How Informal Sector is undermining Zambia’s Economic Development
By Mwansa Chalwe Snr
“ The Trump administration has already frozen almost all foreign assistance and made moves to dismantle USAID,” CNN reported in a story of President Trump’s Executive Order suspending AID to South Africa.
The Trump administrations decision to cut foreign aid should serve as a wake-up call to Sub-Saharan Africa, including Zambia, highlighting the reality that no nation can achieve sustainable development through reliance on handouts. Zambias reliance on foreign aid has masked the need for homegrown solutions to drive development. It is now imperative for Zambia to develop homegrown solutions and leverage our natural resources to generate income for economic progress.One of the most viable solutions I have consistently advocated for in my commentaries in the past ten years to solve youth unemployment especially, is addressing the vast informal sector, which is estimated to account for 90% of the economy in Zambia and other Sub-Saharan nations. Reducing the size of the informal sector can have a significant impact on the countrys economic growth.Empirical evidence shows that no country can develop with a huge informal sector. Now is the time to implement the formalization solution.
Formalization is supported by many international organizations like the International Monetary Fund (IMF) who believe that : "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”.
They are supported by the African Development Bank who in a 2018 study entitled “Informal Sector and Economic Development in Africa” observed : "The informal sector accounts for a significant share of economic activity in Africa, but its potential can only be fully realized through formalization, which can provide access to finance, markets, and social protection. Formalization of the informal sector is crucial for Africas economic transformation, as it can lead to increased productivity, improved working conditions, and enhanced economic growth.
There is no doubt that Zambia’s current size of the informal sector carries significant economic costs, and
this article will outline those costs to encourage authorities to prioritize solving this issue, which offers
substantial benefits for economic recovery and development.
Suboptimal Production
The informal sector often operates with limited access to advanced technology, skilled labor, and efficient production methods. This results in lower productivity and output compared to formal enterprises.Suboptimal production not only limits the growth potential of these businesses but can lead to a waste of resources, reduced economic growth, and lower living standards.
Low Investment
Informal businesses typically have limited access to formal credit and financial services because they often lack collateral or formal financial records, making it difficult to secure loans or attract investment from formal sources which restricts their ability to invest in capital, technology, or expansion which leads to reduced job creation. Additionally, informal enterprises often reinvest less of their profits into their businesses due to uncertainty and the need to prioritize short-term survival over long-term growth.
Free Rider Phenomenon
The informal sector often benefits from public goods and services (e.g., infrastructure, security, and education) without contributing to their funding through taxes. This creates a “free rider problem, where informal businesses enjoy the benefits of public investments without sharing the costs. This undermines the governments ability to fund and maintain public services, placing a heavier burden on formal businesses and taxpayers.
Unfair Competition to Formal Enterprises
Informal sector businesses often operate outside of regulatory frameworks. They often avoid taxes,regulatory compliance costs, and labor protections, allowing them to operate at lower costs than formal enterprises. This creates an uneven playing field, where formal businesses struggle to compete with informal ones. Unfair competition can undermine the formal sectors ability to create jobs, drive innovation, and contribute to economic growth. Over time, this can discourage formalization and reduce the competitiveness of the formal sector.
Low Innovation
The informal sector generally lacks the resources, incentives, and institutional support needed for innovation. Informal businesses often focus on survival and short-term gains rather than investing in research and development or adopting new technologies. This limits their ability to improve products,processes, or services, which in turn hinders overall economic progress and technological advancement.Low innovation in the informal sector can limit its ability to create new jobs, drive economic growth, and improve living standards.
Large Uninsured Population
Workers in the informal sector typically lack access to social security, health insurance, and other safety nets. This leaves them vulnerable to economic shocks, health crises, and other risks. A large uninsured population increases the burden on public healthcare systems and social services, as informal workers often rely on government assistance during emergencies. This also perpetuates poverty and inequality.
Conclusion
The informal sector poses significant economic challenges, including inefficiencies, inequality, and reduced growth potential. Addressing these issues requires initiatives and policies that encourage formalization, improve access to finance and social protection, and create a level playing field for all businesses. By integrating informal workers and enterprises into the mainstream economy, governments can unlock greater economic potential and ensure more inclusive development.
To implement the formalization program, there is no need for the Zambian government to reinvent the wheel. The Zambia Chamber of Commerce and Industry (ZACCI) has already developed a well-researched formalization solution that leverages mobile technology and Artificial Intelligence (AI).ZACCI has partnered with the Industrial Development Corporation (IDC) and plans to collaborate with key government agencies such as the Citizen Economic Empowerment Commission (CEEC), the Zambia Revenue Authority (ZRA), the Bank of Zambia, the Patents and Companies Registration Agency (PACRA), the National Pension Scheme Authority (NAPSA), National Health Insurance Management Authority (NHIMA) and various economic cluster ministries. The objective is to implement an innovative and sustainable formalization program under a soft Public Private Partnership (PPP) model which is designed to rapidly transform Zambias economy in a very short period of time.
ZACCI has benchmarked its initiative on Latin American countries like Brazil, Mexico, Peru, Columbia,Chile, Argentina, Uruguay and Ecuador who successfully implemented similar programs between 2000 and 2015 and transformed their economies. Brazil had the most dramatic transformation because its formalization program was multifaceted like the ZACCI one.
By 2012, Brazils economy had surpassed that of the UK, becoming the 6th largest in the world. The countrys GDP had grown from $552 billion in 2000 to over $2.5 trillion, 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.
By addressing the informal sector, Zambia can unlock its economic potential and accelerate its move towards sustainable development, regain its economic sovereignty by doing away with excessive foreign borrowing and dependency on foreign Aid with its attendant black mail on economic, political and social policies.
The writer is a Chartered Accountant, Author and an independent financial analyst and Economic Commentator.
On point, Mr. Chalwe. May the talkers embark on walking the talk!
And yet a very simple thing like the Sustainable Fuelwood Agency that would create jobs, micro economics in almost every rural community in Zambia and push a sustainable environment to the forefront of activity……..never happens.
Educated Zambians are full of theories. That is why this country has never made anything.
True! theories should result into action. The culprit has been our education system. You can’t have an educated person say in agriculture without the necessary interest in the field. All they do is learn and not perfect the skill through practice since they are not interested.
It is time to review our taxation system. Our National Budget has always been that the larger part of it would be foreign funded. It follows therefore that we increase our revenue band so we can have money of our own to buy medicines and medical supplies, and other requisites. Let’s not cry over aid cuts to Zambia. We are dupped that with Capitalism our government does not need to do business but we just collect tax when we do not even have that collectable tax to boast about.
Most firms avoid taxes by changing names every five years to run away from responsibilities. Zambia is rich and can probably survive without handouts.
Yes,
When we experiences Zambophiles put half a century of hands-on experience for the betterment of the country, we’re shunned,…..FOR BEING EXPATS…..Nobody listens!!!! Our advice is free, without monetary gains!!!
experienced