The Informal Sector and Formal Competitiveness in Senegal

Abstract: The purpose of this paper is to investigate the informal sector of the Senegalese economy with focus on the relationship with formal sector competitiveness. The paper is based on three research questions. 1. What are the characteristics of the informal sector in Senegal? 2. What are the linkages, similarities and differences between the formal and informal sector? 3. How can formal sector competitiveness be improved by actions in the informal sector? The answer to the first question makes it clear that informal sector businesses are small in size, number of employees, financial capital and thus output. It is also clear that the informal sector is rather heterogeneous. This knowledge enables the investigation of the second research question. These answers are related to the different components used when assessing competitiveness in an economy: (i) governmental performance and institutional quality, (ii) GDP and trade performance, (iii) the exchange rate, (iv) the labour force and production costs and (v) infrastructure. Finally, the third research question is addressed. There appear to be both synergetic and counteracting effects between the two sectors with respect to overall economic competitiveness. However, the counteracting effects seem to be dominating and, in the end, the informal sector needs to be diminished in order for formal sector competitiveness to be improved. Furthermore, the results obtained throughout the paper give clear indications why the informal sector is of such magnitude. It also becomes clear in what areas the main problems are to be found. Thus, the policy actions suggested in order for the informal sector to be diminished and formal competitiveness to be improved are (i) eased entry to the formal sector by re- and deregulations, (ii) a more encouraging taxation system in order to improve the quality and quantity of public goods, (iii) easier access to financial capital among small-scale producers, (iv) a labour market that makes education profitable and (v) proper wages rates.