adminSanderson Abel Business Correspondent
According to the International Labour Organisation, the informal sector essentially covers the unorganised spectrum of economic activities in commerce, agriculture, construction, manufacturing, transportation and services.
It now absorbs as much as 60 percent of the labour force in urban areas of developing countries. This basically includes the portion of a country’s economy that lies outside of any formal regulatory environment. Informal sector activities are rarely reflected in official statistics on economic activity (for example, gross domestic product).
In his 2014 National Budget statement, the Minister of Finance identified one of the most observations that the economy has undergone significant structural transformation in the past decade, with the informal sector now the dominant force. This realisation and identification of the significance of the sector calls forth for the need develop mechanisms to make sure that the contribution of the sector is captured and is utilised for the development of the country.
The performance of informal sector has a major impact on the performance of the wider economy. Despite the sector not falling under the armpit of the tax man, the sector indirectly contributes some significant mount to the fiscal revenues through VAT. Given that the informal sector employs a significant amount of the people who are supporting the majority of the households in the country their purchasing activities of the various household consumables and capital goods significantly contribute to the VAT. In this regard any measure that the government takes to promote this sector will assist in achieving economic targets.
Evidence around the world even from Zimbabwe shows that large informal sector acts as an important shock absorber for an economy gripped by a fairly lengthy period of sluggish jobs and income growth. Experience during the economic crisis will definitely support this motion that the majority of the citizenry were supported by the incomes that were coming from the informal sector. The trend of growing informality at the expense of the documented economy depicts the operation of very serious structural constraints for the country’s formal sector, and for its overall, long-run growth prospects.
What this implies is that there is therefore a need for a clear road map on how the informal sector can be harnessed as the new engine of growth especially through its linkages with the formal sector and its contribution to GDP and how to measure it.
To better tap into this sector and use them for economic development, there is need to better understand their characteristics and tame these for the benefit of the country. Activities that are undertaken in the informal sector are usually characterized by unregulated and competitive markets; small scale operation with individual or family ownership; ease of entry; reliance on locally available resources;
family ownership of enterprises; labour intensive and adapted technology and absence or limited of access to institutional credit or other supports and protections.
While those people engaged in the informal sector are characterised by the following:
Absence of official protection and recognition;
Non-coverage by minimum wage legislation and social security system;
Predominance of own-account and self-employment work;
Absence of trade union organisation;
Low income and wages not transferred through the banking system;
Little job security and no fringe benefits from institutional sources.
In the face of unambiguous and unequivocal evidence on the rising informality of the economy, the central question is: what should the government do, how can this sector be supported and what are the prospects of ever formalizing the informal sector.
Some of the major reasons cited for the growth of the informal sector are the tax and regulatory burden that are either preventing informal businesses from formalising, or are driving already documented firms into the informal economy.
There is, therefore, need critically look at the tax and regulatory environment and the associated bureaucracy that one needs to go through the process of setting up a formal institute. Relaxing some of the regulatory requirements while the process of compliance of the various requirements can be staggered can assist in the process of formalising these businesses.
Another aspect for consideration in developing the informal sector players is need for continuous capacity development. The success of the informal sector lies in them acquiring skills that will transform their businesses which include cultivating in the informal sector entrepreneurs the skills of changing their business models with the successful SMEs believe that learning gives them competitive advantage.
There is need to cultivate the importance of innovation in the informal sector players. In the new structure of the Zimbabwean economy, it is expected that the informal players in the near future transform themselves into the formal big business.
It is not expected that the informal players can remain informal forever. Hence these players should to find new ways of doing things and encourage their employees to think and behave innovatively.
In light of the above, the financial sector plays a critical role of financing innovation. This is only possible when these players are able to sell their ideas to the financial institutions. In most instances banks do not provide the capital required given they seem to know very little about the requirements of the small businesses. The Banks can be the source of information for the development of the Bankable proposals for these informal organisations once they want to turn their operations formal.
Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can contacted on [email protected] <mailto:[email protected]> or on numbers 04-744686 and 0772463008
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