The Informal Sector: How it works

Background

Pre-industrial revolution, the difference between formal and informal employment was meaningless.  With the rise of factories and trade unions, labour markets became more efficient and specialised workers increasingly entered into contractual relationships with employees that set benefits. Governments passed laws establishing minimum wages, social security plans and other protections.

Current situation

Informal employment refers to employment which is not formal - the business is not formally registered, it is non-tax paying and non-regulated.  Economic commentators view informal employment as a “problem child”.

However, what is apparent is that if people are working in the informal sector, it’s because the formal sector (which is registered, and often bigger in size) is not creating enough jobs. The size and scope of the informal sector is an indication of real problems elsewhere in the economy.

Why the informal sector is expanding

Firstly, problems that lead the informal sector to expand are often things like corruption and regulations that make it extremely costly for individuals, especially poorer individuals, to start or set up a proper business.  The informal sector becomes the gateway for many who are financially poor, to make a living when the institutional environment limits opportunity. 

The informal sector gives the poor and unemployed some place to go and find work – some choice is better than no choice for most. 

Secondly, the informal sector provides products or services to the consumer at prices they can afford.  Thirdly, the informal sector is less exposed to the volatility that often cripples the formal sector as and when economic performance plummets during recessionary times, because it is not as tied to that formal sector.

During recession, the informal sector will continue to operate when formal sector factories close.

As one observer aptly puts it “per capita income may be less for these workers, growth may be slow, but you get your bread and butter”.  

No assistance for informal workers

While the government and other stakeholders appreciate the crucial role being played by the informal sector, there is very little assistance for many small entrepreneurs. Many businesses are operating below capacity because of lack of funds.

According to Constance Sekete, who is the managing director  of Micro King Finance, more than 90% of entrepreneurs in the informal sector have no access to banking facilities at all.

In cases where the operators have access to financial institutions, most have no collateral and therefore are unable to access loans from these financial institutions.

As a result of this most of the informal traders struggle to finance their projects.

Projects to help informal workers

In order to create employment through the informal sector the government has initiated projects such as the Masvingo-based Informal Sector Training and Resource Network run by the Ministry of Higher Education and Technology in conjunction with German Technical Co-operation Zimbabwe (GTZ).

The network has been in operation since 1995.  Its role is to encourage entrepreneurs to come up with income-generating projects and provide funding and training for implementation of identified projects.

Regrettably, the majority of informal sector entrepreneurs interviewed professed ignorance of the organisation’s existence.

Analysts said there was little coordination between the Ministries of Youth, Gender and Employment Creation and Industry and International Trade, both involved in the informal sector.

 A lot still needs to be done to empower the informal sector and grow it sustainably.

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Find out more about Minimum Wages in Zimbabwe.