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Author: Mwansa Chalewe Lao
Like many sub-Saharan countries, Zambia has yet to recognize that the informal economy, which dominates its economic structure and outweighs the formal economy, is a major obstacle to its development. This neglect persists despite the overwhelming empirical evidence from reputable international organizations such as the International Labour Organization (ILO), the Organization for Economic Cooperation and Development (OECD), the African Development Bank (AfDB), the World Bank, the United Nations (UN) and the International Monetary Fund (IMF), which clearly show that no country can achieve sustainable development if its economy is dominated by the informal economy.
The International Monetary Fund’s Finance and Development Magazine stated in December 2020: “Economic growth in regions or countries with large informal sectors remains below potential. Therefore, addressing informality is critical and urgent to support inclusive economic development and reduce global poverty.”
The IMF argues that countries, especially in sub-Saharan Africa, should prioritize formalization, a view supported by the International Labour Organization (ILO).
“In sub-Saharan Africa, the formal sector of the economy typically employs no more than 10 percent of the workforce. There is an urgent need to implement a comprehensive and coherent set of policies aimed at integrating economic units into the mainstream economy,” the ILO said in one of its publications.
There is a lot of evidence that there is a correlation between the size of the informal economy and a country’s level of development. Developed countries have smaller informal sectors than developing countries. Countries with the highest per capita incomes have smaller informal sectors, while poorer countries have a higher share of informality in their total output.
For years, the author and entrepreneur has been warning about the antiquated structure of the Zambian economy and the adverse effects of Zambia’s large informal economy, which is estimated to account for more than 90% of the country’s economic activity. This overwhelming dominance not only hampers monetary policy, but also overcrowds the formal economy, stifling its growth and potential. As a result, jobs remain out of reach for millions of young people.
It is encouraging to see that the Governor of the Bank of Zambia, Dr Danny Kalialia, has finally acknowledged the negative impact of the informal sector in his speech at the launch of the bank’s strategic plan and at the recent Monetary Policy Statement conference.
“When money is under the pillow, it does not come back to the banking system, (and) monetary policy has no impact on that. That’s the informal sector that we have. So, that’s what we want to address,” the governor said at the launch of the bank’s 2024-2027 strategic plan, bemoaning the negative impact of Zambia’s informal sector on the effectiveness of monetary policy.
As an advocate for youth employment creation through formalization, I conducted extensive research and presented benchmarked, practical and tailored solutions based on mobile phone technology and artificial intelligence to the relevant Zambian authorities to provide concrete solutions to this pressing issue.
Collecting dust on the bookshelves of government ministries and agencies.
Now, with the Governor’s endorsement, it is time to revisit and implement these solutions to address the informal economy’s stranglehold on Zambia’s development and unlock the country’s full economic potential, thereby creating millions of formal employment opportunities for young people currently lurking in the informal economy in a short period of time.
The size of the informal sector in Zambia
In February 2024, the Bank of Zambia released its 2022 Micro, Small and Medium Enterprise (MSME) Financing Survey. One of the main findings was that there are about 1,553,892 MSMEs in Zambia, of which 95.6% are in the informal sector, employing 1.9 million people. The Governor of the Bank of Zambia believes that it is important that some of these businesses formalize so that they can access capital to invest, expand and create jobs for the economy and promote the monetary policy of the central bank.
At the launch, the Permanent Secretary of the Ministry of Small and Medium Enterprises Development, Subeta Mutelo, called on MSMEs to formalize their businesses. “As the Ministry, we have taken note of this challenge and have stepped up efforts to create awareness on the benefits of formalization and incentivize MSMEs to register their businesses,” she said. “We believe that by creating an enabling environment and providing the necessary support and incentives, we can encourage more MSMEs to formalize their businesses.”
In reviewing the comments of various speakers at the report launch, we get the impression that our policymakers have not fully appreciated the complexity of the informality phenomenon and therefore their efforts to date have not been successful. Reactively advising entrepreneurs to formalize has not worked anywhere in the world. Formalization does not happen in a vacuum. It has to be pushed to happen. Formalization strategies need to not only transform existing informal sector businesses into formal enterprises, but also prevent new businesses from going informal.
The benefits of formalization are enormous. They include: faster economic growth and higher productivity; creation of more and higher quality jobs; a wider tax base and lower tax rates; a reduction in the cash economy, thereby providing more resource intermediation to the formal financial sector; and improved access to productive resources such as formal markets, business services and finance.
Proposed Formal Method
Regularization is a multifaceted concept that is often misunderstood by many, including government officials. It encompasses much more than just registering a business with the Patent and Company Registration Authority (PACRA). Registration is just one step, and the simplest one.
Effective formalization requires a comprehensive approach that includes political will, multi-stakeholder engagement, and nuanced interventions.
Designing a successful formalization strategy requires knowledge that addresses key questions such as: What are the different demographics within the informal sector? What drives informalization? What motivates entrepreneurs to formalize? What factors contribute to successful formalization? Why do some countries fail while others succeed?
Has it been successful? What are the unique formalized value chains in Zambia?
By its very nature, the informal economy is complex and heterogeneous. Formalization initiatives and interventions should be rigorously and well-researched before implementation, including benchmarking against successful countries and regions to develop context-specific approaches. Any intervention that is not well-researched, based on faulty assumptions, and adopts a one-size-fits-all solution is bound to fail, as some past attempts in Bangladesh, Peru, Tanzania, Sri Lanka, and elsewhere have done.
Given the above complexities, based on empirical evidence, one of the prerequisites for the successful implementation of formalization programs is for the government to collaborate with private sector entities that have the necessary in-depth knowledge of the micro and small enterprise (MSE) ecosystem. Policymakers should keep in mind that the decision of informal entrepreneurs to formalize or not is based on a cost-benefit analysis.
in conclusion
We have accumulated a wealth of experience on the successes and failures of formalization attempts, based on research conducted by leading international organizations and universities in Latin America and the Caribbean, Asia, and a few African countries.
Formalization processes in many countries have been highly successful in promoting economic growth, creating jobs, reducing poverty, and broadening the tax base, although the degree of success varies from country to country, depending on a range of factors, such as policies, formalization strategies, economic structures, and political will. Therefore, there are some common guiding principles for successful formalization design.
Given the recent interest of the Bank of Zambia in reducing the informal sector and as an evidence-based institution, they are the right institution to lead the formalization program in Zambia. To accelerate this process, they do not need to reinvent the wheel but work with the author and consider his ready-made solutions.
If Zambia does not take steps to reduce and prevent the growth of the informal economy and continues to develop its economic strategy, including development plans and budgets, based on a 10 per cent formal economy, it will have no hope of development, poverty reduction and youth unemployment, and the same is true 200 years later, as Haiti has demonstrated.
The author is a chartered accountant, author, independent financial analyst and economic commentator. He is the founder of the virtual knowledge and strategy company Prosper Knowledge Solutions Ltd. Contact details: (email protected)
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