Download Rethinking the transition to formalization in Zimbabwe`s

Rethinking the transition to
formalization in Zimbabwe’s
informal sector
Nixon S. Chekenya
Midlands State University
[email protected], [email protected]
Presented at the 2nd Economic Research Advisory
Network Annual Conference: Phillip Sanders
Resort, Bloemfontein, South Africa, 8-10 March
2017
Purpose of the paper
• To examine the main drivers of informality in
Zimbabwe.
• To propose a model to formalize informal
activities in the country’s economy.
Main arguments and findings
• The informal sector in Zimbabwe is contributing at
least 60 per cent of the total GDP.
• Informality in Zimbabwe is driven mainly by high tax
burden, high poverty rates, high unemployment rates
and restricted pursuit by tax collectors.
• The existence of a sheer-sized underground economy
has several policy implications including;
(a) Lost revenue
(b) There is a possibility that the continued neglect
of a booming underground economy can result in
overlapping of this sector over the formal sector
Main arguments and findings
• Continued growth of the informal sector
threatens the private sector
-burden to private sector tax payers
• Formalization;
-economic stability
-widens tax bracket
-investment, saving, production and
consumption decisions.
About this presentation
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Definition
Estimation and theories
Stylized facts of informality in Zimbabwe
Reasons for a booming informal economy in the
country
Data and methods
Model
Findings
Policy recommendations
Summary and conclusion
Definition
• All currently unregistered economic activities
that contribute to the observed GDP (Feige,
1989, 1994; Schneider, 1994a, 2004, 2006;
Makochekanwa, 2010)
• Term first featured in the work of British
anthropologist Keith Hart (Hart, 1973) and
popularized by ILO in 1994.
• Synonyms: Agora, System D, underground
economy, second, shadow, parallel, black
market, unofficial, unregistered, dual,
marginal, submerged.
Estimation and theories of informal
sector
• Direct approach
• Indirect approach
-Discrepancy method
-Electricity consumption method
-monetary
-Currency demand
i. Exclusion model
ii. Rational exit
iii. Dual economy model
Stylized facts of informality
• National output: The sector in Zimbabwe has
grown from 10 per cent of official GDP in 1980
to 70 per cent in 2008 to an all still higher
share of 52 per cent in 2009.
• Labour force: 85 per cent of total labour force
in 2014 employed in the informal sector.
• Revenue potential: At least US$4 billion
circulating in the sector per month (Finscope,
2012).
Informality estimation using the
DYMMIC and Currency Demand
Method
Informal sector (in % of GDP) using the DYMMIC and Currency
Demand Approach
Informal sector percentage of GDP
70%
60%
50%
40%
30%
Informal sector (in % of official GDP) using the
DYMMIC and Currency Demand Method 1999/00
20%
Informal sector (in % of official GDP) using the
DYMMIC and Currency Demand Method 2001/02
10%
Informal sector (in % of official GDP) using the
DYMMIC and Currency Demand Method 2002/03
0%
Country
Drivers of informality in Zimbabwe
• High tax burden
• Restrictive business regulatory environment
• High rate of return in the informal economy
(Ocran, 2009; Makochekanwa, 2010)
• High unemployment rate
• High rates of poverty
Zimbabwe ranked in the top 20 poorest
countries in the world (World Bank, 2016).
Drivers of informality in Zimbabwe
• Social security contribution burden
• Restricted pursuit by tax authorities (ZIMRA)
-ZIMRA lacks understanding of the revenue
potential of the informal sector.
Methodology
• Extended literature review
• Content analysis of secondary sources to
critically analyze the notion of informality
• Vigilance taken in drawing lessons from
country cases in LEDCs and emerging nations
which have booming second economies
comparable to Zimbabwe
Formalization framework
Explain what
formalization is
Make formalization easy
Make formalization
desirable
Institute aposite legal and
regulatory frameworks
Tax the informal sector
Findings
• The informal sector can best be taxed in
blocks in demarcated areas where traders
conduct their business.
• Taxpayer education important with tailormade courses for each category of taxpayers
• Specialised training for Revenue Authority
staff essential to equip them with skills to tax
different categories of taxpayers.
• Flat rates of tax make compliance easy
Policy recommendations
• Revision, design and implementation of laws
and policies that dissolute informality
• Multi-thronged approach
Engage ZIMRA, MSME, CZI and Local Authorities
in formation and formalization of informal
traders’ blocks for ease of tax administration
• Policy changes targeted at introducing flat tax
rates
Educational workshops
Specialized training for revenue authority staff
Policy recommendations
• Study tour to Rwanda
A team of ZIMRA, Ministry of Finance, CZI,
MSMEs.
Conclusion
• Informal sector growth translated lost revenue
potentials
• Overlapping of informal sector over the formal
economy
Continued neglect of informal economy
• Taxation of the second economy a matter
deserving exigent attention.
END
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