Zimbabwe’s national statistical agency, ZimStat, recently reported that 76% of the national economy is informal. This should be of no surprise to anyone, but what to do about it is the big question troubling policymakers. We know the causes: failure to invest in the core economy, lack of external financing, mountains of inherited regulation and poor economic governance. But is the solution to try and tax and ban the informal economy or work with it, avoiding unnecessary distortions and disincentives?
Many of those notionally in the formal sector of course also engage in the informal economy. Ask any teacher, health worker or government civil servant and they all do other work making money when their salaries are inadequate. The boundaries between the formal and informal are very obscure these days, meaning that taking the informal economy seriously – which after all is the majority economy – must be important.
And of course, as many commentators point out, the informal is not ‘bad’. After all, nearly all farming that keeps the nation alive is ‘informal’ in this sense. The obsession with a particular type of modernist formality as representing ‘development’ is one that emerges from colonial policies, along with the raft of regulations, licensing systems and so on that follow. The desire to control and manage towards a particular vision of progress is strong, despite the long and important tradition in development thinking that has made the case for the so-called ‘informal sector’ in growing economies as discussed in a previous blog.
Blunt instruments
Yet politicians keep haranguing the informal sector, despite the fact that it contributes a very substantial proportion of the GDP and many, many livelihoods both urban and rural. From all political sides, the informal is condemned and deemed unhygienic, unsightly, unsafe, and most especially not contributing the national fiscus through taxation. Many attempts have been made to tax informality, including the so-called ‘presumptive tax’ or the 2% tax applied to all money transfers. To much outrage, presumptive taxes have just been hiked on all transport operators recently, once again increasing costs. These are blunt and much-resented instruments. And they don’t work; in fact, the opposite as they undermine informal activity and encourage people to avoid taxes as much as possible.
Attempts to outlaw the informal sector, as has recently happened with dramatic interventions by the local government minister, are bound to fail. In March he announced that all street vending would be banned, and most recently in August he added to this by making night-time clothes trading illegal. These are reminiscent of colonial interventions that prevented Africans trading in downtown areas, which were reserved for whites. Yet most citizens rely on these trading options for cheap, reliable supplies of important goods, especially when the economy is so depressed and wages so minimal.
Rural implications
Although mostly focused on the metropolitan urban areas these measures have impacts on the rural hinterlands too. The huge trade in agricultural products flowing from the land reform areas go to these markets in both large and small towns. Traders from rural areas are central to the activity in the many informal markets, such as the kuTrain market in Masvingo. Rural people invest in and deploy labour to enterprises in towns, investing their surplus income from farming in new enterprises, whether small shops, hair salons or hardware stores as our studies of small towns have shown.
Upsetting local (frequently informal) economic development, now thriving thanks to land reform, through poorly thought-out interventions can have major knock-on effects on the growth and linkage potentials of land reform areas too, as well as the direct negative impacts on those informal traders and service providers. A recent positive development has been the reduction of taxes, levies and fees in the agricultural sector, focusing initially on livestock, dairy and stockfeed, but trailed as part of a revision and rationalisation of taxes across all sectors to improve the ‘ease of doing business’ across the economy. This is certainly welcome and long overdue.
Taxation choices
An excellent new study has been published through the International Centre for Tax and Development (ICTD) (briefing here), which is based at my home base, the Institute of Development Studies at the University of Sussex in the UK. The two Zimbabwean authors highlight the dilemmas of taxing informal economic systems, a theme that the Centre has been exploring especially in Africa in a number of interesting publications (see, for example, here and here, amongst many).
The bottom line is that generic, unfocused tax instruments (like the ones favoured by the Zimbabwean government) are inappropriate and simpler, more targeted approaches are required that don’t cause disincentives to economic activity and encourage a gradual shift to more formal forms. This is the same advice offered by the World Bank in a report covered on this blog before.
The ICTD report uses a survey of 2490 informants, covering a whole array of informal suppliers of goods and services, in two cities – Harare and Masvingo. They show that most of these informal sector players have incomes below the poverty line. Most would not be normally subject to income-based taxation, therefore, and it is only the top 20% of the sample who might be eligible, although in practice only 6% pay mostly the ‘presumptive tax’ applied to informal operators.
But in fact all informal players are heavily taxed, whether through licensing, tolls, fees and permits (see the report’s table 5.4). And in particular, a large proportion of outgoings are through bribes to local government, police and other officials so as to avoid other forms of tax. This is a grossly inefficient system and although the bribes go to support underpaid officials, this is a huge loss to the tax system and a poor form of redistribution.
The survey shows too that women suffer a particularly large burden of this array of taxes and bribes because of the sort of activities they do, including trading involving moving so being vulnerable to being stopped and charged. And yet women are largely in the lower income brackets so suffer a high burden comparatively.
The report also shows that it depends on the city what types of taxes/bribes are charged, with Harare showing a far higher level than Masvingo. The report authors argue that it is essential to have a decentralised taxation system, appropriate to the locality and types of businesses, and have this targeted so that there are fewer gender and other inequities. The massive loss of revenue through bribes of course can only be reversed when such officials are paid living wages but will reduce if the opportunities for taking bribes are not available through so many layers of regulation and licensing.
Supporting informality through appropriate policies
What is clear – as many others have pointed out – is that the top-down implementation of taxes, bans on informal activity and police harassment that results is massively counter-productive. Wishing the informal economy away with dreams of a modern, formal system is simply pie-in-the-sky. The finance minister, Mthuli Ncube, appears to have realised the burdens of regulation and taxation only when his wife tried to set up a restaurant and had to navigate so many licenses and associated charges. The mooted economy-wide changes to encourage business will hopefully get rid of inappropriate polices and clumsy interventions that have for so long undermined the very economy the finance ministry is trying to manage, which after all is predominantly informal. A look at the ICTD report by ministry officials might offer some clues to a different path ahead.
This post was written by Ian Scoones and first appeared on Zimbabweland