Why ZACCI-IDC Formalization Program Benchmarked on Latin America

How Formalization Transformed Brazilian Economy

By Mwansa Chalwe Snr
The formalization initiative by Zambia Chamber of commerce and Industry (ZACCI) in collaboration with Industrial Development Corporation (IDC) has the potential to be a transformative driver for Zambia’s economic recovery. Unfortunately, its significance is being overlooked by many and dismissed by skeptics due to a lack of comprehension about the true meaning and benefits of sustainable formalization, as well as ignorance about its successful
implementation in Latin American countries, such as Brazil in the early 2000s. The crown jewel of the ZACCI-IDC formalization project is the Artisanal and small-scale mining (ASM) sector. The formalization of this sector will create tens of thousands of jobs and bring in millions of foreign exchange to help the kwacha appreciate within a very short period of time, which will in turn reduce the cost of living and doing business.

Formalization is not mere registration with PACRA

Formalization is a misunderstood term by many Zambians. Informality is a complex,heterogeneous and multidimensional phenomenon that requires multiple and integrated interventions rather than isolated efforts. The ZACCI-IDC initiative is, therefore, much more than the mere registration of a business with PACRA. This innovative initiative, a result of
extensive research addresses root causes of informality, making it a comprehensive and lasting solution.

The Digital Graduation of Informal Sector Entrepreneurs (DIGISE) Formalization Program is a groundbreaking innovation that leverages mobile technology and artificial intelligence for critical mass virtual management and financial literacy skills capacity-building mentorship. This approach empowers informal sector entrepreneurs with the necessary skills and knowledge to transition into the formal economy successfully.It includes other key components such as education and sensitization, proposals for regulatory and tax minimization reforms for MSEs, market access and linkages, resource empowerment, as well as business registration. Informal entrepreneurs weigh the costs and benefits of the
formalization before deciding to formalize.

The reduction of the informal sector has long been recommended to developing countries’governments, by international Organisations like for Economic Co-operation and Development (OECD), the International Labour Organization (ILO), the International Monetary Fund (IMF),the United Nations Development Programme (UNDP), as necessary to accelerate economic
growth and development. However, no African country has made efforts to implement this initiative, thus the persistent underdevelopment, unemployment, and poverty.

ZACCI-IDC Collaboration is Potential Economic Game Changer

To change this narrative, the Zambia Chamber of Commerce and Industry (ZACCI) and the Industrial Development Corporation (IDC) entered into a Memorandum of Agreement (MOA) to formalize micro and small enterprises (MSEs). According to IDC CEO Cornwell Muleya, and ZACCI President Antony Kabaghe, government support for the initiative will accelerate
economic growth, development and job creation.

“We recognize the critical role that MSMEs play in driving economic growth, creating employment opportunities, and reducing poverty. However, we also acknowledge the challenges that these enterprises face, including business development services and financial literacy, lack of finance, access to markets, and shortage of equipment and technology.

“We are drawn to the formalization project due to its potential to accelerate mass job creation in a short timeframe, given the huge size of the informal sector in Zambia, which includes artisanal and small-scale miners, an area of particular interest to us,” Mr. Cornwell Muleya said during the signing of the MOU with ZACCI.

At the same event, ZACCI President Antony Kabaghe welcomed the collaboration between ZACCI and a Public Sector entity like IDC in a soft Public Private Partnership (PPP) project. He further said that ZACCI was inspired by Latin American countries’ formalization successes.

“ Brazil’s experience has shown us that when micro and small enterprises are integrated into the formal economy, they gain access to credit, markets and government support, enabling them to grow and thrive. This, in turn, leads to job creation, increased tax revenues, and a more resilient economy. We are confident that by adopting similar strategies, Zambia can achieve comparable success,” He said.

Countries with large informal sector never develop

Zambia’s economy is predominantly informal, with an estimated 90% operating outside the formal sector, while only 10% is formalized. Empirical evidence suggests that no country can
achieve sustainable development with such a skewed economic structure.In the early 2000s, Latin American countries realized that in order to grow their economies,reduce unemployment and poverty, they could no longer depend on Foreign Direct Investments (FDIs) and so between 2005 to 2015, they embarked on formalizations programs.

“Almost all countries in Latin America have decreased their informal employment rates. Brazil implemented a series of measures to encourage the formalization of micro and small enterprises and to promote the creation of formal employment. Micro and Small Enterprises (MSEs)currently account for 95% of Brazilian firms, generate some 16.6 million formal sector jobs and contribute 20% to GDP,” ILO Report on Latin America Formalization stated.

The International Monetary Fund (IMF) supports formalization does encourage countries to reduce their informal sectors.
“Informality critically affects how fast economies can grow, develop, and provide decent economic opportunities for their populations. Sustainable development requires a reduction in informality over time. Economic growth in regions or countries with large informal sectors remains below potential. Addressing informality is thus essential and urgent to support inclusive economic development and reduce poverty worldwide,” IMF, Finance and Development December,2020.

How Formalization Transformed Brazilian Economy

Brazil, like many developing countries, historically had a large informal sector that contributed to low economic growth and high poverty levels. By the early 2000s, estimates suggested that over half of the workforce in Brazil operated informally, hindering productivity, economic planning, and fiscal capacity. Recognizing these challenges, the government under President Lula da Silva, prioritized formalization as a cornerstone of its broader economic strategy.

By simplifying tax laws and reducing bureaucracy, the government encouraged more businesses to formalize, leading to an increase in tax revenue and a reduction in informality. This, in turn,enabled the government to invest in vital public services. The formalization initiatives also led to a significant increase in foreign investment, as Brazil’s improved business environment and reduced corruption made it a more attractive destination for investors.By 2012, Brazil’s economy had surpassed that of the UK, becoming the 6th largest in the world.

The country’s GDP had grown from $552 billion in 2000 to over $2.5 trillion, with a growth rate of over 4% per annum. The formalization initiatives had played a key role in this success,enabling Brazil to unlock its economic potential and become a major player on the global stage.In order to put Brazil’s economic transformation in context, it is worth mentioning some key economic indicators .GDP grew by 4.5% per annum between 2000 and 2012; foreign investment increased from $20 billion in 2000 to over $60 billion in 2012; tax revenue increased from 24% of GDP in 2000 to over 30% in 2012 ; poverty reduced as millions of Brazilians – 89%were lifted out of poverty – with the poverty rate declining from 35% in 2000 to under 20% in 2012; the middle class grew from 40% of the population in 2000 to over 50% in 2012 and unemployment
rates dropped from over 12% in 2003 to around 5% in 2012.

It is the transformational impact of formalization that won President Lula two terms from 2003 to 2010, and the clamor for his return to office by Brazilians in October, 2022, for an unprecedented third term, making him the oldest President in Brazilian history.

Conclusion
Brazil’s journey from an economy plagued by informality to a global economic powerhouse underscores the importance of formalization as a driver of sustainable inclusive economic growth. The lessons from Brazil’s early 2000s transformation remain relevant for countries like Zambia and others in Sub-Saharan Africa seeking to harness the potential of their informal sectors. Brazil’s experience demonstrates the transformative potential of formalization when integrated with broader economic policies. Formalization is certainly the long sought after silver bullet home grown solution to economic turnaround and sustainable development for Zambia.

The writer is a Chartered Accountant, Author and an independent financial analyst and Economic Commentator.