Zambia’s private sector development dialogue is inextricably linked to debates about its Informal
Sector, which, according to most estimates, employs about 90% of its labor force. While some data
on informal sector workers is available and has been used to understand the nature of the informal
labor force, little is known about enterprises that constitute the informal sector.
This study attempts to bridge the gap in knowledge about the size of the informal sector, and the
characteristics of firms within it. It combines data from two complementary surveys-the Zambia
Business Survey (ZBS,2008), whose sampling methodology encompasses all businesses in Zambia,
including informal enterprises in agriculture and services, and the World Bank Enterprise Survey
(WBES,2008) database, which includes a module covering urban microenterprises in major cities of
Zambia. Used together, an interesting and insightful picture emerges.
Defining informality to include businesses that are not registered with the Zambian Revenue
Authority (ZRA) for tax purposes, this study finds that there are about 1.02 million informal micro
and small enterprises (MSMEs) in Zambia, along with about 30,000 formal MSMEs. While this
number seems strikingly high at first glance, and could imply enormous taxation potential, further
examination shows that a vast majority of these “businesses” are very small: only 15% of firms have
revenues greater than 1m kwacha per month; less than 8% have revenues more than 2 million
kwacha. If one uses the 2m kwachathreshold for taxation eligibility; only about 80,000 businesses
would qualify for taxation. Majority of these businesses (70%) are farming operations; others are
mostly in the retail sector.
Data from the World Bank Enterprise Survey show that informal businesses in the urban areas of
Lusaka and Copperbelt provinces are atypical of informal sector businesses as a whole, comprising
only about 3% of the informal sector. However, they form the top tier of informal sector firms.
Compared to an average, typically rural informal enterprise, informal businesses in the city centers
resemble a typical formal MSME: they have more educated owners, greater access to public services
and earn significantly higher revenues. Revenues of many firms in this urban segment overlap with
those of firms in the formal sector.
Differences between formal MSMEs and informal sector operators lie along many dimensions.
Registered firms have significantly higher labor costs and bureaucratic burden compared to firms
in the informal sector. However, these costs are offset by higher revenues and greater productivity.
Managers with higher human and financial capital self-select themselves into the formal sector;
firms in this sector are also much more likely to have access to basic infrastructure and financial
services. There is a clear dichotomy in financial sector borrowing-almost without exception, only
registered firms have access to overdrafts and loans.
Our results indicate that taxation potential is likely to be highest for urban, informal sector firms.
These firms often have access to infrastructure services (mainly electricity and water) through
their “society”, and enjoy the benefits of formalization, while circumventing registration costs,
bureaucratic burden of tax compliance, and higher labor costs. Others-notably those in agriculture
and service sector outside urban areas are unregistered because of low skills and productivity.
These firms would benefit from interventions designed to augment productivity, including skills
training, availability of infrastructure and microenterprise lending facilities. However, many of
these firms are survivalist in nature, and should “disappear”, with policies geared towards
structural transformation in agriculture, and growth of the formal large-firm private sector, which
can shift informal workers and small-business employers as employees in its formal sector.