At present, informal activity accounts for nearly two-thirds of Zimbabwe’s output and four-fifths of its employment, which is higher than the average level in LMICs and UMICs.
While a declining trend in employment informality has been observed in an average LMIC and UMIC, during the past two decades, employment informality in Zimbabwe has been persistent and has edged up during output recessions, offering a source of resilience against shocks. However, the high levels of informal employment suggest a lack of opportunities in the formal sector, given that informal jobs provide lower wages and offer more limited protection for workers.
Employment informality covers all sectors of the economy, including critical sectors of the economy such as agriculture, mining, and tourism.
Despite these sectors’ importance in the economy, they present less opportunity for Zimbabwe to move its economy up the value-added chain or provide quality jobs for workers.
There are considerable productivity gaps between formal and informal firms in Zimbabwe. As shown by the recent enterprise surveys, labor productivity in a median informal firm is one-tenth that of a formal firm of similar size, suggesting a relatively high productivity gap of nearly 90 percent.
Moreover, over three-quarters of formal sector firms face competition from informal firms, which is significantly higher than in middle-income countries (MICs) and peers in SSA. Three-quarters of formal firms in Zimbabwe identified the competition from informal firm as a major obstacle to their business. Cross-country evidence suggests that competition from informal firms can lower formal firms’ productivity by 24 percent compared with firms that do not face such competition.
Lack of sustained growth and a business environment with heavy regulatory burdens have contributed to the persistent and pervasive informality. Limited economic development and an unfriendly business climate have incentivized firms and workers to move to the informal sector, while reducing the benefits of joining the formal sector.
The two recessions during the past two decades have significantly impacted economic activity and jobs, and have led to the rise in output informality and employment informality.
Subsequent positive output growth between 2009 and 2018 did little to reverse this structural change.
The COVID-19 pandemic further fueled the expansion of the informal sector. The occurrence of the COVID-19 pandemic in early 2020 disrupted supply chains and, coupled with the lockdown, severely weakened the country’s economic fundamentals.
As a result, the size of the informal sector is estimated to have increased to 62.2 percent of GDP, while triggering structural shifts within the economy.
Employment shifted from industries with higher value added, such as manufacturing and high productivity services, to industries with lower value added, including the wholesale and retail trade, and other low-productivity services activities.
Given the difficulty of reversing the expansion of the informal sector after the 2000–08 recession, the recession induced by the COVID-19 pandemic may also cause a long-lasting expansion of the informal sector in Zimbabwe.
Tackling informality needs to be at the forefront of Zimbabwe’s development strategy to enhance productivity, achieve high and sustained growth, and attain UMIC status.
There are two pathways to realize the productivity potential trapped in the informal sector and boost its overall productivity level.
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