11/04/2014
Hello my friends. Sorry I missed two contributions because I was away on a tight work assignment. Today I read an article in the Independent insinuating that government must formalise the Informal sector. I attach below my comment to that article and a paper that I presented to a CIS Seminar in Gweru on the role of the informal sector. As usual I urge you all to critique the article.
Comment
I have argued several times that the informal sector cannot sustain this economy. Like Oswald said, it is a desperate attempt by ZIMRA to increase revenue inflows. The economy is in a bad shape and it is not going to be rescued by the informal or SME sectors which are two different things by the way. The Seven billion dollars figure is guess work. The assumption that there is so much money in the informal sector is a fallacy. The entire Mubedzannahmo stock which is the biggest informal set up in the country is less than the stock at Farm and City Harare and Halsteds. Where would you get even a billion dollars from these people. These people operate with working capital of nomore than $250. Even if you were to assume that the 2.8 million so-called SMEs were operating at this figure, they would only be worth $700m whai is a far cry from the $7b. Most of them have stocks of less than $100.00 made up of nails, planks , a few tins of paint etc.
What does the minister mean when she talks about formalising them and why should they be formalised. They are and have always been part of society and cannot be eliminated. The proliferation is a symptom of a non-performing economy. The informal sector is subsistence in nature just like peasantry agriculture. They contribute to taxation through VAT. They get all their produce from the formal market. It is a shame that we must be chasing people who have failed to find employment and are trying to irk a living through honest means. Zimra’s mission is “To promote economic development through efficient revenue generation and trade facilitation” . The key word is revenue generation not collection. We must all understand how we are going to achieve revenue generation which is where taxes come from.
Let us fool ourselves, this economy requires real capital. The SME sector is not going to grow if we do not have large businesses to support them through contracts.
The role of the Informal Sector in the Economy
A. Introduction
The informal sector refers to the part of the economy that does not fall under the scope of organized economic activities. It is defined as economic activity not included in a nation's data on gross domestic product, and not subject to formal contracts, licensing, and taxation. These businesses generally rely on indigenous resources, small-scale operations, and unregulated and competitive markets. Skills used are normally obtained outside the formal educational system.
The informal organisation concept started when the world community was trying to solve the problem of negative economic growth and perpetuation of poverty in developing countries. For a long traditional economic development had always focused on:
i) The need for appropriate macroeconomic policies, institutions and the availability of
sufficient funding.
ii) A planned promotion of growth in selected leading sectors of the economy that would then lead to the overall growth of the economy.
The identification of the target sectors that could link the rest of the economy was perceived to be the primary problem, which once solved would enhance the growth rate of the rest of the economy. Although there was realisation that a large section of the population worked outside the formal system the assumption was that it was a temporary phenomenon which would disappear with the growth of the economy. It was envisaged that once the take-off in economic growth was accomplished, with the growth of the organized economy the demand for, and returns to labour would increase, hence the need to participate in activities outside the organized economy would disappear.
Despite the logical reasoning of the early economist, their theory of economic development did not achieve the intended results and a large population in developing countries continued to suffer from poverty and still worked outside the organized sector. The demand for jobs in the formal sector grew faster than what the organized economy could offer. From thereon the focus of development policies started to shift from pure economic growth to growth with equity and the eradication of poverty. It was only at this stage that interest was generated in sectors outside the organized economy that was providing a livelihood to a large section of the poor. Hence, the concept of the informal sector was born.
B. The Current Business/Economic Environment
According to (J.D. Thompson) The central problem for complex organisations is one of coping with uncertainty. In trying to understand the uncertainties of the environment it is important to identify the forces that are at play in shaping the environment and that ultimately influence the long run business/economic decision making process. These forces include:
Political Legal forces that allocate power and provide constraining and protecting laws and regulations
Economic Forces that regulate the exchange of materials, money, energy, and information.
Sociocultural Forces that regulate the values, morals and customs of society.
Technological Forces that generate problem solving inventions
The current environment is summarised in Table 1 below
C. Impact of the Informal Sector
A generally agreed theory used to explain the role of the informal sector to Society is the Hosier Concept.
According to Richard Hosier, the two conflicting concepts are the "evolutionist" and the "involutionist" perspectives. Evolutionists basically believe that the informal economy has the ability to evolve or grow, and can be used to alleviate poverty. They also view the informal economy as a reality that will continue to exist and that governments should strive to support, rather than hinder, its growth.
Involutionists believe the informal economy to be a system of labor exploitation and will not lead to improved standards of living for the working poor. This concept holds that any promotion of the informal economy will further increase the wage inequality between the formal economy's wage earners, managers, and capitalists, and low-paid subsistence workers.
Although evolutionists and involutionists seem to have opposite views, there are elements of truth in both perspectives. Even if the informal economy's long-term permanence and growth potential are proven unstable, or even undesirable, the short-term (3 to 10 years) effects will be positive.
I will therefore look at the positive impacts from the evolutionist perspective and then the negative impacts from the involutionist perspective and conclude as to whether or not the sector must be encouraged.
Economists generally use aggregates production particularly from large/formal organisations in determining a country’s output. However, small business cannot be ignored. For example
Approximately 99 percent of the 17 million businesses in the United States employ fewer than 100 people.
Small business account for approximately half of all U.S. employment and create over
80% of all new jobs in the United States between 1960 and 1985.Well over 60% were created by new ventures.
During the 1960s ,Fortune 500 companies eliminated 3.5 million jobs, whereas small businesses created more than 20 million jobs.
Research reveals that small firms spend almost twice as much as large firms on their R and D dollars on fundamental research. As a result, small companies are responsible for high proportion of innovative product and services. For example, new firms produce 24 times more innovation per research dollar than to do the much larger Fortune 500 firms. The National Science Foundation estimates that 98% of ‘radical’ product developments result from the research done in the labs of small companies.
D. Positive Impacts of the Informal Sector
Many authors and researchers are agreed that the informal sector has a critical role in economic development. For example; an informal sector provides jobs to people who would otherwise be unemployed. Thus, existence of an informal sector prevents the negative effects of economic crises and by this way avoids the destructive influences of social inequalities. More to the point, the firms operating informally have a cost advantage which helps them to compete in the national and international markets. This competitiveness benefit is the reason why most of the underdeveloped and developing countries tolerate an informal sector in their economy. Zimbabwe has been exposed to the worst economic experience in the world but its economy did not collapse because of the vibrant informal sector. The success of the informal sector in the manufacturing sector is a result of the competitiveness driven by the cost advantage inherent in the informal sector. However Zimbabwe needs to do more to tolerate its informal sector
Altuğ (1994) states the relevance of the subject with the tax revenues. He cites that for the reason that the tax revenues are not used efficiently by the government, the taxes that are not paid can be used more efficiently by the private sector. He also claims that the transfer of the funds from the formal to the informal sector may engage in a multiplier effect and increase the speed of savings – investments transformation, and enhances the velocity of development.
Moreover Toptaş (1998: 77-78) adds the following benefits to the above mentioned ones:
Since the informal sector goes beyond with the formal economy, it reduces the negative consequences of economic conjunctures, - The funds earned in the informal sector become a source of wealth for the formal economy by means of banks and stock exchanges. It is observed that while the informal sector is an underground operation the products and services they use are obtained from the formal sector hence their key role in offering a market to the formal market.
D. Negative Impacts of the Informal Sector in the Current Environment
According to Frey and Schneider (2000: 1) it could be stated that the informal economy causes three important problems:
i) Since the official statistics will be biased because of the existence of an informal sector, the policy decisions related with the economic and social situations of the individuals, households and countries will be biased as well. As a result, macroeconomic policies may be more expansive. There will be a decrease in tax revenue
ii) The existence of an informal economy results in an unhealthy relation between the government and citizens. An imbalance between the tax amount paid and the public services that the tax payers’ benefit from may result in dissatisfaction of tax payers and force them to go into the informal sector. As a consequence of this reaction there may be problems in financing the public services and goods which are necessary for the economic and social structure of the country.
iii) Another problem of the informal economy is related with its ethical dimension. Altuğ (1994) argues that the informal economy constitutes an uprising against the state, distorts ethical values and as a result it demolishes social coherence and raises the number of crimes and guilty people.
At the microeconomic level as Kırbaş(1995: 24) states that informality may avoid the constitution of firms to operate at the optimum scale size. Since the small enterprises are very prone to work informally, with a number of reasons, such as cost disadvantage of working formally, a great informal sector forces the other firms to go informal. This causes that firms which would otherwise operate at the optimum scale size, will choose to become smaller in order to work informally. This results in inefficient use of economic resources.
F. Conclusion
It is clear that in Zimbabwe just like in most African economies, the informal sector is the driving force of the economy and that as a matter of fact it is the informal sector that has sustained the economy even during the hyperinflationary error and currently when the formal sector is underperforming. The reason for the non collapse of the economy is the sustaining power and ‘ability’ of the neglected informal sector. It is also argued that the reason why most Western originated economic recovery prescriptions channeled through the World Bank, IMF and so on to Africa have often failed is because of the inability of such prescriptions to take the informal sector in most of these African economies into consideration.
The prominence of the informal sector in the Zimbabwean economy cannot really be underemphasized as almost all persons who cannot find placements within the formal sector of the economy finds solace in the informal sector of the economy. In as much as the informal sector, drives the entire economy, it is ironic that this sector remains neglected although there is a government ministry of Small and Medium Enterprises. Despite its contribution, it seldom accounts for a pride of place in government planning for the overall economy. This may be due to a myriad of factors such as:
The unregistered and unregulated nature of most businesses in the informal sector,
Poor work ethics of most micro entrepreneurs,
Mismanagement of such businesses,
Tax evasion and illiteracy on the part of most operators in the informal sector.
Given the problems of attracting investment through the conventional routes such as FDI, Offshore borrowing and Donor funding, the informal sector, in the Zimbabwean economy becomes the key driver of the economy and government should be encouraged to take more than a simple look at the informal sector with a view of enacting policies that will synergize the informal and formal sectors in order to unleash the vast potentials of the economy since activities in both sectors of the economy are not mutually exclusive. A massive drive to register and have a data base of all businesses in the informal sector can also be carried out to ascertain the number and needs of the operators in the informal sector. It is very clear that the informal sector has already replaced formal sector in most business sectors. A general jock in business circle is that the economy has now been informalised because formal businesses can no longer compete with informal sector players who in most cases have the same skills but do not carry heavy costs that emanate from regulation costs.
