# **1. Introduction**

Promoting income-generating activities for the working poor and near-poor is essential to inclusive growth. In Sub-Saharan Africa (SSA) almost all of the labor force participants in low-income households are engaged in household-based activities – family farming, and very small non-farm enterprises, commonly called “informal enterprises”<sup>1</sup> . While these very small enterprises have been recognized in the rural development literature as an important part of rural income growth and poverty reduction (Haggeblade, et al., 2010), they are still an under analyzed area in the private enterprise literature (Grimm, van der Hoeven, and Lay , 2011) and underestimated in structural transformation debate (Fox and Pimhidzai, 2011). The household enterprise (HE) sector generates the majority of new nonfarm jobs in most SSA countries, even during times of high economic growth (Fox and Gaal, 2008). A better understanding of the dynamics, constraints, and potential of the nano-enterprises and their owners is essential for designing policies and interventions that can promote this sector as an engine of employment and income growth.

Economists usually have a negative view of informal household enterprises. As Ravi Kanbur has noted, _“There seems to be a consensus in the development economics and development policy discourse that “informality” is “bad”. It is bad for economic growth, for equity, and for poverty reduction.”_ (Kanbur, 2012, p. 2) Informal enterprises used to be seen as an indication of a failed development policy, because development was supposed to create wage jobs in the modern sector, and reduce the size of this sector (Tokman, 2007). They were also seen as an indicator of over-regulation, which stifled growth of larger, more efficient firms. As a result, enterprises stay small and get trapped in low productivity activities (Nwabuzor, 2005, Loayza et al., 2009). Informal enterprises are often operated at a scale so small as to be inefficient, so they have been reported to be a poverty trap (Bannerjee and Duflo, 2007). These views indicate the three different approaches to analyzing informal household enterprises - as employment strategies, as enterprises, and as livelihoods. Each approach conveys a partial view of the role of informal household enterprises in development SSA today.

As a job, self-employment was initially viewed in the 1970s as a sign of disequilibrium resulting from some labor market or other market distortion producing too high wages and thus too little wage employment (e.g. an insider-outsider problem or an overvalued exchange rate). Over time, self-employment or the creation of a microenterprise came to be viewed in some cases as reflecting a positive choice which would maximize earnings given a set of skills (e.g. entrepreneurial skills) or provide more total utility than wage employment because of the value placed on the non-wage aspects (flexibility, etc.), while in other cases it clearly reflecting a lack of alternatives for the qualified workforce (Maloney, 2004). Studies of employment and earnings determination increasingly consider both cases (positive choice or lack of alternatives) plausible (see Guther and Launov, 2011, and World Bank, 2007). The problem for economists working on SSA countries, however, is that one view does not properly characterize the choices available to the economically active. For those located outside of larger cities, there is no choice

> 1 We contrast “informal enterprises” with “modern wage employment enterprises” (often called formal enterprises) despite the heterogeneity and overlapping continuums of degrees of formality by different criteria. We avoid the term “informal sector” as according to the latest definitions released by the ILO, it includes both wage workers without access to formal social protection systems and enterprises (of any size) not formally registered. By lumping the two types of employment together a duality is presented which does not correspond to the more segmented and nuanced reality (ILO, 2011).

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