Developing Zambia’s Informal Sector and enhancing its Contribution to the Fiscus

Project Active from to Firms and Entrepreneurship

One of Zambia’s main economic challenges is an ever growing informal sector. Broadly defined, the informal sector comprises of enterprises which do not comply with the full extent of government laws and regulations. This sector is typically characterised by its ease of entry (anybody can start a business whenever they feel like), low levels of skills, labour intensive technology, and small firm size. In terms of employment, the informal sector in Zambia employs 90% of the labour force, and has grown rapidly in recent years (approximately more than a million informal businesses). Most of these are rural, agricultural operations, run by farmers with low skills and generating low revenues. The informal sector in Zambia raises a lot of interesting questions which is an indication of the gap in knowledge about both its size and the characteristics of firms within it. Manju Kedia Shah (Campbell University) uses data from two complementary surveys-the Zambia Business Survey (ZBS,2008), whose sampling methodology encompasses all businesses in Zambia, including informal enterprises in agriculture and services, and the World Bank Enterprise Survey (WBES,2008) database, which includes a module covering urban microenterprises in major cities of Zambia, to shed light on the country’s untapped informal sector. The characteristics of the informal sector in Zambia may be classified according to location of business, that is, whether located in the rural or urban area. Businesses in the urban areas of Lusaka and Copperbelt provinces form the top tier of informal sector firms. Compared to an average, typically rural informal enterprise, informal businesses in the city centres resemble a typical formal Micro, Small and Medium scale Enterprise (MSME): they have more educated owners, greater access to public services and earn significantly higher revenues. In addition, the majority of urban informal sector firms are shielded from tax inspector visits, unlike registered operators. Revenues of many firms in this urban segment overlap with those of firms in the formal sector. In this regard taxation potential is highest for urban, informal sector firms. Furthermore, these firms often have access to infrastructure services (mainly electricity and water) and enjoy the benefits of formalisation, while circumventing registration costs, bureaucratic burden of tax compliance, and higher labour costs. On the other hand firms in the rural areas, notably those in agriculture and service sector are unregistered because of low skills and productivity. These firms would benefit from interventions designed to augment productivity, including skills training, availability of infrastructure and microenterprise lending facilities. However, many of these firms are survivalist in nature, and could “disappear”, with policies geared towards structural transformation in agriculture, and growth of the formal large-firm private sector, which can shift informal workers and small-business employers as employees in its formal sector.