The informal sector makes up a large share of activity in most of Africa’s largest economies. The OECD estimates that informal work accounts for two-thirds of non-agricultural employment in sub-Saharan Africa. In the case of Tanzania the figure is even higher, with 76% of the non-agricultural workforce subsisting outside the formal economic framework.
There are many benefits of the informal sector – including low barriers to entry, and high levels of competition, entrepreneurship and job creation – but there are also challenges. In particular, it restricts the ability of governments to accurately measure their economies and limits the collection of tax revenue.
The informal nature of much of Tanzania’s economy also has a direct bearing on some of its most important development goals, such as the promotion of manufacturing activity. Small, informal firms make it difficult to nurture value chains, which depend on formal linkages between small, medium and large firms. More broadly, informality constrains business growth due to the limited scope of contractual enforcement, and increases the cost of social service provision.
Societal Shift
Where previous initiatives to formalise the informal workforce have been based on a mixture of enforcement and penalisation, recently there has been greater emphasis from international bodies on support and incentivisation.
In October 2016 the UN Conference on Housing and Sustainable Urban Development adopted the New Urban Agenda, which stresses the importance of supporting informal enterprises by extending legal services and social protections. It also calls for a combination of incentives and compliance measures to be implemented without undermining existing livelihoods.
This more cooperative approach was adopted by the government and incorporated in its most recent five-year development plan. Three initiatives underpin this effort: the establishment of a new national identification system, the formulation of comprehensive land use plans and the maintenance of a transaction-based business registration database.
Land
The question of land use is of particular interest to foreign investors. Acquiring land in Tanzania can be complicated. A land bank managed by the Tanzania Investment Centre has yet to reach critical mass, so foreign investors often face a long process of transferring village land, held by customary right, to general land. The removal of this bottleneck would improve the investment climate and give the government greater oversight of the economic activities taking place. The government also proposes allowing informal operators to continue with activities in designated areas, either on a full- or part-time basis, with the necessary permissions to be granted by local authorities.
More recently, local governments have adopted a more accommodating stance. The Arusha City Council, for example, has assisted informal actors in setting up hundreds of businesses, ranging from tree nurseries to car washes. Allowing businesses to continue to operate informally in this way will not address the lack of revenue, but the improved visibility of their activities will aid the government in its attempts to facilitate important linkages between formal and informal industry.
Tax
The government is also attempting to widen its tax net. Its most promising option here may be to link the Tanzania Revenue Authority’s taxpayer identification system to the national system, which will allow the authority to more accurately quantify the informal economy and encourage compliance. The government also plans to enlist the support of village leaders to identify and register businesses.
The provision of social protection certainly makes being brought under the tax umbrella more palatable. However, the days of using pensions and health insurance as an incentive appear to be over as Tanzania plans across-the-board social protections, including increasing community health funds and promoting supplementary schemes for the informal sector.
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