The Informal Sector: Problems

Problems within the informal sector

 Informal businesses, as the name suggests, often do not pay taxes and they also lack the capital and expertise to be as productive as big enterprises, leading to less innovation and a subsequent lower standard of living for workers.

Informal workers lack health benefits and other safeguards and have to save more for emergencies, resulting in less capital spending that further drags down business  growth.

The informal sector is often referred to as the "underground economy".

Significance of the informal sector

The enormous scale of the current global economic recession is forcing analysts to reconsider the significance of the informal sector.

The ILO forecasts that as many as 52 million people could lose their jobs from the economic downturn.  Without the informal sector, many of the jobless will have nowhere to go.  Informal jobs “will absorb a lot of these people and offer them a source of livelihood going into the future” and the sector acts as a “safety valve to defuse a potentially volatile situation emanating from unemployment”, says William Maloney, an economist with the World Bank.

What happens when you lose your formal job?

Jefta Nyoni, 45, was working full-time on a wire-drawing machine in a wire-drawing plant in Kwekwe and lost his job in January 2011.  He was earning USD 250 per month including transport, accommodation and education allowances.

He was retrenched when his company, which manufacturers wire and rods, had to cut costs to mitigate the effects of the global recession.

Finding alternative employment was not easy, as his organisation was the only wire-drawing company in the whole of the midlands.

He decided to start his own business.  He invested his severance package into the new business  - buying and selling household appliances imported from South Africa. His initial investment was USD 1 200.

He says he makes a profit of USD 450,00 per month which is enough to sustain his family of four.  He says it is more than what he was being paid per month by his former employer.  He says he is enjoying being his own boss and the income he is making is enough to sustain him and his family, and send his parents money who live in the rural areas in Murehwa.

“It was tough at first but now l am used to the travelling to and from South Africa” he says with a smile.

Who works in the informal sector?

Defining what makes a job informal is not easy.  At a general level it includes any work outside the “formal” sector, in which companies register with the government, pay taxes and provide jobs with fixed salaries and benefits like pension and health care.  In Zimbabwe the informal sector includes; taxi cabs, food vendors and cross border traders.

Informal trade on the increase

Some researchers are starting to argue that the informal economy is becoming a permanent fixture in developing countries such as Zimbabwe, as population growth outstrips job creation.

The recession may lead to massive job losses in the formal  sector as companies try to cut labour costs. Many of the laid off workers may never be re-absorbed by the formal economy.

Zimbabwe’s challenge is that the economy cannot create enough steady, salaried positions to absorb the thousands of skilled personnel and school leavers entering the job market each year.

Statistics

Described as the "dark side" of the economy, there are no definitive statistics on the informal sector, which markets everything from toiletries to motor vehicle spares to basic commodities that are scarce or too expensive on the local market. 

However, a study by the Confederation of Zimbabwe Industries found that in November 2000, at least 1.7 million people were making their living in the informal sector. In that same year, 9 684 workers were retrenched while in the last 18 months a further 90 000 people are estimated to have been forced out of formal employment and would naturally have been forced to become small traders. 

As already noted above, thousands of job seekers are being spewed out of Zimbabwe’s school system every year with little chance of finding work in an economy that saw 400 companies shut down in 2000 and a further 700 closing in the past 18 months. 

Against this background, analysts believe employment in the informal sector has far surpassed that in the formal economy, where only about 40% or 2.7 million of the 6.7 million working adults in Zimbabwe are still employed. 

Conclusion

The reality is that the informal sector is there and it is going to grow and become more competitive as more people lose their formal jobs.

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Find out more about Decent Work and Labour Laws in Zimbabwe.