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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 • • • • • • • • • 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 THANK YOU