Exploring the implication of digitalization in the informal sector

Posted June 20, 2022

The socio-economic impact assessment conducted by the UNDP Ethiopia country office in collaboration with other UN agencies showed that Covid-19 disrupted many businesses, especially those in the informal sector. Those hardest hit were workers in informal sectors (manufacturing, construction, trading, retail, hospitality, and tourism), women in the urban informal sector and those in urban informal settlements and slums were the hardest hit due to restrictions on movement and lockdowns. 

The COVID-19 outbreak has placed particularly small and medium enterprises (SMEs) under huge pressure to survive, requiring them to respond effectively to the crisis. SMEs have adopted various digital technologies to cope with this crisis. The study used a data set from a survey with 62 SMEs and examined the relationship between SMEs’ digitalization. The empirical results showed that digitalization enabled SMEs to respond effectively to public crises using their dynamic capabilities. 

The objective of this survey was to learn and sense more about the implications of how “going digital” affected business operations and results by answering learning questions like how have the informal businesses been using “digital tools, platforms”? What part of the value chain has gone digital? What are the effects (opportunities, challenges, and risks) of digitalization on the informal sector (both businesses and individuals)? Do business owners have any concerns about using those digital tools? And What is the connection between digitalization and formalization?

Implications of going digital for informal businesses

In this exploratory survey, 40.32 % of respondents were women. We also explored the respondent’s level of formality and found that 83.87 % have a bank account while only 58.06 % have a valid business registration. Women are more digital compared to men respondents, which is something that we need to highlight here. 

Some insights from this exercise include that 82.35% of the businesses have started to use digital tools during the Covid-19 lockdowns, which shows the pandemic was a significant driver of the adoption of digital tools. Most of them also stated that they had no interest in going back to business as usual. More than 30 % of respondents said that going digital has effectively helped them find new customers and around 25 % of them said it has helped them improve their sales. The more formal components a business has, the more it tends to operate with digital tools. Only a few reported having negative experiences with using digital tools for their business, citing scams or fraud as the main concern.

When we dig deep, even if most businesses have started to use digital tools during the Covid-19 lockdowns, they are using them mainly for marketing, getting new customers, and very few for delivery and ordering supplies. But the use of mobile wallets and digital financial tools for enabling payment was exceptionally low. The majority noted that they haven’t stopped using digital tools even if pandemic COVID lockdowns are ending.

What is next?

This exercise has shown some interesting trends in the use of digitalization to bridge the divide between informal and formal. The Accelerator Lab will be using this learning as an input for the ecosystem mapping and exploration work for Ethiopia’s digital financial ecosystem in collaboration with the Inclusive and innovative Finance project. We will be looking at financial service providers, FinTech companies, mobile network operators, remittance service providers, pension and insurance providers, and payment system operators to develop an overview of the ecosystem in Ethiopia. Moreover, we will explore what kind of services they provide and generate knowledge about the needs and solutions that have been developed at the grassroots level, especially for SMEs and informal sectors.

As we move forward on this journey, we look forward to sharing key learnings and insights about the ecosystem. If you are interested in this topic and have any ideas or suggestions, we would love to hear from you through the email address ethiopia.acclab@undp.org.