Economic development through informal sector support

THE ZimStat has estimated the unemployment rate in Zimbabwe at 11 percent but these figures have generally been dismissed by most analysts. The ZimStat figure has been based on the inclusion of people who are into informal businesses to fend for the families.

The question is just how sustainable are these informal operations and can the country pin its hopes of economic prosperity on a sector that is highly unregulated, difficult to tax and above all transitory in nature. These and many other issues including how to improve financial inclusion of the usually unbanked informal sector will be the subject of this week’s article.

Overall contribution of the informal sector to economic growth of Zimbabwe

A growing informal sector can act as an important shock absorber, especially for an economy where there is sluggish growth or a decline in formal sector jobs like the Zimbabwean one. The economic crisis (20002008) resulted in company closures and the remaining companies were operating at low capacities which did not accommodate the increasing labour force from the educational system.

Consequently, most of the graduates from the education system who were desperate for jobs found themselves being engaged in low income and insecure informal sector jobs. In Zimbabwe, the Growth and Equity through Microenterprise Investments and Institutions (Gemini) Study (1991-1993) showed that the role of micro and small enterprises increased as the economy deindustrialised.

The Medium Term Plan (2011-2015) estimated that the micro, small and medium enterprise (MSME) sector accounted for 60 percent of the gross domestic product and 50 percent of employment.

A Finscope (MSME) Survey established that there were 3,5 million (MSMEs) with an estimated turnover of US$7,4 billion (or 63,5 percent of gross domestic product) and employed 5,7 million (owners and employees). Of the 3,4 million businesses, 71 percent were individual entrepreneurs with no employees; 24 percent had 1-5 employees (micro enterprises); four percent had 6-40 employees (small enterprises) and one percent had 30-75 employees (medium enterprises).

The study further found that 85 percent of all the MSMEs were not registered. Of the registered MSMEs, 71 percent were registered with local authorities, 17 percent with the Registrar of Companies, six percent with the Registrar of Co-operatives and seven percent with other institutions. This indicated that the level of informality was high in Zimbabwe. In its economic blueprint, Zim Asset, the Government expected the informal sector to create employment and spur economic growth and development. Whether the informal sector has the capacity for such a task will be explored below. Institutional Support for SMEs The Government has over time addressed the informal sector with the creation of Small Enterprises Development Corporation (Sedco) in 1983, renamed Small and Medium Enterprises Development Corporation on 7 February 2014. Small and Medium Enterprises Development Corporation (Smedco) is a development finance institution that promotes MSMEs. Although, Smedco has branches throughout the country, its operations were severely hampered by underfunding. A fully-fledged ministry, the Ministry of Small and Medium Enterprises and Co-operative Development was formed in order to promote SMEs in the country. The ministry has over time constructed basic infrastructure such as vendor marts and assisted SMEs to form business clusters.

Over time a number of NGOs assisted informal sector enterprises with concessional financing as well as training in business management. Unfortunately the institutional structure has not been effective in supporting expansion of SMES due to a number of factors.

These included limited availability of finance in microfinance institutions and banks; high cost of credit finance; limited access to infrastructure and technology and limited access to domestic, regional and international markets.

Meanwhile, entrepreneurial and business management skills deficiencies hampered any growth prospects of some SMEs.

Capacity of Informal Sector to Create Sustainable Employment

In a 2015 study of informal sector in Zimbabwe by Tavonga Njaya, he notes that Zim Asset identifies MSMEs and co-operatives as drivers of sustainable economic empowerment, economic growth and employment creation.

In fact, the Government saw the informal economy as an option to formal sector business. This was based on the assumption that it was natural that people joined the informal economy in order to survive. From the aspects of poverty, social policy and the labour market, the informal sector was indeed important because it provided a considerable source of income and employment in a country where formal employment opportunities were limited. But were workers there just merely to survive? Employees in the informal sector showed that although informal enterprises provided them with subsistence income, they needed their basic rights, they needed protection through legislation and most importantly they needed social security. The issue was that workers needed jobs with all the dignity and rights that went with them, something that is lacking in MSMEs. Most of the informal sector enterprises are independent and self-employed entrepreneurs with no employees (but who often use unpaid family labour) and micro enterprises that employ one to five unskilled and low wage workers. Again, the transitory nature of the businesses set up is another clear indication that informal sector entrepreneurs were sheer survivalists. Informal sector businesses such as food outlets, hairsalons, unregistered taxis and clothes (both new and old) retailing were meant to sustain household livelihoods. Such enterprises, in the majority of cases last for a few months and are shut down as the owner ventures into another “money spinning scheme”.

It would appear a significant number of informal sector entrepreneurs are wheeler-dealers as opposed to entrepreneurs who have a long-term vision of the business. The implication is that a broad approach to provide support to MSMEs only helped survivalist firms and it boosts the livelihoods of the individual owners thereby reducing poverty and not actually reducing unemployment in the country.

Because of low entry barriers, informal sector is a refuge occupation since it is not created by design. ZimStat found that 2,8 million small businesses created 5,7 million jobs while 800 000 medium-sized firms employed 2,9 million jobs. But how many of these jobs were long-term and could lead to further employment creation is a question begging answers. A majority of informal traders express the view that they would return to formal employment if the chance arises because incomes in the informal sector were uncertain, highly irregular and insecure. For example, less than 34,6 percent earned more than US$250 per month while more than 86,7 percent of the workers did not receive a regular and full-time wage. Major challenges in financing the informal sector Limited access to funds is one of the major challenges confronting the informal sector. Facilitating access to formal financing channels could be a major step in facilitating growth of informal sector entrepreneurs and formalisation of their businesses. The informal sector also suffers from negative perception as players in the sector are considered as high risk and some of their activities are perceived as illegal in nature.

Despite the sector’s strong interest in credit, banks’ profit orientation may deter them from supplying credit to them because of the high transaction costs and risks involved. First, informal sector loan requirements are small, so the costs of processing the loans tend to be high relative to the loan amounts.

Second, it is difficult for financial institutions to obtain information necessary to assess the risks of new, unproven ventures, especially because the success of small firms often depends heavily on the abilities of the entrepreneur.

Third, the probability of failure for new small ventures is considered to be high. It is difficult for the informal sector to obtain credit from the formal financial sector due to the lack of collateral and they are therefore forced to resort to informal sources of credit such as loan sharks who charge them exorbitant interest rates that they cannot easily repay.

Another reason for informal businesses not getting financial support is that they are not registered and this makes it very difficult for the willing financial institutions to reach out to them as they do not know where to find them. Limited finance has also made it difficult for small businesses to advance technologically, hire expert labour, buy inputs in bulk to enjoy economies of scale and grow in size.

Informal businesses often do not make optimum use of their existing resources and are unlikely to do better even if they get enough loans. The argument is that they do not have strategic business plans and financial records which may guide the effective and efficient use of any available resources. It was also found that small enterprises fail to keep books of accounts for their business operations, or if they do, they are inadequate and therefore not enough to assist bankers in awarding them loans.

Butler Tambo is a Policy Analyst who works for the Centre for Public Engagement and can be contacted on butlertambo@gmail.com or +263776607524.