The informal sector in Africa

By Eddie Cross | Jul. 14, 2023

Eddie Cross

WHEN I was the chief executive officer of a large food manufacturing company in Zimbabwe, I tried to export our products to Tanzania.

I secured an agent in that country and despatched our first consignment. It did not move and I decided to visit that country to see for myself what was happening.

I found our first consignment pretty much unsold and went on a walk with my agent to see what was happening. Dar es Salaam at that time was a bustling city of several million people.

However, the majority of the retail trade was conducted by small informal sector shops in high-density residential areas.

We found our product all over the place, in fact nearly every reasonable food vendor was selling our stuff. Where was it coming from? How did it get here? We asked a number of traders these questions and they told us they got it from truckers.

We found that over 60% of all foreign trade was being conducted by truckers who visited Zimbabwe, purchased our products in bulk and then smuggled the stuff into Tanzania, no border duties and now in the informal sector, no taxes, no rentals. We were simply unable to compete.

Every country in Africa has a large and growing informal sector. In fact, this is the salvation of most countries because the majority of people are only able to find a means of making a living by participating in some way in this sector of the economy. Most countries have no idea how big or what sort of turnover their informal economy generates.

Here in Zimbabwe, we have a very well developed informal economy. The reason is simply survival economics. Every business has to have a strategy for this sector or face a market situation that will hamper growth and demand.

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One major company, dealing in products with a mass consumption profile, estimates that 70% of sales are going to the informal sector. I can see no reason why that should not be a reasonable estimate of the size of the informal economy.

If our current budget reflects tax revenues of about US$4,6 billion and we are collecting about 20% of formal sector gross domestic product (GDP), then our formal economy is about US$23 billion.

That is a GDP of about US$1 700 per capita. If the informal economy is 70% of our national economy then our total GDP might be US$39 billion a year or US$2 800 per capita — two-thirds higher than the estimate of the formal sector only. It also means that we are not collecting 20% of GDP in taxes, only 12%.

That defines our first challenge; how do we fund the essential services that meet the basic needs of our people, on a tax base that only collects 12% of the GDP. We should be collecting 25% of GDP so this tax base represents half the real revenue potential of our country.

Ask any minister in government what a doubling of available resources for their ministries would mean.

Instead, we have a private sector and formal sector employees who pay what must be some of the highest taxes in the world — add them all up and we still cannot finance essentials.

But the challenges do not stop there. Right now, with the shambles on the money market and the high level of import duties and the fact that we are effectively dollarised, especially in the informal sector, our formal economy is discovering that it simply cannot compete.

We did a survey of prices last week in the formal and informal market and found that on average the informal sector, for the same products, was 20% to 35% cheaper than the major supermarkets.

Extend that to the manufacturing sector and firms are discovering that they cannot compete in many industries. Clothing, light engineering, motor spares, building services are all available at a fraction of their formal sector counterparts.

How do they do it? It is complex and multi-factored. Smuggling across our borders is rampant, not paying any of the taxes and levies that every formal sector organisation is obliged to pay and charge clients. Overheads are low, often even services like water and electricity go unpaid or are supplied illegally. Then there is the simple efficiency of the whole sector.

Order a product from a neighbouring State using a runner and it is in your hands in 48 hours and cheaper than you can get it locally even from a registered dealer. Stolen goods also play a part, and no rates for the local authority.

Yet the informal sector is a critical component in every country. Formal sector employment only provides a living for a small minority of adults. In our case, we have a population of 15 million, perhaps five million adults with perhaps a million in some form of formal employment.

That is 20%, what does the 80% live on? It is also an incubator for enterprise. Many start out on the street, use their street skills to make a basic living and go on to become successful entrepreneurs.

I know a man who was raised as an orphan in institutions in New Zealand and started out selling hot dogs and soft drinks on the streets of Sydney, Australia.

By the age of 40, he was a multimillionaire in hotels, property and other enterprises, employing hundreds. It is much more common than you think.

So how do we learn to live in such an economy. How do we raise living standards and the necessary tax revenues that we need to service the needs of our people?

In many ways, that is the most important question facing those of us who live and work in the Third World. My answer to that question is pretty simple. The real issue is do we have the political leadership with the will and determination to deliver?

The first answer is to manage our macro-economic and monetary policies properly and on a disciplined basis. Get these wrong (as we have over the years) and everything and everybody suffers. Ask any Zimbabwean who has lived through the past quarter century.

The second is not so easy to define or implement, it is level the playing field for all those who work and live in this economy. We have to find ways to raise taxes on those who work here.

The small tax on money transfers is a good example — at just 2%, it balanced the budget in 2018 when 40% of the budget was a fiscal deficit funded by borrowings.

It involves a small group of taxpayers who collect the tax and remit it to Treasury everyday by simply a click of a button.

We need our own currency, we need to stop using foreign currencies for domestic trade, we need to limit cash transactions and foster electronic transactions. Then we need to move from direct taxes on individuals and companies to a national transaction tax system.

Stop taxing business and harassing them at every turn. Stop taxing formal sector incomes at the lower end, give more people discretionary income that they can spend.

We need to create environments where the informal sector can operate with dignity and have essential services, toilets, showers, shelter, power, financial services and access to finance and loans.

We need to provide technical advice and access to essential inputs. All of this could be self-funding. We need to stop harassing the informal sector, stop raids on vendors and replace this with registration and recognition.

We need to abandon import duties on all goods coming into the country and leave it to competition to sort out the winners and losers.

We know from global experience that free trade grows economic output, ask any European or American. Global free trade policies have lifted billions out of poverty in the past century. We need a weak domestic currency to foster exports and limit imports.

Give our people an enabling environment and limit the burden of the State and you can leave the rest to our people.

We are a hardworking people of basic integrity and enterprise. We all know that our future is in our own hands, not anyone else’s.

Eddie Cross is an economist and former Bulawayo South legislator. He writes here in his personal capacity.