By Mwansa Chalwe Snr
Story Highlights
- Economic growth in regions or countries with large informal sectors remains below potential. Addressing informality is thus essential and urgent to support inclusive economic development and reduce poverty worldwide (IMF, Finance and Development Magazine, December,2020)
- When you walk through markets such as Kalingalinga, Marapodi, Chisokone, Maramba, and many others, you see young people welding window and door frames, gates and some are brake bonding. UPND government will ensure that business is given to these youths. These youths will create employment as a result of having a guaranteed market.( President HH on his face book page as a Candidate, 2021)
- The rise in poverty has been largely driven by falling incomes in urban areas, especially among those relying on employment income from the informal sector.The government must develop more aggressive home grown solutions to stimulate domestic resource mobilization. (JCTR Executive Director, Father Alex Maybe, S.J).
- The 2000s reveals a significant shift toward formalization of the working population in Brazil, over a period of only five years (2007-2012), a total of 4.9 million micro and small enterprises were formalized.(International Labour Organisation (ILO) Study
- Creating an economy with a higher proportion of formal enterprises and jobs is important to long term wealth creation, stability and poverty reduction.
(Organisation for Economic Cooperation and Development–OECD)
Immediately after clinching the IMF bail-out deal on 31st August, 2022; the following day, the 1st September, 2022, President Hakainde Hichilema launched the 8th National Development Plan (NDP8). The launch of the plan symbolized that the IMF deal was not a panacea for solving the Country’s economic problems. The NDP 8 identifies a number of challenges and possible general interventions.
“The current state of development indicates persisting socio-economic challenges which include low diversification of the economy, high youth unemployment, high incidences of poverty and inequality, slow pace of decentralisation as well as low education outcomes, coupled with inadequate access to other social services,” The NDP 8 states.
It is gratifying to note that NDP8, identifies high Youth unemployment as one of the top challenges that Zambia faces. To any keen observer, the recruitment exercises of Teachers, Medical Personnel and Enumerators raised red flags. They suggest that the pursuit of solutions to youth unemployment should be government’s top priority going forward, now that IMF deal and debt restructuring are almost done.
The NDP 8 is a very good document, but Zambia is not in the current economic mess because of lack of plans. We have had many very good paper plans. Zambia’s problem has been the absence of the design of innovative and practical programmes and projects, and implementing them. This requires thinkers and extensive research to gather evidence on which to base designed programs and projects.
If one reviews the NDP 8, there is one major omission. This is in regard to what to do with the informal economy. There was a need to mention the transformation of the informal economy as a key to national development and accelerated economic growth strategy. The informal economy is hardly mentioned in NDP 8. The key challenges of youth unemployment, high incidences of poverty and inequality can only be achieved by innovative formalization of the informal sector. It should be noted that a solution to the problem, ought to be able to meet the size of the challenge for it to be credible. Formalization is the only solution that meets the size of the challenges that youth unemployment and the high level of poverty pose.
Selective Formalization of the Informal economy
One of the most effective solutions that can fast track Zambia’s economic growth and create millions of Youth jobs in a very short period of time, is an intervention that entails the transformation of Zambia’s huge informal sector through a well thought out, and innovative formalization process.
Zambia’s informal sector is estimated at 85% (6.8million) of total employment, whereas the formal sector is only 15% (1.2million).There is overwhelming empirical evidence that shows that there is a correlation between the size of the informal economy and the level of a country’s development and its poverty levels. The available empirical evidence clearly show that in order to achieve inclusive growth, create jobs and reduce poverty, a nation has to reduce its informal sector.
The issue of reducing the informal sector through formalization is supported by many international organizations including the World Bank, International Labour Organization and many others.
“Informality critically affects how fast economies can grow, develop, and provide decent economic opportunities for their populations. Sustainable development requires a reduction in informality over time. Addressing informality is thus essential and urgent to support inclusive economic development and reduce poverty worldwide,” IMF, Finance and Development Magazine (December, 2020) wrote.
The International Labour Organization (ILO) recommends to governments to try out solutions to reduce the size of their informal sectors. Informality restricts economic growth, promotes inequality in general, and gender inequality in particular, promotes poor labour conditions, engenders low productivity and denies the country tax revenues.
“In sub-Saharan Africa, typically, the formal segment of the economy does not employ more than 10 per cent of the labour force. Addressing the challenge of the informal economy and poverty reduction are therefore closely intertwined. There is an urgent necessity of implementing a range of integrated and coherent policies aimed at moving economic units into the mainstream economy,” The ILO wrote in its research paper, The Informal Economy: Enabling Transition to Formalization (2007).
It is, therefore, apparent that one of Zambia’s low-lying fruit growth strategies that should be explored is the reduction in Zambia’s huge informal sector through innovative formalization, like some Latin American countries, have done.
Latin America, a formalization Benchmark
In the past 20 years, there have been Studies that have been carried out by various organisations including the International Labour Organization (ILO) on Latin American countries-Argentina, Bolivia, Brazil, Colombia, Mexico, Panama, Peru and Uruguay – on the formalization process which happened between 2005 to 2015.They have all concluded that, overall, the formalization processes have been very successful in fostering economic growth, creating employment and reducing poverty, although they also found varied levels of success in the different countries under study, depending on a number of factors such as: policies, formalization strategies, structure of economy and political will.
“Almost all countries in Latin America have decreased their informal employment rates but this formalization process has not been uniform. In some countries, processes were faster and took a relatively short time. In others, progress has been slower,” ILO Report on Latin America Formalization said. “To reduce informality, it is necessary to implement deliberate and integrated economic, social and labour policies and actions”.
Brazil in particular, in the mid-2000s under the Presidency of Luiz Lula Da Silva -who has come back to stand for elections, and is favourite to win this October Presidential elections – was one of the countries that achieved spectacular results in the reduction of the size of its informal economy thereby creating formal jobs and reducing poverty and income inequality.
“Between 2003 and 2013, some 40 million people were lifted out of poverty, while extreme poverty fell by 89%. The country successfully reduced inequality and, at the same time, experienced a significant decrease in the prevalence of informal employment. Micro and small enterprises (MSEs) currently account for 95% of Brazilian firms, generate some 16.6 million formal sector jobs, and contribute 20% to GDP. Over the last three decades of the 20th century, Brazil implemented a series of measures to encourage the formalization of micro and small enterprises and to promote the creation of formal employment in this segment of companies,” The International Labour Organisation (ILO) wrote in one of its papers on Brazil.
According to ILO, Latin America has reduced its informal economy over the years substantially. Its informality is estimated to be around 47.7% whereas Africa and Zambia sits at 90%.Women and youth, are disproportionately represented in the informal economy. There is a huge scope for Zambia and African countries to create formal jobs from the informal sector through innovative interventions. And all that is required is the employment of African brains and African leaders’ political will.
Can Zambia Emulate Brazil and Latin America Formalization?
The answer as to whether Zambia can emulate Latin American Countries’ success in the formalisation of the Informal economy depends on who designs it, how it is designed and who implements the programme. Success of formalization reforms is context specific as characteristics of the informal sector can greatly differ from one country to another. The informal sector is complex, and consequently, any designed interventions should be based on sound research rather than superficial analysis.
In Zambia, there is a superficial understanding of the informal economy. Most people think that this sector is only made up of marketeers, traders, small scale farmers and artisanal miners. This is a very simplistic understanding of the sector. And any formalization strategy which is based on this assumption, will be highly flawed and unlikely to succeed. There are many other demographics suitable to formalization. There are about ten Informal Sector Segments with their own sub segments. It is, therefore, vitally important to carry extensive research before embarking on a Formalization Programme.
Informality is complicated by its multiple causes, forms and heterogeneous demographic. In the light of the foregoing, it should be borne in mind that the formalization assignment cannot just be undertaken by anybody. And any intervention which is not well researched but based on shallow assumptions and adopts a one-size-fits-all solution, will certainly fail just like some past attempts in Bangladesh, Peru, Tanzania, Sri Lanka to name but a few, did.
In designing informal economy interventions, there is a need to understand the causes of informality, the barriers to formalization and the different demographics that make up the informal economy. However, extensive research and policy experiments in both developing and advanced economies, point to a set of guiding principles for policy design and interventions. The most successful cases of countries reducing informality have demonstrated that no one policy is likely to work on its own, but rather practical actions and a comprehensive policy package containing multiple policies to achieve various goals—economic growth, social protection, inclusion, and trust, is what works.
In the event that the proposed formalization programme is considered by the New Dawn government, it should be spearheaded by the Ministry of Small and Medium enterprises Development. They ministry should be able to coordinate the Programme with other Ministries because the formalization process of the informal sector can only succeed if public policy formulation and coordination involved multiple relevant ministries for necessary regulatory reforms.
In view of the complexity mentioned above, one of the prerequisite for a successful formalization program is the need for government to collaborate with the Private Sector with the necessary expertise. Empirical evidence suggests that formalisation initiatives can only succeed if government works with the private sector players with deep knowledge of the Micro enterprises and Small businesses ecosystem. Policy makers ought to bear in mind that the decision that informal entrepreneurs face as to whether to formalize or not is based on Cost-Benefit analysis.
Conclusion
In view of research done by reputable international organizations and Universities in Latin America and the Caribbean, Asia and a handful of African countries, there is a body of knowledge about the successes and failures of formalization attempts. Therefore, there are certain common guiding principles for successful formalization designs. The ingredients that a successful formalization program should contain, which can be termed as the formalization value chain critical success factors which ,include intellectual capital empowerment, utilization of technology, finance capital empowerment and a few more other facilitation components, in addition to the overarching standard stimulation type of interventions of regulatory policy reforms. In the absence of these ingredients, the objectives of any formalization program will not be achieved; and any envisaged jobs to be created or other benefits expected to accrue will be a mere mirage.
The International Monetary Fund (IMF) Bail out Agreement with Zambia has projected economic growth in 2022 as 3% and 2025 at 5%. This rate of growth will not produce jobs in the hundreds of thousands or millions nor reduce poverty. This is just a plain fact. However, if a properly designed informal sector formalization is put in place and implemented by competent and experienced people, our economic growth could jump up to as high as 10%. It could range from 8%-12%.The Informal Sector is a blue ocean that Zambia and African countries should tap in. It has long been long ignored as a source measurable economic activity and jobs by most African countries, because they have never figured out, how to do it due to its complexity. It is certainly a silver bullet solution to Youth unemployment and non- inclusive economic growth, if done properly.
The writer is a Chartered Accountant and Author. He is a semi-retired international MSMEs Consultant. He is also an Op-Ed Contributor to the Hong Kong based, Alibaba owned South China Morning Post (SCMP).Contact:[email protected], www.youthemploymentcreation.com
