A recent study by the International Monetary Fund (IMF) has shown that Zimbabwe has the second largest informal sector in the world. Only the south American Bolivia has a larger black market.
The working paper titled, ‘Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?’ says more than 60% of the Zimbabwean economy is informal, second only to Bolivia’s 62.3%. This should be contrasted to the most formal economies, Switzerland and Austria at 7.2% and 8.9% respectively.
As you might expect, measuring the size of a country’s informal sector is not an easy task. The authors’ methodology becomes important to consider and you can examine it yourself here.
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The first thing to understand is just what is considered a shadow economy. Note that the shadow economy is the same as the black economy, lack economy, parallel economy, gray economy, informal economy and hidden economy. The authors say,
For our study, the shadow economy reflects mostly legal economic and productive activities that, if recorded, would contribute to national GDP, therefore the definition of the shadow economy in our study tries to avoid illegal or criminal activities, do-it-yourself, or other household activities.
The shadow economy includes all economic activities which are hidden from official authorities for monetary, regulatory, and institutional reasons.
For those of us living in Zimbabwe, we have a general idea of what causes an informal market. In the day to day running of your business you face various ‘obstacles’ that tempt you to go ‘off the books.’
The study in question lists tax (ZIMRA) and social security contribution (NSSA) burdens as one of the biggest causes. The Zimbabwean government is known for its high tax rates, however in this southern African region, the country’s tax rate is comparatively low. That would mean tax and social security contributions alone are not responsible for the large black market.
The Zimbabwean government is looking to lower taxes if Finance Minister Chinamasa is to be believed. The Deputy Minister of Finance recently announced that the government is scrapping tax on swipe transactions below $10.
The government said all these moves are meant to address this tax issue and attract investment into the country whilst also encouraging those in the informal sector to register their enterprises.
The IMF study notes that the quality of public institutions and corruption actually play a bigger role in the creation of a parallel market than the actual burden of taxes and regulations. They observed that a bureaucracy with highly corrupt government officials is usually accompanied by larger unofficial activity.
I think this best explains Zimbabwe’s situation. Most of us have encountered a government employee who expects to be ‘bribed’ with ‘yedrink’ to do the job for which they are paid. The government says it is trying to weed out corruption and has some dismissals to back up that talk but this is a mammoth task as culture is not easily changed.
The study notes the catch-22 that is created by a large informal sector. Growth in the informal market leads to lower tax revenues for the state. The state then increases tax rates to increase revenue which leads to more businesses going off the books.
The encouraging thing for Zimbabwe is that the government seems ready to break out of that cycle by contending with lower revenues, from reduced taxes, in the short term. All this in an effort to promote informal sector business to register whilst attracting foreign investment.
The IMF study lists other causes of the informal market and you would do well to go through the full report yourself here.