About informal sector

About informal sector CHAPTER ONE INTRODUCTION 1.1 PROBLEM STATEMENT The informal sector makes a considerable contribution to production, consumption and income generation, particularly in developing countries. For example, it contributed about 8 percent and 68 percent to the GDP of the United States and Bolivia respectively in the years 2002 – 2003 (Schneider 2005). The sector is also a source of sustenance for the majority of the poor, unskilled and socially marginalized population, especially women. Moreover, it is a vital way of survival in an economy that suffers from deficient social safety programmers and unemployment insurance. In developing countries the informal sector not only contributes significantly to the national output but it also serves as a source of employment for most of the unskilled population (Becker 2004). According to the estimations of the World Bank (2003) in the period from 1980 to 1990, the informal sector contributed on average 40 percent of the GNP and 50 percent of the employment in developing countries. In India, the informal sector accounts for 62 percent of the GNP, 50 percent of the gross national savings and 40 percent of the national exports and absorbs 83 percent of workforce (ILO 2002). The contribution of the informal sector also tends to increase in many countries. On average, the informal sector contributed about 41 percent of the official GDP in 1999 – 2000, and increased to 43 percent in 2002 – 2003. For example in Colombia it increased from 39.1 percent in 1999 – 2000 to 43.4 percent in 2002 – 2003; in Moldova from about 45 percent to 49 percent; in Botswana from 33.4 percent to 34.6 percent and in South Africa from 28.4 percent to 29.5 percent (Schneider 2005). However, different methods of measurement were applied depending on the specific definition of the informal sector. This complicates any comparison. In Africa the informal sector is mostly composed of street vendors, retailers and in rare cas es wholesalers who trade in products such as food, clothes and electronic appliances. The manufacturing and services only account for a small share of the sector (UN 1996). For instance in countries like, Angola, Botswana and Uganda, the informal sector is dominated by the retail sector. ILO (2002) demonstrates that in Sub-Saharan Africa (SSA) the majority of informal workers are self-employed and it makes up 70 percent of the total informal labor force and the remainder are hired employees. However, street vendors are much more common on the continent and according to Charmes (1998) they account for about 80 percent of the entire sector in Benin. In recent decades there has been greater interest in getting consensus on the definition of the informal sector as well as on the measurement. It is important to have a clear understanding of its impact and contribution to the economic growth and the welfare of the society of low income countries. Therefore, most governments in developing countries took positive steps to measure the size of the sector to ensure that it is integrated as an engine of growth and development. This is important to make policies in order to support the informal sector in a sustainable manner (Tokman 2001). The informal sector in Mozambique involves wholesalers and retailers, selling a broad range of food and non food products that are consumed not only by low income, but also medium income households (Dana & Galbraith 2006). The sector employs the majority of the labor force due to a lack of financial incentives to participate in formal activities, labor laws and complexities in the implementations of regulations. Approximately 77 percent of the labor force was involved in the informal activities in 2005 (INE 2006). Additionally, this sector accounts for 20 to 50 percent of the country’s GDP. The above mentioned factors clearly demonstrate that this sector requires legal empowerment as support for its stakeholders and enterprises (Weber, Michael & David 1992). Although the government of Mozambique designed a strategy to attract foreign investment to support and develop the linkages between the informal and formal sectors of the economy, this is not sufficient.