Government crusades to formalise SMEs
THE Ministry of Small and Medium Enterprises and Co-operative Development recently unveiled its inaugural magazine “The New Economy”, which is designed to sensitise the market on the new opportunities that are being presented by a burgeoning new class of economic players in the informal sector.
As the formal sector remains largely constrained, there has, as a result, been a corresponding increase in the informal sector.
However, not much — besides employment opportunities and a source of individual sustenance — has accrued to the local economy as a result of informal economic activities. And it is precisely because of this that the Ministry is making a pitch for most of the informal sector enterprises to be both regularised and formalised.
The Sunday Mail Business reproduces below one of the articles in which Government is making a case for transitioning from the informality to formality for SMEs
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Transitioning from informality to formality
THE Micro, Small and Medium Enterprises (MSMEs) sector has grown to become a veritable engine of economic growth the world over.
MSMEs account for over 95 percent of all enterprises in developing countries, of which over 80 percent of those are in the informal sector.
However, Africa, Asia and Latin America are the biggest contributors in this sector.
In Zimbabwe, there are 2,8 million MSMEs owners employing 2,9 million people, translating into 5,7 million people dependent on the sector, contributing more than 60 percent to Gross Domestic Product (GDP) (Finscope MSME Survey, 2012).
Many people derive their livelihoods from this sector which is however highly informal.
Eighty-five percent of MSMEs are operating informally.
The proportion of MSMEs owners with registered businesses is slightly higher in urban areas, probably due to better accessibility of registration facilities, possibly better enforcement, as well as the fact that higher portions of small and medium size businesses are found in those areas.
Moving from informality to formality in the MSME sector can ensure an inclusive contribution to economic growth and development.
The movement from informality to formality is not a single event, neither can it occur overnight hence, this movement is described as a transition from informality to formality (ILO, 2015).
When an organisation is transitioning from informality to formality, it is considered as undergoing the formalisation process.
To define formalisation, we first have to look at what informality entails.
Informality is when economic activities, in law or practice, are not covered or are insufficiently covered by formal arrangements (ILO, 2007).
We will therefore consider formalisation to be the transformation of an economic unit from non-compliance to compliance with the laws of the land a business is operating from.
Formalisation is the process of making the unofficial official, thereby giving a formal status or approval to the enterprise.
The Ministry of SMECD has identified formalisation of MSMEs among other recommendations of the Fin Scope MSME Survey Report 2012 as of paramount importance to revamp and develop the sector in line with Zim-Asset and as alluded to by the President’s 10-point Plan, which clearly articulates the importance of MSMEs.
Background to formalisation of informal enterprises
Over the past decade, the informal sectors exploded to become the leading employer and a source to livelihoods.
The reason why the informal sector is so large is that the benefits of formality are outweighed by the costs.
However, in a perfect world there would be few advantages of remaining outside the formal national economy.
Therefore, the more complex and unfavourable the institutional framework is, the greater becomes the incen- tive to remain informal (Becker, 2004).
Governments across the world are trying to reduce the size of the informal sector because of many negative aspects that are associated with informal enterprises both at macro and micro level, for example, labour conditions, a poor tax base and poor social protection coverage for both the employers and employees.
In Zimbabwe, informality is one of the major challenges facing the small business with 85 percent of the MSMEs not registered or licensed (Finscope survey, 2012).
The informal economy emerged as a result of the demise of the corporate sector.
Desperate for money and armed with skills, the unemployed sort for alternative ways to survive; hence, they entered the informal economy.
The informal sector can make substantial contribution to the economy only if it is integrated into the mainstream formal economy.
Several other countries have undertaken different strategies to formalise the informal sector.
In Uganda, business registration reforms were undertaken.
A one-stop registration service was introduced which resulted in a simplified registration process taking about 30 minutes to complete, 10 percent reduction in administrative costs, 40 percent increase in government revenue, 43 percent increase in business registration and better business to government relationship, among others.
In India, informal sector workers were organised into trade unions and cooperatives and given access to social protection, banking services, skills training and entrepreneurship development.
This resulted in the organised workers being able to influence policies, labour commissions, increased national and international networks and become influential in ILO conventions.
Lastly, in Brazil they introduced a sector initiative in waste collection where waste picking was recognised as profession, represented in the form of Membership Business Organisations (MBOs), cooperatives, trade unions, and given rights.
This resulted in the waste pickers earning above minimum wage, accessing the national health system and improved working conditions.
The above mentioned case studies have led to the creation of a universally accepted Integrated Strategy Framework to enable transitioning from informality to formality.
Scope of the formalisation strategy
The proposed strategy applies to all workers and economic units, including enterprises, entrepreneurs and households in the informal economy. The proposed strategy provides that: a) The term “informal economy” refers to all economic activities by workers and economic units that are — in law and practice — not covered or insufficiently covered by the formal arrangements and;
b) Informal work can be carried out across all the sectors of the economy both in public and private spaces except illicit activities.
Also the proposed instrument should cover informal employment which includes:
a) Own-account workers in the informal economy
b) Employers employed in their own informal sector enterprises
c) Contributing family workers, irrespective of the type of enterprise; d) Members of cooperatives; and e) All enterprise owners The strategy will focus on informal micro, small and medium enterprises and cooperatives operating across all sectors of the economy.
Barriers to formalisation Regulatory barriers
Regulatory barriers are inappropriate requirements stemming from governments, local authorities or agencies that do not appreciate the impact of regulations on firms, particularly smaller firms.
Regulatory barriers include requirements for multiple reporting, inspection and other compliance procedures.
Various studies have perceived burdensome and costly Government regulations as the most significant determinant of informality and as a cause of corruption.
Regulatory barriers have a strong effect on the business environment.
Most informal businesses continue to suffer from these barriers in various countries worldwide.
Administrative barriers
Administrative barriers stem from the way regulations are enforced.
They include excessive paperwork, inefficiency or delayed decisions, inaccessibility of services, bureaucratic obstruction and abuse of authority.
These barriers have many sources, including over-complicated regulations, outdated ways of working, lack of human and technical capacity, over centralisation of authority and distrust of the private sector.
Local authorities and Registrar of Companies in Zimbabwe have been identified as those institutions that are linked to administrative barriers to compliance by the informal economy.
Financial requirements
Financial requirement barriers consist of regressive fees that penalise smaller firms, overly complex tax regulations and poor tax and tariff administration.
Informal enterprises shy away from joining tax regimes for the following reasons among others: a) They are worried about tax levels; b) They do not understand how to comply with tax requirements;
c) They fear the behaviour of revenue officials towards them; and
d) They do not believe they will receive services in return for payment of taxes.
The above reasons result in economic units failing to find benefits that go with payment of taxes.
Financial barriers are integrally entwined with regulatory and administrative barriers related to the general registration of business activity and licensing for operators in specific sectors.
The main registration obstacles are excessive costs and time spent dealing with bureaucracy.
In Zimbabwe, entrepreneurs travel to the capital(s) or other distant towns to conduct these procedures.
This deters them from registering their businesses. Labour laws Informality is one way of avoiding labour laws and their associated costs (social insurance).
In many countries, including Zimbabwe, businesses face major hurdles in taking on their first ‘formal’ employees.
In addition, overly rigid labour laws often hurt people they are meant to protect, keeping employees in the informal economy and inhibiting economic growth that could create new jobs.
Corruption
Corruption is a major factor deterring formalisation as businesses stay off registers and tax trolls in order to minimise contact with public officials.
Corruption erodes the trust that businesses have in Government and leads informal businesses to conclude that their long-term prospects in the formal economy are poor.
Therefore, efforts to reduce barriers to growth and formalisation will be thwarted if corruption is not tackled.
Reducing and simplifying regulatory and administrative requirements diminishes opportunities for corruption.
Socio-cultural barriers
The informal economy comprises of strong networks of trust, interdependence and often cemented by collective experiences of oppression or social exclusion.
When an informal entrepreneur has a history of successful trade with other informal enterprises in the same social group, the motivation to formalise is minimised.
Benefits of formalisation
1. Reduction in corruption 2. Increase in circulation of money in the formal system
3. Broadening to business (inter-organisational) confidence
4. Investor confidence in formalised units 5. Access to information 6. Sustainable decent jobs 7. Reinforcement of the social contract
8. Access to business services, formal markets and productive resources such as capital and land.
9. Easy planning.