Limited benefits from informal sector

A WHILE ago Zimstats released a report which showed that about 20% of Zimbabwe’s GDP comes from the informal sector.

Collins Rudzuna

Bankers have also indicated that they estimate that billions of dollars change hands in the informal sector without ever circulating in the banking system.

In various forums, the informal sector has been lauded for absorbing the glut of unemployed people in the economy. Indeed, the informal sector should be praised for being the saving grace for many people who would otherwise have no way of earning a living in a country where the unemployment rate is estimated to be around 80%.

Many who praise the informal sector conveniently overlook to also mention that the growth of this parallel economy is partly the result of de-industrialisation. Once busy industrial hubs like the Workington area in Harare now resemble ghost towns after manufacturing companies closed down. Some blame cheap imports for killing local industry, arguing that manufacturers closed down because they failed to compete with imports from China and other places.

Many also believe the myriad of economic problems of the hyperinflation years are to blame.

Whatever the real cause of the demise of Zimbabwe’s manufacturing sector, one of the results of mass business closures was a flood of experienced and qualified workers who suddenly found themselves unemployed. Some left the country but many remained and took their skills to the informal sector.

Mechanics who had worked in assembly plants and service depots now ply their trade from home, places like Highfields’ Gazaland or even under the trees. Carpenters who worked for companies like Tedco now work in places like the Glen View furniture market where sofas can be made in an open field while you wait. Steel workers, leather upholsters, boilermakers and various other journeymen are other examples of the growth of self-employment.

While many say this new model where artisans work for themselves in small operations that they own is an example of empowerment, it has its disadvantages. For starters, economic reasoning suggests that it is inefficient.

If the small, unproductive firms closed down and larger, more productive firms hired the workers, total output and income would rise.

Efficient production usually requires division of labour among those with technical know-how and other support functions such as marketing, finance, human resource management, etcetera. Informal sector businesses, however, have a reputation for weaknesses in areas such as record-keeping and customer service.

Additionally, if the informal sector was replaced by larger, more formal businesses, it would be easier for the authorities to enforce workmanship quality standards.

As it is, the thousands of far-flung operators are next to impossible to monitor. Even standards such as labour practices would likely be easier to keep track of. Many people who work in the informal sector have no formal contracts and are sometimes subjected to treatment that is in violation of labour laws.

More importantly, the government would probably have an easier time collecting taxes. Most informal businesses are not even registered and do not pay any income tax.

It is no secret that under-developed countries like Zimbabwe aspire to one day become developed. Looking at developed countries, one will notice that their informal sectors are very small and they rely more on bigger formally organised firms.

Instead of celebrating mediocrity and hiding behind the fallacy of empowerment, perhaps Zimbabwe should be looking for ways to grow formal industry and get the manufacturing sector working again.

To get the formal sector working again first requires an understanding of what caused its demise in the first place. Some have suggested that Zimbabwe never had the comparative advantage required for success in manufacturing.

According to this school of thought, the manufacturing sector was developed specifically to counter sanctions in the UDI era.
The belief is that Zimbabwe never had advantages such as technology or skilled manpower to warrant it being a manufacturing hub. As proof of this, proponents of this idea point out that most manufactured goods made here were meant for local consumption only. Once the sanctions fell away, cheaper imports flooded the market and local manufacturers were ill-equipped to compete. The sector then slowly shrunk until the hyperinflation days put the final nail in the coffin.

Should that theory be true, then the way to go would be to concentrate on sectors where Zimbabwe has some natural advantage over others. Cigarette manufacturing is one such area. Because Zimbabwe is a

leading tobacco producer, it would be natural for us to forward integrate. The same can also be said for industries that rely on agricultural and mineral input. Diamond polishing and refining of platinum have long been proposed, but are yet to come to fruition.
If Zimbabwe’s economy continues to have a high portion of industry in the informal sector there is a great risk that the country will remain under-developed.

Moreso now when the crop of qualified journeymen who left formal employment is being replaced by informally trained and inexperienced workmen.

The quality of work done by these latter people is just proof that the informal sector is fraught with mediocrity. Formal industrialisation is much more likely to lead to sustained growth and prosperity.