Social Protection for the Informal Economy: OPERATIONAL LESSONS FOR DEVELOPING COUNTRIES IN AFRICA AND BEYOND

This report addresses the critical gap in social protection coverage for the vast informal economy in developing countries, particularly in Africa. It focuses on the “missed middle”—nonpoor informal workers excluded from both traditional safety nets and formal social insurance—and provides operational lessons for designing and implementing voluntary savings schemes tailored to their needs, leveraging digital technologies and behavioral insights to build resilience.

Core Arguments & Findings

The Challenge: Informality and Vulnerability

Africa’s informal economy is large, diverse, and the main source of employment, but characterized by low productivity, low human capital, irregular earnings, and limited access to finance and public services (p. 1-6). Workers, especially women who comprise a larger share of informal employment (p. 2), are highly vulnerable to both idiosyncratic shocks (like illness) and covariate shocks (like pandemics or droughts) due to limited formal risk mitigation instruments (p. 7). Despite vulnerabilities, this sector, particularly in urban areas, is often not covered by social assistance or insurance programs (p. 7).

COVID-19 Impact & Response

The pandemic disproportionately impacted the urban informal economy, highlighting existing vulnerabilities and pushing millions into poverty (p. vii, 11-13). Governments responded primarily through social assistance, often expanding coverage using innovative digital tools for targeting (satellite imagery, mobile data) and payments (mobile money) (p. 15-17). However, these responses, often externally financed, were emergency measures and significant coverage gaps remained, particularly for the informal economy not captured in existing databases (p. vii, 17).

Identifying the “Missed Middle”

The report proposes a conceptual framework to categorize households for targeted social protection:

1. Poor: Below the national poverty line, typically targeted by safety nets.
2. Non-Poor Informal (NPI): Above the poverty line but outside formal social insurance. This is the “missed middle”.
3. Non-Poor Formal (NPF): Covered by formal social insurance. (p. 19-20)

Analysis across six African countries shows the NPI group constitutes a large share (often over 50%) of the population (p. 20). NPI households often resemble NPF households in consumption patterns but are closer to poor households regarding wealth, education, and employment types (p. 21-24). Within the NPI group, a distinction is made between:

• NPI-Resilient: Able to cope with shocks without resorting to negative strategies (e.g., selling productive assets).
• NPI-Nonresilient: Resort to negative coping strategies, indicating liquidity constraints. (p. 25) Understanding these segments is crucial for designing appropriate interventions.

Suitable Instruments for the Informal Economy

A suite of instruments is needed across the income spectrum:

• Poor Informal: Strengthen social safety nets (cash transfers, public works) and link them with economic inclusion programs (skills training, financial services, coaching) to enhance productivity and facilitate graduation (p. 31-35).
• Non-Poor Informal (Missed Middle): Develop innovative social insurance mechanisms, primarily voluntary savings schemes. These should allow for short-term liquidity access (e.g., for health, unemployment) alongside long-term savings (old age), feature flexible contributions, and leverage digital platforms (p. x, 35-39). Productivity-enhancing measures like access to finance and affordable childcare are also vital (p. 39-41).

Leveraging Digital Platforms

An integrated digital ecosystem is essential for reaching the informal economy cost-effectively and at scale. Key components include:

• Social Registries: Dynamic information systems for outreach, intake, registration, and eligibility determination across multiple programs. Linking social assistance and social insurance data is crucial (p. xi, 43-45, 48).
• ID Systems: Robust, unique foundational ID systems are critical for accurate administration, preventing fraud, enabling interoperability, and building trust, especially for mobile/migrant populations (p. xii, 46-47, 53-55). Regional IDs (like WURI) can support cross-border portability (p. 47).
• Payment Systems: Digital payments (especially mobile money) reduce costs and increase accessibility. Infrastructure should support both Government-to-Person (G2P) payouts and Person-to-Government (P2G) contributions (p. xi, 49-51).

The report envisions a specialized digital social insurance platform integrated within this ecosystem to manage individual accounts, contributions, savings, investments, withdrawals, and subsidies for informal economy schemes (p. xi, 46).

Key Statistics & Data

• Informal Economy Size: Accounts for 89.2% of employment in Africa (p. 2); 34.6% of GDP (2010-18) (p. 1).
• Coverage Gaps: Only 10.9% of Africa’s working-age population participates in contributory social insurance (p. 8); social assistance covers 23.5% of the population but often misses the urban informal (p. 7, 32-33).
• The “Missed Middle”: NPI households constitute >50% of the population in Benin, Kenya, Uganda; ~50% in Rwanda; ~33% in Zambia (p. 20).
• NPI Characteristics (Example: Benin): Median consumption is double that of poor households but lower than NPF. Closer to NPF on school enrollment but closer to poor on asset ownership (flush toilets, electricity) (p. 23-24).
• Digital Finance: Mobile money account ownership in Africa reached 42.6% in 2017 (p. 7). Mobile money was the primary method for COVID-19 emergency cash transfers (p. 15, 49).

Methodology

• Household Classification Framework: Employs household survey data (consumption, employment status, social insurance participation, shock experience, coping strategies) to categorize households into Poor, NPI-Nonresilient, NPI-Resilient, and NPF groups. This allows for analysis of the “missed middle” and informs policy design (p. 19-20, Annex C).
• Scheme Viability Assessment Tool (SVAT): A quantitative tool developed by the World Bank to model the financial viability of voluntary defined contribution schemes over 40 years. It projects contributor numbers, savings, assets under management, revenues, and costs under various assumptions to estimate the break-even point and required financing (p. xiii, 76-82).
• Behavioral Economics Framework: Analyzes the “journey toward resilience” (decision, enrollment, first contribution, repeated contribution) for informal workers joining savings schemes. It identifies potential behavioral bottlenecks (e.g., limited attention, present bias, loss aversion, status quo bias, hassle factors, mistrust) at each stage and proposes evidence-based solutions (“nudges”) involving scheme design, communication, and framing (p. xiii, 85-91, Annex E).

Key Conclusions & Recommendations

The report concludes with ten main messages for designing and implementing voluntary savings schemes for the informal economy (p. xiv, 94-99):

1. Target the “Missed Middle”: Recognize that many nonpoor informal workers lack social protection but have some savings capacity, requiring tailored solutions.
2. Integrate Systems: Link social insurance and social assistance via digital platforms for positive spillovers (graduation, financial inclusion, shock responsiveness).
3. Employ Digital Systems: Leverage mobile money, digital IDs, and social registries to reduce costs and improve accessibility.
4. Build Trust: Trust is paramount for take-up; ensure transparency, reliability, and utilize trusted community leaders/aggregators.
5. Incentivize & Bundle: Use fiscal incentives (e.g., matching contributions) and behavioral nudges; bundle savings with desired services (e.g., health/life insurance) to boost participation.
6. Ensure Viability: Achieve scale and cost-effectiveness; use tools like SVAT to assess financial viability and budget needs.
7. Invest in Communication & Nudges: Use effective communication strategies and behavioral insights to drive enrollment and consistent saving.
8. Keep Design Simple: Opt for simple, intuitive designs (e.g., defined contribution mimicking bank accounts) with flexibility (contribution levels, withdrawal rules).
9. Pilot Test: Conduct thorough feasibility studies and pilot tests (ideally randomized control trials) before national scale-up.
10. Set SMART Goals & Monitor: Establish clear goals and continuously monitor key indicators (coverage, savings, costs, user experience) for learning and adaptation.

Stated or Implied Applications

This report serves as a practical guide for policymakers, social protection practitioners, and development partners involved in:

• Designing and implementing voluntary savings or micro-pension schemes for informal economy workers.
• Developing integrated social protection systems that bridge social assistance and social insurance.
• Leveraging digital technology (IDs, payments, registries) for social protection delivery.
• Applying behavioral science principles to improve program uptake and effectiveness.
• Assessing the financial viability and potential impact of new social protection initiatives targeting the informal sector.