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Role of formal business in enterprise formalisation

The Zimbabwe economy is becoming more and more informal rather than becoming formal due to poverty, restrictive formalisation procedures, conflicting policies, lack of formal employment opportunities among many other factors. Informality has adverse effects on economic growth, private sector development and government revenue.

Esther Dzviti Mapungwana

Industrialist

On the other hand, formalisation provides investor security, increased business linkages, employee protection, reduction in poverty, expanded opportunities and increased government revenue.

On that background the Employers’ Confederation of Zimbabwe (Emcoz) held a webinar titled Strengthening Capacity of Employers and Businesses to Effectively Engage in Developing a Formalisation Strategy.

The objective of the workshop was to give the business sector approaches on how best to design and implement a formalisation strategy. The webinar revealed that Zimbabwe needs to deal with the causes of informality first before it tries to bring formality.

The president of Emcoz, Dr Israel Murefu, highlighted that the Zimbabwean economy has undergone significant structural transformation, especially over the past two decades, and has inevitably propelled the growth of the informal sector. Consequently, an increasing number of the active labour force is being absorbed in the informal sector.

“Policymakers are interested in formalising the informal sector; the revenue authorities are faced with a shrinking formal sector tax base and are exploring ways of increasing the contribution of the informal sector to tax revenue while the development community is interested in supporting players in the informal sector to improve and reduce poverty. The banking sector on the other side of the same coin, is interested in promoting financial sector deepening; financial inclusion and how to nurture players in this sector to contribute towards savings mobilisation,”  Dr Murefu said.

“Harnessing resources from the informal sector is therefore a critical pillar in the inclusive financial sector development agenda. Deep financial markets play a critical role in supporting economic growth and development in the country. Hence, formalisation of informal activities is the way to go and will definitely spur economic growth, particularly with increased employment and higher labour productivity.”

The meeting discussed the importance of the formal business sector in the formalisation process.  Presentations made showed that formalisation levels the unfair competition from the informal sector and widens the tax base as well as provides social security. Formalising the informal sector brings entrepreneurship and skills into businesses that may have not been around, it also creates business linkages. It also creates a favourable business environment as it promotes policies that support an enabling atmosphere for the private sector.

During the meeting Dr Godfrey Kanyenze from the Labour Economic Development Research Institute Zimbabwe (Ledriz), gave an economic background of Zimbabwe demonstrating that the country is experiencing structural regression, increased dependence on natural resources, de-industrialisation  and a declining GDP. He pointed out that the informal sector accounted for 80%, 84,2% and 94,5 % of the  total employment  in 2004, 2011 and 2014 respectively.

The World Bank states that Zimbabwe has the third largest informal economy in the world; instead of the economy formalising the Zimbabwean economy is de-industrialising and becoming informal. He said that 98% of all youths aged 15-24 years are in the informal sector. The vulnerable are largely found in this segment, the total population living in poverty is 76%.

Dr Kanyenze presented statistics showing that even the employed are in poverty since the bulk of employees are not in  decent work employment. He emphasised that there is need for an improvement in productivity in the formal sector and the non-formal segment.

Based on other countries’ experiences, the formalisation process takes time and it is a gradual process which can take place in business units, employment, and transition of jobs from the informal to formal. Some enterprises struggle to meet the formalisation requirements and hence remain informal. The consequences of informality for the people are mainly looking at the risk of high exposure to decent work deficits, exposure to non-compliance working in poverty.

In enterprises it is unfair competition and unfair distribution of the tax burden. For governments apart from increased revenue, informality limits their scope of actions to grow the economy and reduce poverty.

Existing policies in Zimbabwe have not been supportive to promote formalisation. The president of the Zimbabwe Congress of Trade Unions, Peter Mutasa, pointed out that the government needs to be involved in the formalisation strategy and at every developmental agenda.

He emphasised that the private sector should not be at the lead of the development agenda and  he also stressed that the government needs to consider the impact of their policies on the majority before they implement.

Lorraine Sibanda, the National President of the Zimbabwe Chamber of Informal Economy Associations (ZCIEA),  expressed  her deepest disappointment in the treatment that informal economy actors have been receiving from the Zimbabwean government. She indicated that the sector is characterised by lack of social protection, harassment, violence and recently the sector has been facing demolitions. She specified that for a country with high levels of informality the government should be facilitating the growth of the sector or its formalisation as this is the source of livelihoods of the majority of the people. Sibanda advised that there is need for the government to be honest and revisit the economy to see that the majority of economic activity is in the informal sector and the county is drifting slowly away from formality to informality due to poverty.

According to the ILO the ultimate goal of enterprise formalisation initiatives is to create more and better jobs, reduce poverty and address marginalisation of those who are especially vulnerable to the most serious decent work deficits in the informal economy, including but not limited to women, young people, migrants, older people, indigenous and tribal peoples, persons living with HIV or affected by HIV or Aids and persons with disabilities. For governments and society, the formalisation of micro, small and medium-sized enterprises goes hand in hand with a conducive business environment, economic growth and better working conditions. It also increases tax revenues which in turn are needed to provide public goods and services.

Formal businesses benefit from enterprise formalisation in the sense that it reduces unfair competition by informal firms.

Enterprise formalisation measures aim to:

  • Reduce entry barriers through streamlined business registration, licensing and compliance;
  •  Incentivise formalisation through market access, increased social security coverage and reduced taxes or other financial obligations;
  •  Enhance business productivity through business upgrading, technical skills training and access to finance and business development services;
  • Facilitate dialogue by supporting employers’ organisations to develop relevant services and by supporting the involvement of informal business associations and representative bodies through advocacy.
  •  Strengthen enforcement and compliance through preventive and corrective measures.

Formalised enterprises gain access to finance, business development services and technologies and reduce their exposure to government fines. They can also participate in public biddings or act as suppliers or retailers of larger companies. Formalisation of enterprises is part of a multidimensional and balanced approach, as outlined in ILO Recommendation 204 concerning the Transition from the Informal to the Formal Economy. It is also essential for the formalisation of employment in these enterprises.

“Enterprise formalisation initiatives combine measures to reduce registration and compliance costs with incentives and business development initiatives. Based on the most recent empirical evidence on what works to formalise enterprises, the ILO designs initiatives on the premise that it is probably not so much the expected costs but rather the benefits of formalisation that is pivotal for the decision to formalise, and that entrepreneurs compare the costs with the benefits of running a formal business. If the benefits outweigh the costs, they may consider formalising the business,” advised a report by the ILO.

Mapungwana is an economist and industrialist. He is also a member of the Reserve Bank of Zimbabwe’s Monetary Policy Committee. These weekly New Horizon articles are co-ordinated by Lovemore Kadenge, independent consultant, past president of the Zimbabwe Economics Society and past president of the Institute of Chartered Secretaries and Administrators in Zimbabwe. — kadenge.zes@gmail.com and mobile +263 772 382 852.

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