Is the Informal Sector Constrained from the Demand Side? Evidence for Six West African Capitals

Marcus Böhme,Rainer Thiele

doi:10.1016/j.worlddev.2011.12.005

Abstract

Employing a unique dataset that covers households from six West African capitals, this paper provides new evidence on the demand for informal sector products and services. We first investigate whether demand linkages exist between formal and informal products and distribution channels. In a second step, we estimate demand elasticities based on Engel curves. We find strong demand-side linkages between the formal and informal sector, with the exception that informal goods are hardly bought through formal distribution channels. The estimated demand elasticities tend to show that rising incomes are associated with a lower propensity to consume informal sector goods and to use informal distribution channels.

Highlights

In urban Sub-Saharan Africa (SSA), formal employment covered by labor legislation and social protection schemes is the exception rather than the rule
Togo has the lowest expenditure shares on both formal goods and goods distributed via formal distribution channels and at the same time exhibits by far the worst governance indicators among the countries under consideration
We have offered a descriptive overview of demand in six capitals of the West African Economic and Monetary Union as well as an analysis of budget elasticities for different sectors and distribution channels

Summary

Introduction

In urban Sub-Saharan Africa (SSA), formal employment covered by labor legislation and social protection schemes is the exception rather than the rule. The literature on the structure of demand has mainly been descriptive It has distinguished informal and formal products and services, and formal and informal customers or households, typically identified by the (main) sector of occupation of the household head (formal or informal). A core proposition of this literature has been that informal and formal products will often have an overlapping customer base (Sethuraman 1997). Such overlaps may reflect complementary or competitive product markets. Covering a sample of 13 Sub-Saharan African countries, Xaba et al (2002) find rather strong inter-linkages in the final product market, with each sector being a strong supply as well as demand base of the other sector. Similar results are obtained by Grimm and Günther (2006) for the case of Burkina Faso

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