AS the world rapidly urbanises, the United Nations Conference on Trade and Development (UNCTAD) notes that at least 57% of the global population now resides in cities.
This phenomenon has been particularly pronounced in developing countries, where rapid urbanisation has led to the growth of informal economies.
Observably, the informal economy is a significant sector in Africa, contributing substantially to the continent's GDP. However, the size of the informal economy has declined over the years, from an average of 41% of total GDP in 1990 to an estimated 33% by the end of 2020.
Nigeria stands out as the second-ranked country with high informality, averaging 53% of the country's GDP. Although this figure has declined from 57% in the 1990s, it remains a significant portion of the country's economy.
In contrast, Mauritius boasts the lowest level of informal economic activities, averaging only 18% towards national GDP. This is a remarkable achievement, indicating a well-structured and formalised economy.
Zimbabwe, on the other hand, has an informal economy that averages around 60% of its GDP, making it one of the countries with the highest levels of informality in Africa.
This is largely due to the country's economic challenges, including high inflation, corruption, and inconsistent monetary policies.
Other countries with low levels of informalisation include South Africa, Algeria, Rwanda, Botswana, Namibia, and Morocco. Interestingly, these countries also rank among the least corrupt countries in Africa on the Transparency International Corruption Index.
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The decline in the size of the informal economy in Africa is a positive trend, indicating a shift towards formalisation and a more structured economy.
However, the persistence of high informality in countries such Nigeria and Zimbabwe highlights the need for targeted policies to support formalisation and economic growth.
In Zimbabwe, for instance, the informal sector has grown exponentially over the past two decades, with estimates suggesting that between 85-90% of the population is now engaged in informal economic activities.
This trend has been driven by a combination of factors, including high inflation, poor remuneration in the formal sector, and punitive foreign exchange regulations.
However, despite these challenges, Zimbabwe's informal sector has proven to be remarkably resilient. Through innovative marketing strategies, cross-border trade, and the adoption of ICT, informal entrepreneurs have managed to build resilience and increase their earnings.
The sector has also become increasingly sophisticated, with many informal businesses now offering a range of goods and services that rival those of their formal sector counterparts.
One of the key factors driving the growth of Zimbabwe's informal sector has been the country's deteriorating business environment. With high levels of corruption, inconsistent monetary policies, and a complex tax regime, many businesses have been forced to operate informally in order to survive.
Despite its many challenges, Zimbabwe's informal sector has also proven to be a hotbed of innovation and entrepreneurship. Through creative marketing strategies and innovative product offerings, informal entrepreneurs have managed to carve out a niche for themselves in the market.
However, in January this year, Finance, Economic Development and Investment Promotion minister Mthuli Ncube announced measures to address the informalisation of the economy, in particular measures halting the smuggling of goods.
Concurrently, this has affected major retail shops such as OK Zimbabwe Limited, N Richards Group and Spar according to Maji-Marefu institute of economic governance.
This shaking of the formal retail sector is aimed at pushing them towards buying local-manufactured products and boost production of local commodities.
On the other hand, the growth of Zimbabwe's informal sector has not been without its challenges.
With limited access to finance, inadequate infrastructure, and a lack of social protection, many informal entrepreneurs are forced to operate in a state of constant vulnerability.
The sector is also highly competitive, with many businesses competing for limited market share.
Challenges facing informal sector
Lack of funding: The informal sector is often shunned by banks due to lack of collateral security, making it difficult for businesses to access loans and grow.
Lack of government support: Despite its potential to boost government revenue, the informal sector has received little support from the government.
Lack of business acumen and professionalism: The informal sector often lacks proper planning, administration, and leadership, with many businesses operating on an ad hoc basis.
Stiff competition: The proliferation of cheap imported products has posed stiff competition to both formal and informal businesses, making it difficult for local businesses to compete.
Lack of equipment and technology: Many informal traders still rely on traditional tools and skills, lacking the capacity to adopt new technology and improve efficiency.
Poor marketing skills: The informal sector often lacks effective marketing strategies, relying on personal selling and word-of-mouth advertising.
Social and personal problems: Informal traders often face numerous social and personal challenges, including theft, inadequate transport, poor sanitation, and lack of decent accommodation.
Lack of effective leadership: The informal sector often lacks effective leadership, making it difficult for businesses to grow and develop.
Despite these challenges, Zimbabwe's informal sector remains a vital component of the country's economy. With its contribution to GDP estimated to be below 50%, the sector provides a vital source of employment and income for millions of Zimbabweans.
However, in order to ensure sustainable economic growth, it is essential that the government enforces policies to contain informalisation and eliminate barriers to formalisation.
This can be achieved through a range of measures, including simplifying the tax registration process, providing incentives for fiscalisation, and promoting access to finance.
The government must also work to address the root causes of informalisation, including high inflation, corruption, and inconsistent monetary policies.
Key strategies in formalising
Registration of informal sector traders: Government should register informal traders to regulate and monitor their operations.
Provision of business stands and partnerships: Local authorities should provide business stands to enable informal traders to construct better premises.
Empowering through business training: Government should facilitate training workshops to equip informal traders with business skills, leadership skills, and knowledge on compliance issues.
Mobilisation of financial resources: Government should put in place policies to enable informal sector traders to access soft loans and financial packages.
As Zimbabwe's population continues to grow and economic instability persists, it is essential that the government implements deliberate policies to support the growth of the formal sector.
Zimbabwe's informal sector has proven to be a resilient and innovative force, capable of adapting to even the most challenging economic conditions.
However, in order to ensure sustainable economic growth, it is essential that the government implements policies to support the growth of the formal sector and eliminate barriers to formalisation.
Moreover there is need for effective leadership in this sector, which can transcend to transformation of this sector into more formal and organised small and medium enterprises and even develop into large companies in the long run.
This could result in improved formal employment as well as economic growth and standard of living.
- Nyawo is a development practitioner, writer and public speaker. These weekly New Perspectives articles, published in the Zimbabwe Independent, are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Pvt) Ltd, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe. — kadenge.zes@gmail.com or +263 772 382 852.
