This 50/- (50 US cents) note was given to me in Lumakanda for change. Note how dirty it is and that it has been taped together where it was torn. The note says that it was part of the 10th July 2009 issue so it may have been around in circulation for almost nine years. Most of the 50/- and 100/- notes in Lumakanda are well used. If this note were deposited in a bank or a supermarket in Eldoret, it would have been taken out of circulation. The fact that it has not been taken out of circulation means that it is being passed from person to person without entering the banking economy.

What can you buy for 50/-? A motorcycle taxi ride from the main road to town; a loaf of bread; five bananas; add 10/- and you can get a newspaper; subtract 10/- and you can get a liter (quart) of milk. A 50/- note therefore changes hands quickly. If it has changed hands three times per week for nine years, it would have participated in 1404 transactions worth 70,200/- ($702). I suspect though that a small note like this moves even faster than three times per week, sometimes maybe even three times in one day. If we calculate the note changes hands two times per day, in nine years, it would have participated in 6570 transactions worth 328,500/- ($3,285). In Lumakanda when I buy bananas, mangoes, the newspaper, and other daily items I am unable to use a 1000/- note ($10) because people do not have sufficient change. Unlike the used/dirty 50/- and 100/- notes, the 500/- ($5) and 1000/- ($10, the largest note in use in Kenya) are usually not dirty or torn. I speculate that people keep these as savings for when they need to buy an expensive item.

The government and economists love the formal economy which can be counted and taxed. On the other hand the informal economy mostly eludes taxation. Let us compare what people in Lumakanda buy from the formal economy versus the informal economy. If we start with food items, since people do not have refrigerators, they need to buy perishable items every day or two.

Food purchases in the formal economy: sugar (probably the largest expense because Kenyans put a lot of sugar in their daily tea), rice, bread and wheat flour, cooking oil, margarine and jam, tea leaves, soda (still in returnable glass bottles), salt.

Food purchases from the informal economy: all meat, chicken and fish; maize flour (eaten daily); Irish and sweet potatoes; greens; tomatoes and onions (which are put in almost every Kenyan dish); fruits and vegetables, milk.

In looking at these lists, it is clear that much of the food is bought from the informal economy. Moreover much of this is produced on the family farm and therefore doesn’t cost any money. If people are short of cash, they also refrain from purchased food.

At the other extreme of expense we can look at the formal and informal funds for building a house.

Building materials from the formal economy: Corrugated iron roofing sheets (the most expensive item), cement, nails, paint, iron for doors and windows, plumbing and electrical materials (if needed for the house).

Building materials from the informal economy: Stones, gravel, sand, bricks, timber, transport of these items, all labor, wooden windows and doors.

Note that the roof can be covered with grass and a mud and wattle house can be plastered with cow dung, ending the need for the expensive items in the formal sector. While this is not done much around Lumakanda any more, it is still common in some parts of East Africa.

The conclusion is that a large part of building a house comes via the informal economy.

Kenya has a very vibrant “jua kali” sector. “Jua kali” means “hot sun” because these are the people working in small enterprises in the sun. These include furniture making. This is a picture of the shop were we have bought most of our furniture. There are also iron makers, hair-dressing salons, tailoring shops, shoe repair, butcheries, the sale of vegetables and fruits, second-hand clothes, motorcycle and bicycle repair, maize grinding mills, cafes, sellers of charcoal and firewood, and rented properties.

Then there are those parts of the economy which one would think are in the formal sector, but are not. For example, the motorcycle taxi drivers are in the informal economy even though the motorcycles and petrol are in the formal economy. Likewise people who sell scratch cards and M-Pesa transactions for mobile phones are in the informal economy because they are not employees, but paid on a commission of sales.

The economists indicate that over eighty per cent of the population work in the informal economy and account for about one-third of the country’s economy. I do not know how they make these estimates, but I am sure that they are the educated elite in Nairobi with little understanding of the rural economy. Since people in the informal economy do not want to be taxed, they also hide as much of their income as they can. Moreover these many small transactions and payments for labor are impossible to count and monitor.

My conclusion is that the informal economy in the rural areas like Lumakanda is grossly underestimated. If we estimate that the informal economy is twice the size of the economists’ calculations (this perhaps is a conservative estimate particularly if we add the food that is grown and consumed at the farm level), then the Kenyan economy at $2,673 per capita is 33% larger than the official per capital income of $2,010. Moreover this increase of $463 per person would be spread out mostly among the rural population in informal work. In other words, rural people are richer than economists think they are.

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David Zarembka

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