Social Protection for the Informal Economy: Operational Lessons for Developing Countries in Africa and Beyond

November 17, 2021 — The size of the informal economy as a share of GDP in Africa is the largest in the world and with most jobs expected to be created in the informal economy, they will continue to be the lifeblood of economies. Informality in these economies is often characterized by low human capital, low productivity, limited access to basic services, limited financial inclusion, low earnings, and irregular, unpredictable income.

Despite these vulnerabilities, informal economy workers are not typically covered by social protection programs. Coverage of existing social insurance programs is also limited to the small formal economy in the region.

In light of existing vulnerabilities, high and persistent rates of informality, and limited ways to assess needs of informal sector as evidenced in the pandemic, governments in Africa and beyond are looking to revisit their social protection programs. Expanding coverage to workers in the informal economy is now at the forefront of social protection priorities in these economies.

The report begins with a synthesis of social protection responses to COVID-19 from Africa underscoring the gaps in coverage arising because of the “missed middle.” Policy makers and social protection practitioners need to understand the characteristics of the missed middle —  composed largely of workers in the large and diverse informal economy —  to design appropriate risk mitigation instruments.

The key questions policymakers and practitioners face when launching or scaling social protection schemes for workers in the informal economy are addressed in this report. A suite of social protection instruments including safety nets, economic inclusion programs, productivity enhancing measures as well as social insurance implemented with support of coordinated policies would ensure a continuum of social protection to the informal economy across the income spectrum.   

Of these instruments, the report presents readers with a deep dive on social insurance for the informal sector to provide readers with a practical guide to designing and implementing voluntary savings schemes for the informal economy with a focus on integrating it with the overall social protection systems. The operational approach advocated in the report will allow for building a continuum of social protection and a foundation for countries to provide universal social protection access, when their fiscal and administrative capacity allows.

Readers of this report can expect to learn about vulnerabilities of the informal sector in the Africa region, a practical methodology to group households into four categories depending on their ability to cope with shocks, suit of social protection instruments needed for the informal economy across the income spectrum, design for an integrated social insurance platform as well as enabling environment (ID, payment systems) necessary for it, lessons learned from implementation of such schemes, and 10 key takeaways for policymakers and practitioners looking to launch such schemes:

2. Efforts to integrate social insurance schemes and social assistance programs through a digital platform can have positive spillover effects like graduation of safety net beneficiaries, creation of shock-responsive systems, and improving financial inclusion.
3. Employing digital systems, especially mobile money, can reduce the operating costs of the schemes and make saving more accessible for the informal economy.
4. Trust in the scheme is the key to take-up.
5. Incentives and the bundling of services can boost take-up rates.
6. Scale and cost effectiveness are critical for a scheme to be viable.
7. Investing in communication strategies, using aggregators, and testing behavioral nudges are critical.
8. Keeping the design of the scheme simple increases the chance of success.
9. Pilot testing the scheme before launch is strongly recommended.
10. Setting SMART goals and monitoring key indicators will help in making adjustments for continuous improvement of the schemes.