Informal sector can be a major driver of economic opportunities

Wednesday May 18 2016

By Andrew Rugasira

Economists used to consider the informal sector a shadow economy, a relic from the underdeveloped past that would be replaced by formal activities and better paid jobs. Not anymore. The informal sector has in many ways superceded the formal sector and is now the face of modernity rather than its antithesis.
In the informal economy, jobs and business activities are not registered or protected by the State. They don’t enjoy any social benefits, and often have no titled or registered assets. This means they are inherently vulnerable, highly mobile, and insecure. As a consequence, these unregulated entities don’t pay taxes, their employees are excluded any social safety nets and they lack the protection accorded by formal labour contracts.
It is easy to underestimate the contribution this sector makes to the Ugandan economy. Over 50 per cent of GDP (UBOS, 2014) is attributed to the informal sector, and 80 per cent of the labour force work in the informal economy.

The highest informality is in the agricultural sector. Typically, farmers don’t have property rights in the form of a land title, they lack access to extension support, social security and formal credit markets.
With only 11 per cent of credit in Uganda going to the rural economy (Bank of Uganda) and with 1 in 10,000 entrepreneurs able to successfully obtain credit (World Bank), the rural farmer is essentially consigned to relying on unregulated loan sharks whose repayments include the farmers produce which hampers the next seasons productivity.

Similarly, the informal urban entrepreneur will tend to be unskilled, although a large segment of the informal sector is increasingly comprise graduates; they will have no titled assets or documented inventory, lack credit and are vulnerable to the enforcement measures of the regulatory authorities.
Informality has several distinct realities that inform the choices entrepreneurs or job seekers make in deciding sector participation. One is urban bias. Because most public and private resources are invested in the urban areas, rural dwellers look to the urban centres as ‘beacons of light’.

Two, it is difficult and costly to register a new business. According to the World Bank “Doing Business 2016” report, it takes over 27 days to set up a new business in Uganda. Compare this to the 48 hours. Delays in registration are compounded by burdensome compliance procedures, complex tax regulations, corruption and cost of initial business registration. All this discourages entrepreneurs from formalising their businesses and makes informality attractive.
Three, Uganda has the highest number of young people (under 30 years) in the world. Each year, it is estimated that over 400,000 young people enter the job market to compete for approximately 9,000 available jobs. So many are chasing few jobs and because the educated lack sufficient employable skills, the informal sector continues to expand.

Four, the lack of key business services is a major driver of informality. From difficulty to obtaining property titles to weak institutional capacity of business associations to guide, mentor and support new entrants, the informal sector is the only first port of call for economic activity today but typically ends up being the final destination for many.
Formalisation is a journey and the end of the road results in higher quality and better-paid jobs, a stronger contract between citizen and State, strengthened and reliable agreements between firms and a broadened tax base, which could potentially lower taxes because it lowers the tax burden currently being carried by few taxpayers.

When we started our work with coffee farmers in Kasese in 2004, we found that the majority of farmers didn’t belong to any producer groups. We began to bring farmers together into groups based on proximity, shared values and ambition.
We knew that introducing the washed coffee method as a programme in the Rwenzori region would lead to improved coffee quality and increased household incomes, but we had to first build the institutional infrastructure to support this- from SACCOS, producer groups to community trainers.

Transformation requires a change in social structures, which itself requires a change in the underlying social economic value system. To change values, the people must be organised into viable grassroots associations around a shared vision. With viable associations, we can begin to unpack vocational training programmes stressing entrepreneurship and business skills, and developing appropriate apprenticeship programmes that give our young people skills, dignity and a better chance to find jobs.
The informal sector shouldn’t just be seen as an “invisible” sector to be “captured” but a major driver of economic opportunity and innovation; a transitional intersection to the formal economy with a visible and beneficial impact.


Mr Rugasira is the chairman, Good African Coffee Ltd. This is an edited version of a speech given at the URA Open Minds Forum on May 5, 2016 at the Serena Hotel, Kampala.