Creating Formal Economies through Education

By Fin Marshall

The way western countries transformed from informal economies to formal ones during the industrial revolution and beyond was a natural trend, and the vast time it took to transform completely allowed it to become a natural process. However, in developing countries, especially those in Africa, the rapid prevalence of globalization and increased awareness between countries may have negatively impacted these countries.

It is estimated that over 85% of the labour force in Africa works in the informal sector, compared to less than 20% in Europe and North America [1]. Here the informal economy is defined as the diversified set of economic activities, enterprises, jobs, and workers that are not regulated or protected by the state. This has stunted the potential growth in these countries due to multiple reasons, such as reduced tax revenue that could be used to improve the countries’ social security nets and infrastructure, as well as fewer stable and reliable jobs for the population.

Why should we target education?

Education is a key factor affecting the level of informality. Globally, when the level of education increases, the level of informality decreases. People who have completed secondary and tertiary education are less likely to be working in the informal economy compared to workers who have either no education or have only completed primary education. Currently in Africa, the rate of secondary completion is 27% [2], compared to 88% [3]in the UK. There is a clear positive correlation between formal economies and education completion rate when looked at across all countries, which would suggest that an increase in education would help decrease the proportion of the economy that is unregulated.

Why should countries move away from informal employment?

While not all informal workers are poor, poverty is both a cause and a consequence of informality. In fact, the ILO report on informal economies states that, ‘the poor face higher rates of informal employment and that poverty rates are higher among workers in informal employment’ [4]. This suggests that there is an urgent need to tackle informality in order to provide more people with job protection and increase the living standards of entire countries.

How to do it

There are active efforts in place currently to change the dynamic of informal economies in African countries. One example of this is the ILO’s ‘Transition from the Informal to the Formal Economy Recommendation’, adopted in 2015 [5], where the ILO is working with governments and organizations in order to decrease the massive percentage of informal workers in developing countries. It will take time though, as workers in these countries may be wary before joining regulated workforces due to the lack of prior experience in these fields and the burden of tax. Therefore, education is very important when dealing with this issue. African governments and authorities need to make sure that more children are attending and completing school. This is an issue that has been improving but still has a long way to go – only 42% of students completed lower secondary school in sub-Saharan Africa in 2014, although this has increased from 23% in 1990 [6]. 

Another issue needed to be addressed in these countries is the actual school curriculum. In many African countries, the curriculum takes a lot of inspiration from western countries such as the UK. This, in part, can be attributed to the colonial powers introducing formal education systems into these countries, but the influence has continued well into the 21st century with near-identical subject choices and syllabuses. There are benefits to teaching children in developing countries subjects that follow western syllabuses because it prepares them for formal employment, which is useful for when the formal economy in these countries eventually grows.

However, currently that is not the case. 54% of the population in African countries such as Ghana work with vocational skills such as agriculture, sewing, and craft skills [7]. Therefore, in order to maximise the output of the current workforce in these countries, vocational skill workshops in schools would be potentially more useful than current syllabuses that take influence from western countries. The current vocational skills schools’ program in Ghana – TVET – only has a gross enrollment ratio of 2.7%, compared to 36.8% for standard education at the same age range [8], suggesting that more should be done to increase the availability of preparatory training for professions in which students are more likely to work.

If governments in Africa can further increase the rates of enrolment and completion of education, as well as diversify the options of skills that students can learn, then the education system will be more suited to their own economies and will get African countries closer to realising the maximum potential of their economies. This will eventually bring down the high rate of informal employment in these countries and therefore improve the quality of life of those living in them.

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

Image Source: Christian Today


[1],[4] Women and men in the informal economy: A statistical picture. Third edition, ILO

[2] UNICEF Global database on completion rate, April 2019

[3] Digest of Education Statistics 2019, tables 603.10, 603.20, and 603.30

[5] Transition from the Informal to the Formal Economy Recommendation, 2015 (No. 204)

[6] UNESCO Institute for Statistics (UIS). 2016. Sustainable Development Data Digest: Laying the Foundation to Measure Sustainable Development Goal 4. Montreal, Canada

[7] GLSS 6 Labour Force Report – Ghana Statistical Service

[8] Ministry of Education (July 2013). “Education Sector Performance Report”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s