Informal sector: A catalysts for growth or a threat to economic stability?

Zimbabwe’s informal sector has often been portrayed as an economic enigma, praised for its contribution to employment and criticised for its perceived undermining of formal economic systems.

In a country where economic instability has become the norm, the informal sector stands out as a lifeline for millions. Yet, it also brings with it complex challenges. With the sector accounting for a staggering 60 to 70 percent of employment in Zimbabwe, is it the devil it is purported to be, or rather a significant pillar in the nation’s economy?

Employment and poverty alleviation

The informal sector is crucial in addressing Zimbabwe’s unemployment crisis. As the formal economy has shrunk due to macroeconomic instability, high inflation, and limited foreign direct investment (FDI), informal employment has become a vital source of income for millions.

With unemployment rates soaring, particularly among the youth, the informal sector has absorbed those left behind by the formal job market.

According to the Zimbabwe National Statistical Agency (ZimStat), informal employment contributes more than 80 percent of all non-agricultural jobs in the country. This has played a significant role in mitigating the country’s poverty levels, especially in urban centres where formal job opportunities remain scarce.

Informal traders, small-scale manufacturers, and service providers offer a diverse array of goods and services that not only meet local demand but also facilitate small-scale trade within and across borders.

The sheer diversity within the informal sector ranging from cross-border traders, street vendors, and artisanal miners to microfinance service providers, illustrates its pivotal role in keeping Zimbabwe’s economy functioning. For many households, the informal sector is the only source of income, providing basic necessities like food, shelter, and education. Without this sector, poverty levels in Zimbabwe would undoubtedly be far worse.

In this regard, the informal sector has helped stem the tide of extreme poverty. A study by the International Labour Organisation (ILO) indicated that informal employment in Zimbabwe, despite its lower wages, has been critical in maintaining a semblance of social stability by preventing millions from falling below the poverty line.

The movement of goods and services

Zimbabwe’s informal sector plays a central role in the movement of goods and services, ensuring that essential products remain available despite persistent economic challenges. Informal cross-border traders are particularly important in keeping local markets supplied with goods that are either scarce or too expensive in the formal market.

Goods like clothing, electronics, groceries, and agricultural products frequently enter Zimbabwe through informal channels, often bypassing formal trade restrictions and tariffs.

In addition, the informal sector’s nimbleness in responding to local market needs is unmatched. Street vendors and informal service providers offer products at competitive prices, often customized to the specific preferences and income levels of their customers.

This ensures that essential goods are accessible to lower-income populations, who would otherwise be priced out of the formal market.

The supply chains built through informal networks have also contributed to the resilience of Zimbabwe’s economy. During times of acute shortages of basic goods due to foreign currency constraints, informal traders have acted as the de facto supply chain managers, importing critical goods and preventing widespread shortages.

The importance of these informal supply chains cannot be overstated, as they provide essential lifelines in an economy frequently stifled by red tape, foreign exchange shortages, and unreliable infrastructure.

Informality and national income shortfalls

However, the informal sector’s contributions come with notable shortcomings, particularly in terms of national income generation and wage structures. One of the main criticisms of Zimbabwe’s informal sector is its inability to contribute meaningfully to tax revenues.

Informal businesses largely operate outside the formal tax system, depriving the Government of much-needed revenue to fund public services such as healthcare, education, and infrastructure. This is a significant concern in a country where public services are already strained due to limited fiscal space and a high debt burden.

According to the Zimbabwe Revenue Authority (ZIMRA), an estimated US$1.5 billion in potential tax revenue is lost annually due to informality.

Moreover, wages in the informal sector are often well below the minimum wage, exacerbating inequality and limiting overall economic mobility. The lack of formal contracts, social protections, and enforceable labour standards means that workers in the informal economy are vulnerable to exploitation.

A report by the African Development Bank (AfDB) highlighted that informal workers in Zimbabwe earn, on average, 30 percent less than their formal sector counterparts, often without access to pensions, healthcare, or unemployment benefits.

This wage disparity reinforces cycles of poverty, as informal sector workers are unable to accumulate sufficient savings or investments to improve their quality of life.

A balanced perspective: informality is not the enemy

Despite these drawbacks, it is important to acknowledge that informality is not inherently destructive to economic growth. Rather, the informal sector serves as a dynamic response to the structural weaknesses in Zimbabwe’s economy.

It fills critical gaps left by the formal economy, particularly in employment and the movement of goods and services. Dismissing the sector as purely detrimental overlooks the essential role it plays in keeping the economy afloat.

To harness the full potential of Zimbabwe’s informal sector, there must be a concerted effort to integrate informal businesses into the formal economy without stifling their flexibility.

Formalisation programs that are overly bureaucratic or punitive risk pushing these businesses further underground. Instead, policies should focus on incentivising registration through simplified tax regimes, access to credit, and business training.

Moreover, investing in education and skills training for informal workers can help bridge the wage gap between formal and informal employment.

Microfinance institutions, which are already deeply embedded in Zimbabwe’s informal economy, should be encouraged to expand their operations and offer more tailored financial products that help informal businesses grow and scale.

In conclusion, the informal sector in Zimbabwe is not the bogeyman that it is often made out to be.

It is a vital component of the country’s economic fabric, providing employment and essential goods and services to millions.

However, its shortcomings, particularly in terms of wage levels and contribution to national income, must be addressed through thoughtful policy interventions. If managed properly, the informal sector can continue to play a key role in alleviating poverty while contributing more robustly to national development goals.

Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn.-ebsinessweekl