) is astute economic development while he continues to siphon wealth from the masses.

Ayittey is correct that Africa’s future depends on people who take initiative rather than passively waiting for states or foreign donors to rescue them. People must stop listening to cliches like township economy and kasinomics to spazashop economy rhetoric and start to work for their futures.

Siya yi banga le economy!