The informal sector makes a considerable contribution to production, consumption and creation of employment and income generation in developing countries. The informal sector is also a source of sustenance for the majority of the poor, unskilled and socially marginalised population, especially women. This is particularly relevant in the case of Mozambique where about 77 percent of the labour force is involved in the informal activities. Moreover, it is a vital way of survival in nations due to a deficient social safety programs and unemployment insurance, particularly for those without skills required for formal employment.
The informal sector makes a significant contribution to the Gross Domestic Product (GDP) of developed and developing countries. However, Schneider (2005) states that the income brought forth by the informal sector differ among countries, for example it contributes about 8 percent and 68 percent in the United States and Bolivia respectively in the years 2002 - 2003. This indicates a relative importance in the case of developing counties.
In developing countries specifically, the informal sector not only contributes significantly to the output but it also serves as a source of employment for the majority 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 contributes on average 40 percent of the GNP and 50 percent of the employment in developing countries. For example 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).
Additionally, the contribution of the informal sector tends to increase in many other 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 raised 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, the above-mentioned figures were estimated applying different methods of measurement which complicated any comparisons.
In Africa the informal sector is mostly composed of activities related to trade such as selling of food clothes electronic appliances etc as street vendors, retailer and in rare cases wholesaler. The manufacturing and services only accounts for a small share of the sector (UN 1996). For instance in countries like, Angola, South Africa and Uganda, the informal sector is dominated by retail trade. ILO (2002) demonstrates that in Sub-Saharan Africa (SSA) the majority of the informal workers are self-employed and it makes up 70 percent of the total informal labour force and the remainder are hired employees. However, street vendors are particularly more common in the continent, and according to Charmes (1998) they account for about 80 percent of the entire sector in Benin, with female workers adding up to 75 percent.
However, in recent years there has been a high interest in getting a consensus for defining the informal sector as well as measuring and studying the sector to have a clear understanding of its impact, and contribution to the economic growth and society of low income countries. Therefore, most governments in developing countries have positively taken steps forward in measuring the sector so as to ensure that it is integrated as an engine to economic growth and development. This is important to make and sustainable policies to support the informal sector (Tokman 2001).
The general objective of the paper is to compare the informal sectors in Mozambique and South Africa according to the reasons for engaging into informal activities, relative size, obstacle, contribution to the economy, and to recommend some policy measures to deal with the sector so that it will no longer be considered as a marginal sector but a segment of the economy that helps in poverty alleviation, economic growth and development and assists the government in attaining its main objectives of poverty reduction as well as the millennium development goals.
The informal sector in Mozambique involves wholesalers and retailers, with a broad range of food and non food products consumed not only by low income earners but also by sizeable number of medium income earners (Dana & Galbraith 2006). Moreover, it employs the majority of the labour force due to lack of financial incentive to participate in formal activities, excess of labour laws and complexities in the implementations of regulations. According to INE (2006) the total labour force in Mozambique is about 10.2 million people of which 7.7 millions are employed in the informal sector. Women are 52 percent of the labour force in the country of which 88 percent are unskilled and employed in the informal sector (Monteiro 2001). Additionally, this sector is increasingly becoming important in the country because it absorbs a large number of the population with no conditions to survive, and it accounts for a large share of the country's GNP. The above mentioned factors clearly demonstrate how does this sector need and requires a legal empowerment for its stakeholders and enterprises (Weber, Michael & David 1992).
The government designed a strategy to attract foreign investment to support and develop the informal business using linkages with the formal sector. However this strategy failed to bring desired results because of asymmetric information about business development, norms and regulations as well as difficult access to credit from the financial institutions (Dana & Galbraith 2006).
In South Africa, the household survey 2000, estimate that 10.4 millions of economically active population are employed in the formal sector, 1.9 million are employed the informal sector and 3.2 million unemployed. Consequently, the informal sector in South Africa is seen as an alternative solution to problems such employment and poverty alleviation. It also works as a support base to the rest of the economy (Braude 2005; Becker 2004).
The central government in South Africa is devoted to creating conducive environment to support the informal sector operators including street vendors, thus they put in place new laws at all economic levels (national, provincial and local). The Law recognize the street traders as business individuals contributing to the national economy since it provides the informal traders with rights to trade and the local authority is merely a regulatory authority (Whyte 1991). Moreover, Whyte states that the South African national strategy also promotes and assists the development of all the categories of the informal sector. Across all the cities of South Africa, Durban has the best environment for informal operators, since it created a department of informal trade and small business opportunities.
- To show how the informal sector contributes to income creation and poverty alleviation.
- To show how the informal sector assists in reducing the rate of unemployment.
- To investigate government regulations, policies and institutions to support the informal sector expansion and development.
- To propose policy measures to support and empower the informal sector operators considering the lessons that can be learnt from other countries.
The paper presents a descriptive overview of the importance of the informal sector in Mozambique. It is based on research done on secondary sources including books, journal articles, online articles, research and studies done previously by various scholars, the government, the United Nations Organization, the World Bank and other NGOs and donors. The assignment was carried out in the following stages: planning of the structure of the study, followed by the collection of information, organization and analysis of the information and finally the compilation of the final document.
The study is structured as follows: Chapter two provides a theoretical framework of the informal sector including definitions, general characteristics and perspectives of the sector.
Chapter three focuses on the informal sector in Mozambique placing more emphasis on the causes of the informal sector in the country, the dimension of the sector, challenges faced by the sector and its contribution to the poverty alleviation and economic growth and development as well as the impact of globalization on the sector.
Chapter four presents the South African informal sector with focus to policies designed and implemented to support the informal sector since it plays a key role in income and employment creation. Finally, chapter five will conclude with some lessons from other countries and policy recommendations to support the informal sector.
Historically, the term "Informal Sector" was introduced by the anthropologist Keith Hart in early 1970, to describe the extent of operating economic activities that were unregistered in the records of revenue authorities in Accra - Ghana (Hart 1973). However, Hart recognized that studies and observations had been done on the so called "economy of the street" in previous decades including studies by Mayhew (1961-2) and Whyte (1943) in London and in the United States of America respectively.
This chapter focuses on providing a clear theoretical background about the informal sector and its contribution to the economy having a base studies done by different scholars in the field. The chapter is structures as follows: first it defines the informal sector according to various experts and organizations, second it focuses of explaining the most common perspectives on the sector, thirdly it provides the general characteristics, fourthly the empirical evidence on the role of the sector, fifthly government policies to support the sector followed by a summary.
The informal sector has become a common concern in the academic literature, even though its does not have a precise definition. However, various scholars describe the informal sector in different ways including: black economy (Lyssiotou, Pashardes, & Stengos 2004), underground economy (Tanzi 1999), and unofficial economy (Hibbs Jr. & Piculescu 2005). All the above mentioned designations classify the attributes of the informal sector that is, the transactions are not recorded or not accounted officially (Tokman 2001).
The International Labour Organization (ILO) in its International Labour Conference ILC (2002) extended the concept of the informal sector to 'informal economy' so as to incorporate vulnerable workers even if they are employed in the formal sector. Moreover, the ILC definition of the informal sector is inclusive and incorporates the whole of informality such as agriculture, industry, trade and labour. Therefore, the ILC defines the informal sector as "all economic activities by workers and economic units that are in law or in practice not covered or insufficiently covered by formal arrangements" (Chen 2004).
In addition, Djankov et al. (2002) classify the informal sector as an activity for subsistence and unofficial business enterprises struggling to make part of the formal sector. He further states that though this sector is engaged in unofficial activities with unreported employees, it has a high potential and dynamic to turn into a formal and registered activity.
The informal sector is also defined as being "the sector of economy whose existence, may be voluntary or involuntary and illegal, thus it is not registered in the national statistics accounts, gross domestic product (GDP) or in the national official numbers of wealth" (Amurane 2007). The informal market is referred to as market that emerged from impulsive organization of people with no state intervention in terms of licensing and tax payment and they even lack the provision of basic infrastructure such as toilets, electricity and water (Amurane 2007).
However, in this study the term informal sector will be used to refer to any people or enterprises participating in the trading, agriculture, manufacturing and employment market without a license from the legal authority, including operating traders who, even though not licensed, pay a certain fee to municipal authorities (MOA/MSU 1992).
The informal sector has a rapid growing role in providing income for the unemployed people and food for the mass of low income consumers in low income countries. Despite the large and increasing significance of the informal sector, it lacks systematic information in regard to its organization and functions. Such information would be crucial for the government to build a coherent social benefit such as increasing the level of organization within the sector and eventually an investment (MOA/MSU 1992).
According to Chen (2004) there are three fundamental schools of thought to explaining the informal sector including: dualistic school, structuralism school and legalist school. However, in reality these three approaches cannot be easily separated since they are in most cases integrated.
The dualist schools advocate that the informal sector is a distinct and separate secondary sector indirectly related to the formal sector since it provides income and security to the poor population (ILO 1972). Moreover, they believe that as a result of development and rise in per capita income the informal sector will cease to exist especially the segment that are peripheral to the capitalism production system (Chen 2004). In contrast, Pratap & Quintin (2006) defend that there is no evidence that the informal sector would disappear completely because the informal output has a significant contribution (10 to 15 percent) to the official GDP of most developed countries.
The structuralism school argue that the informal sector is a subordinate economic activity to the formal economy since the informal enterprises and workers cut down the costs for the formal enterprises and subsequently increase competitiveness (Castells & Portes 1989). Castells and Portes further consider the relations between the informal and formal sectors as "buyer - supplier relationship" or in employment interaction as "contracting out or casualisation". They further state that the informal sector not only mitigates the risk of the formal economy but also functions as a strategy for the reduction of cost. Thus, the formal sector promotes informal production and employment (Moser 1978; Castells et al. 1989).
The legalist school advocate that the informal sector is made up of entrepreneurs who aim to reduce operational costs related to formalization, specifically company tax and labour regulations. Therefore, the informal sector will continue existing as long as the government continue with burdensome and costly regulation (De Soto 1989). This phenomenon can be found in high and middle income countries of Latin America such as Brazil. Pratap & Quintin (2006) also found that high tax, weak institutions, inefficient property rights, quality of the legal system and excess bureaucracy are key factors that explain the disparity in size of the informal sector in countries with similar levels of economic development.
In general, informal sector denotes all unregulated and non-formal economic activities. And it is characterized by, low entrance requirement in terms of capital and qualified workers, small scale operations, and, labour intensive methods of production and technology. The informal sector was perceived to comprise of activities for survival and unpaid domestic workers. Furthermore, the informal sector is also characterized as of tax evasion, undeclared labour, and illegal and for criminal activities. Nonetheless, it provides goods and services which production and supply in the market are legal. Therefore, the informal sector may or may not practice illegal operations but should not be confused with criminal activities (Becker 2004).
In developing countries such as African countries, the informal employment is characterized by high percentage of women and self employment, lower levels of education, high rates of illiteracy and lower wages, longer working hours and poor overall conditions. Therefore, the employment in informal sector is described as lacking decent work as compared to the formal sector employment (Vishwanath (2001) & Avirgan et al. (2005) El Mahdi & Amer (2005)). According to Braude (2005) in South Africa for example, there is a huge gap between levels of education of employees in informal and formal sectors. 37 percent of workers in the informal sector did not complete the primary education as compared to 16 percent of the formal sector. However, this tendency is prevalent in many African countries, where school droppers seek jobs in the informal sector.
Since wages in the informal sector are generally low, the magnitude of poverty is consequently higher among employees and households who rely on the sector employment and income (ILO 2002). Likewise, Braund (2005) found that workers in informal sector in South Africa earn about 84 percent less on average of what employees in the formal sector earn however the estimates do not account for types of occupation.
Additionally, in Africa the informal enterprises are characterized by low business costs and no entry requirements, small transaction scale with small number of workers. Generally, the informal sector is labour intensive and of low skills requirements. Thus, the workers gain skill as they perform their activities (Becker 2004).
In addition the informal sector has become differentiated. With those who still continue in the street corners without a physical infrastructure and those who have developed into established markets with a large number of traders and have a consistent physical infrastructure, and have a direct link with registered wholesalers. Depending on the product in analyse, the informal sector sales surpasses the formal ones (Dana 1996).
Generally, the informal marketing has three characteristics: first the informal sector is still a recent phenomenon and is developing rapidly. Second, it emerged in the midst of a formerly centrally controlled economy. Finally, it operates within a policy environment that creates great uncertainty regarding the sector's current practices and future prospects (Kaufman 2000).
The measurement of the informal sector is challenging, however there are international standards measurement methods including: direct approaches, which employs planned surveys and samples based on voluntary responses or tax auditing and other accepted methods; indirect approaches/indicator approach, this approaches generally uses macroeconomic indicators that that are comprised of information about the development of the sector over time such as the discrepancy between national expenditure and income statistics, the discrepancy between the official and actual labour force, the transactions approach, the currency demand approach and the physical input approach (electricity consumption); and The model approach this method considers factors leading to the existence and expansion of the informal sector as well as the factors impacting on the informal sector such as tax burden and over regulations over time (Schneider 2005; Friedman, Johnson, Kaufmann & Zoido-Lobaton 2000). Hence, the informal sector operates in a variety of forms depending on a country's characteristics. As a result of technological changes, the sector is rapidly developing and new forms of informal business enterprise are emerging, making it more difficult to make a definition that is consistent of time and geographical location and to compare informal sector of different countries (World Bank 2003).
The importance and contribution of the informal sector in the countries gross national product has been realized by various scholars even though it is being treated as unimportant and of low productivity. However, the informal sector also contributes to employment. For example in the context of economic reforms and globalization, the growth of employment in public sector is likely to reduce, thus the informal sector should play a major role in generating employment (ILO 1998).
Contribution to employment
Studies conducted by Bangasser (2000) in developing countries found that the informal sector employ a large share of the labour force. The study also found that the employment in the informal sector is typically characterized by unskilled workers, home based employment and of low income. About 90 percent of the workers in the informal sector gained their knowledge and skills in the field since they did not undergo any training. Additionally, the terms and conditions of employment are generally below the legal standards for example the workers do not have a formal contract. Hence, self employment is the major pattern of the sector, with small family business especially in the initial phase of the enterprise.
In the developing world, the informal sector has been operating as the most important source of employment for the majority of the labour force particularly unskilled, women and older. Moreover, in sub-Saharan Africa, the informal sector accounts for 60 to 80 percent of total non agricultural employment (Charmes 2000). Recent estimates show that in India it accounts for 73.7 percent, in Indonesia 77.9 percent, in Philippines 66.9 percent, in Thailand 51.4 percent and in Pakistan 67.1 percent of urban employment (Charmes 2000, ILO 2000).
Charmes also reported that in sub Saharan Africa 80 percent of the informal sector employment are non wage workers and are in a form of self employment, family labour. Likewise, Sethuraman (1997) assert that most of the informal operators are self employed or family workers.
Contribution to output
Studies conducted by Schneider & Klinglmair (2004), found that the informal sector impacts negatively on economic growth of developing countries, contrasting results that were found in developed countries whereby informality impacts positively on economic growth. Same results were found by Sarte (2000).
On the other hand, Bhattacharyya (1993), Asea (1996), Schneider & Enste (2000) found that informal economy impacts positively on formal or official economy. They advocate that the informal sector contributes to the growth of the formal sector by creating market for its products and indirectly increasing tax revenue to the government.
According to Chen, Sebstad & O'Connel (1999), the informal sector emerged due to low economic growth, high rate of unemployment and structural adjustments. Thus the informality is a defensive protection of the economic agents in response to intolerable regulatory burden imposed to them through policy measures, such as labour law, tax and social security.
Studies conducted by Loayza (1996) using data from 31 countries of Latin America and Caribbean in a period from 1980 to 1992 found that the informal sector tends to expand as a result of high corporate income tax. He also found that the dimension of the informal sector is positively related to labour market requirements and negatively related to quality of State institutions including law enforcement, bureaucracy and corruption level and non discriminatory policies. However, Botero et al (2004) found that the result of negative relationship with labour regulation is observed in richer countries, and generally these results are not valid for the developing countries.
Dues to scarcity of data it is difficulty to estimate the contribution of the informal sector in the out put, however, where estimated, evidences demonstrates that the informal sector has a significant contribution to GDP. Thus, in sub-Saharan Africa excluding South Africa, South and Southeast Asia and Latin America it contribute with 20 to 50 percent of non agricultural GDP (Charmes 2000).
Activities and enterprises
According to Tokman (1990) the informal sector is heterogeneous in terms of type activities, thus it encompasses manufacturing, construction, trade and services subsectors. The large share informal sector is made up of Trade related activities followed by trade and services. Construction is less common. Tokman further describes the informal sector as being of small scale, low technology levels, few capital requirements and labour intensive operations. However it is important to distinct between the types of informal sector activities (subsistence and those directly or indirectly related to the formal sector).
A study conducted by (Narayana, Kaino & Sekwati 2002) on the incidence of women working in the informal sector found that 73 percent of the women work in the informal sector as a secondary activity. However 96 percent which include those doing informal work as primary activity and those doing it as a secondary activity reported that informal self employment is better option because it helps in creation of supplementary income.
In general the informal sector employs more women than men. In Sub Saharan Africa 63 percent the informal sector workers are female, in Latin America is 58 percent employs similar results were found in Asia in the period from 1980 to 1990 (Hart 1973).
Friedman, Johnson, Kaufmann & Zoido-Lobaton (2000) found a different result in a study conduct using data from 64 countries of Latin America in a period from 1980 to 1992 that high taxes were related with lower prevalence of informal sector, especially in rich countries where high tax burden is harmonized by healthier provision of public goods.
The literature and policy of the 1980s has a pessimistic view of informal sector, thus characterizing the informal sector as of marginality, poverty and unproductive labour. However in the 1990s the governments and international agencies engaged in a reformist attitude toward the informal sector thus, they believe that the informal sector contributes to national economy and could be improved by changes in macroeconomic policies that will support the sector (Lubell 1991; Schneider & Enste 2000).
Contribution to output
According to the South African Reserve Bank estimates using expenditure survey of household, the informal sector in South Africa contributes with 7 to 12 percent of GDP. Similarly, studies by Devey, Skinner & Valodia (2003) using alternative methods for measuring the informal sector found that it contributes between 8 to 12 percent of GDP.
There is a gender dimension in South African informal sector. Women make up the larger share of the informal sector operators since the majority of women are unskilled domestic workers. However, they tend to earn less as compared to men and accounts for most of the unpaid labour. Another important characteristic of the country is that the women do not have the right to inherit property thus, unable to participate in formal activities as they do not have assets or collaterals to access credit from financial institutions (Becker 2004).
According to the South African household survey 2000, 10.4 millions of economically active population are employed in the formal sector, 1.9 million are employed the informal sector and 3.2 million unemployed. Consequently, the informal sector in South Africa is seen as an alternative solution to problems such employment and poverty alleviation. It also works as a support base to the rest of the economy Braude (2005). The majority of the informal sector workers operators are concentrated in trade activities, followed by construction, manufacturing and services (ILO 2002).
There is a huge gap between the levels of education of informal sector workers as compared to the formal sector in South Africa. According to Braude (2005), 37 percent of the employees in the informal did not complete the primary education whereas for the formal sector are 16 percent. Consequently, workers in formal sector earn 84 percent more in average than the informal sector workers. However, this estimate do not account for differences in occupation.
The South African policy seeks to eliminate the dualistic economy. Thus, designing programmes and policies that aim to improve the opportunities of the marginalised and poor population enabling them to develop and expand along the lines of the structuralist school.
The Local Government of Durban for example, has developed a regulatory business policy to support the informal enterprises to grow their business. The regulations include: allocation of permanent places for the street vendors, charging fees for the site instead of taxes, decentralization of the registration process to facilitate the informal entrepreneurs to register their business with the Government, and supporting the sector with market expansion and financing programs. In Durban, the local Government recognized that the informal sector has the similar needs as the formal sector such as safe locations, reliable services as security, water, toilets, electricity, etc (Alderslade, Talmage & Freeman 2006).
Effective institutions and legal framework are important for ensuring the smooth performance of business. In contrast, inappropriate institutions raise the business costs and distort the market. However, in general, the institutional framework for the informal operations has been unfriendly in most African countries (Lubell 1991; Schneider & Enste 2000). Policies are instruments for setting standards in provision of goods and services as well as protecting consumers, and investors. Similarly, in the informal sector, by-laws place standards in provision of public goods and services provided by the informal operators and enables local authorities to collect revenue for payments of services (Lubell 1991).
In most African Countries, the local authorities are generally the main obstacle to the expansion and development of the informal sector. Since they use restrictive policies, by-laws and regulations intended to block the growth of informal enterprises. They tend to view informality as illegal activity and as an activity responsible for making cities dirty and obstructing road traffic. Thus the policies do not understand the role played by the informal sector operators (Becker 2004). In contrast, South Africa has taken a step forward in recognizing the vital function of the informal sector. The South African authorities have designed policies measures that improve the business environment for the informal operators as well as promote its growth and development (Braude 2005). South African Government is now committed to continue promoting a conducive environment for the informal activities including street vendors. The policy recognizes the informal operators as business individual who contributes to national economy (Alderslade, Talmage & Freeman 2006). In the case of Mozambique, most informal operators pay so fees to the local authority in order to operate. Depending o the location the fee may vary and they include Municipal fee, security fee, rent of space and cleaning fee. However, the policy and regulations are not consistent.
Various literatures use different terms and employ different definitions to refer to the non official sector of the economy. However, in this study the term informal sector will be used to refer to any people or enterprises participating in economics activities without a license from the legal authority, including those who even though not licensed, pay a certain fee to municipal authorities.
When it comes to the different perspectives of the informal sector (dualistic, structuralist and legalist) the study will employ them in an integrated way, thus not individually as suggested by some experts, because they cannot easily separated.
The general characteristics of the informal sector are as of tax evasion, and undeclared labour. In low income countries the informal sector is described by high percentage of women, self employment lower levels of education lower wages and longer working hours. However, across or within countries, the informal sector is differentiated thus, there are those who continue in the street corners and those who have established physical infrastructures and have a direct link to the wholesalers.
Mozambique is located in Southern Africa, besides Indian Ocean, in the Southern border lies South Africa and Swaziland, and Malawi and Tanzania in north. Currently the Mozambican population is about 20 millions (MOA/MSU 1992).
In Mozambique, the informal sector started openly in the late 1980s, with groups of small traders mostly composed of women, appearing in the street corners selling small quantities of basic food such as tomato, rice, onion etc to the people who passes by casually. These small markets were illegal and suffered from police molestation so as to remove them from there. Today the informal sector involves wholesalers and retailers, with a broad range of food and non food products consumed not only by low income earners but also by sizeable number of medium income earners (Dana & Galbraith 2006).
The Mozambican economy is to a certain extent directly or indirectly linked to the informal sector because it assists in the countries main development goals since it produces goods and services and generates income and employment for the majority of the nation's labour force. Therefore, this sector is increasingly becoming important because it absorbs a large number of the population with no conditions to survive, and it accounts for a large share of the country's GNP. The above mentioned factors clearly demonstrate how does this sector need and requires a legal empowerment for its stakeholders and enterprises (Weber, Michael & David 1992).
According to ILO the main cause of the informal sector is poverty. In their view, the informal activities are taken as an alternative to unemployment since the government does not provide social security benefits to unemployed and thus, the unemployed cannot afford to be unemployed. However, informality is considered as marginal and the vulnerable activity, since it is not protected by labour law (Souza & Tokman 1976). Rakowski (1994) emphasizes that the major path to poverty alleviation and development is macroeconomic policy that stresses in spreading out employment and income which is inclusive to the informal sector operations.
De Soto (1989) highlights that the informal sector is made up of prospective enterprises that are forced to run their business illegally due to increase in tax, flaws in tax system, state excess regulation such as licensing requirement and bureaucracy. Informality is consequently the response to breaking down the legal barriers. Thus, the informality is no longer seen as a problem of development only but as a response to economic crisis and poverty (Rakowski 1994). For example an empirical study done by Loayza (1997) on informal sector in Latin America demonstrates that the size of the informal sector is positively dependent on the level of tax and market restrictions and negatively on government quality. Therefore, reduction or removal of state control combined with flexible policy measures would significantly reduce the informal sector which tends to evade tax and escape labour regulations (De Soto 1989, Portes & Schauffler 1993).
Due to decline in the economic growth rate of the country firms tend to reduce in size thus, retrenching workers so as to reduce their cost of operation (Ranis & Stewart 1999). Consequently, retrenched workers seek for alternative sources of income for survival and in most cases it turns out to be the informal sector employment (Tokman 2001). The growth of the informal sector and the declining in the employment rate are associated with lower GDP (ILO 2004). All the above mentioned factors associated with the high population growth rate of Mozambique make the informal sector expand more rapidly. However, a raise in the growth rate does not automatically shift the informal sector to formal one (ILO 2004, UNDP 2001).
Until 1980s, the majority of the population were employed in the agricultural sector. However, because of the civil war and decline in agricultural output due natural disaster such as drought people had to migrate from the rural areas to the urban areas seeking for protection and other sources of income (Charmes 2000). Consequently, the urban areas became populated with low skilled labour seeking for sources of survival thus, not only shortening the absorptive capacity of the formal sector to hire more workers but also leading to the growth of informality in urban areas. In addition, the demand for goods and services in the rural areas is lower, because most of the residents do not have sufficient income thus, increasing the proportion of migrants to urban areas seeking employment and market for their products (Tokman 2001).
The implementation of the structural adjustment programme (SAP) resulted in real wages decrease and raised the cost of living. Consequently, it forced household (especially women) members to engage in the informal sector to supplement the household income (Anderson 1998, Ishengoma 2004). Likewise, the privatisation of state enterprises and liberalization of the market not only resulted in job cuts and closure of several formal enterprises but also expanded the size of the informal sector (Becker 2004). As a result of poor social security system in Mozambique the retrenched workers are forced to become self-employed and mostly they engage into the informal sector as an alternative source of income and survival. Generally the retrenched labours are those with low levels of education and skills thus adding up to the large share of unskilled workers in the sector (ILO 2004).
The characteristics and dynamic of the sector makes it difficult to establish the size of sector, given that new business start-up while other close almost every day due to financial constraints and management deficiency or in rare cases they turn into formal. However, results suggest that the informal sector activity is mostly owned by women. Some exceptions are fund in business related to electronic devices, spare parts that owned by men. This proportion is explained by the fact that formal market absorbs more men that women thus, the situation forces women to engage on informal activities. In addition women worry more about the everyday survival conditions (Dana 1996).
Similarly, research conducted by Xaba, Horn & Motala (2002), found that 71.3 percent of the informal sector in Mozambique is made up of women living in a condition of poverty. The reason being that most Mozambican men were forced to migrate under the labour system called "Chibalo" to the South African mines and farms. Many women were employed in agriculture sector but in 1990 due to adoption of the structural adjustment program (SAP) a large number of them lost their jobs thus, forced to work in the informal sector as an alternative source of survival. Moreover, the research found that the informal sector absorbs refugees reallocated in the urban areas because of the civil war.
A major characteristic of the informal sector in Mozambique is the large representation of women in the sector since the majority of women in the nation are generally self employed or domestic worker (Chen 2001). According to Charmes (1998), the women are more represented in non agricultural informal sector and trade. However, in industry and services segment the share of women reaches 40 percent of the total workers. Charmes further estimated that the aggregate output of the informal sector is largely contributed by women as compared to men. Although, the women play a major role in the countries informal sector, there is a significant heterogeneity in the sector.
Table1 : Population of 7 years and over per workforce and per gender absolute values (in thousands) by geographical region
|Provices||Labour force||Non Labour force|
The table above shows the economically active workforce, with women making up the largest number of informal sector operators in all regions of the country. Because the majority of poor households are headed by female and they are also less educated or skilled therefore, they rely only on self - employment to make a living (UN 1995). Additionally, in Mozambique evidences show that the great shares of poor people are women (Charmes 1998). Furthermore, the formal labour market, which itself has insufficient capacity for response, has absorbed more men than women, thereby placing women at a double disadvantage. And women's role in managing everyday family life has led them to become the most active members in the struggle for survival, and their way of overcoming the lack of a formal productive occupation, is to carry out informal economic activities.
Table 2 Population of 7 years and over per workforce and per gender absolute values (in thousands) by type of area
|Provices||Labour force||Non Labour force|
In terms of areas, the largest concentration of informal stakeholders is found in rural areas. This can be explained by the fact that formally created economic units for the supply of work are practically non-existent, giving rise to the development of large informal activities.
The role played by the informal sector within the scope of the supply of work, in both urban and rural areas, is clearly shown in the table above. In addition to those officially registered and left out of the formal market, the informal sector absorbed a very large number of unemployed persons seeking work (INE 2006).
Generally, the informal sector enterprises experiences similar obstacles to those experienced by the formal enterprises. However, the informal sector is more exposed to the following issues: physical infrastructure (transport, water, electricity, telecommunication, working premises or hygiene services), Institutional issues: no access credit finances and banking institutions, lack of property rights, excessive regulations from the government, lack of social security, no market opportunities such as global market, and Economic issues: High registration and transaction costs, restricted access to technology, lack of operational capital and lack of funds for additional investment (Becker 2004).
3.4.1 Physical infrastructure and public services
Generally, the majority of informal enterprises do not have a decent business location. Some are located in places with limited or without public services such as storage facilities, transport, water, electricity, telecommunication, working premises or hygiene services. However, those with relative access to these facilities incur high costs as compared to the others. Since they are small enterprises, in most cases they cannot afford to invest in their own infrastructures or outsource services from other private firms because it will be costly (Ishengoma 2004). Therefore, the government should assist the informal sector by providing these public services because poor infrastructure and limited public services, limit their ability to meet the quality standards and hinders their market growth (Vletter 1996).
3.4.2 Access to credit and insurance
As a result of informality, most informal sector enterprises lack property rights of the and consequently lack of collateral, thus the sector becomes constrained when they try to access credit finances in the formal sector. Alternatively, they will resort to family or moneylenders for credit. The moneylender therefore charge exorbitant interest rates which deprive the borrower and keep then in a cycle of debt (Becker 2004). Therefore, the Government should not only improve the access to credit but also banking facilities such as savings accounts should be created so as to improve liquidity when needed.
Besides, appropriate policies and lack of information hinders the informal sector enterprises in getting insurance. Consequently, without insurance the informal business enterprises are subjected to volatile income. Similar to the case of access to credit the insurance firms also impose conditions that the informal business fails to meet (World Bank 2001).
3.4.3 Property rights
According to Rodrik (2000) the establishment of enforceable property rights is a key factor in developing the informal sector. Property rights allow individuals and enterprises to use the property as collateral in order access credit from financial institutions at lower interest rate as compared to moneylenders. De Soto (2000) further, advocate that property rights generate positive externality by providing information which can be use in the market. However, the assignment of property rights should include the informal sector operators where the property rights are assigned through titling. Consequently, with the property rights assigned to the informal sector operators they would therefore take part in the global market.
3.4.4 Worker's representation and social protection
The key factor that contributes to access of credit, insurance, and information technology is the asymmetric information. Therefore, workers representation would break this barrier. The workers representation could be: associations, unions and would provide support to the informal sector by interaction and communication with policymakers (ILO 2002). Since the informal sector operators do not pay taxes they become therefore, ineligible for social security benefits. However, in order to extend the social benefits to the informal sector, the Government should create additional institutions which would make the benefits and protection affordable to the informal sector workers (ILO 2002)
The informal sector exerts key role for the growth and development of low income countries, and it is highlighted in the nation's accounts. However, it is not easy to identify it in the national account balance because of the gap between capital and employment in the economic aggregates (Rei & Bhattacharya 2008). The contribution of the informal sector in the economy has been often overlooked thus, the results of surveys (income and consumption surveys), the household income is frequently exceeded by the household consumption being the difference often allocated to loans. However, some assumptions need to be accepted to find out the causes of the differences in the aggregate values. And depending on economic performance and development of a country, the informal sector may have a considerable weight in the non observed economic activities (Tokman 1990). In this section, the study will focus on the informal sector contribution to GDP, employment, earnings and on poverty relief.
Empirical evidences do not contain enough information regarding the contribution of informal sector to GDP, nevertheless, where possible, the estimates suggest that the informal sector contribute considerably to GDP. In sub Saharan Africa excluding South Africa, the informal sector contributes with about 20 to 50 percent of non agriculture GDP (Charmes 2000).
The Mozambican informal sector is directly or indirectly linked to the major development objectives, increase in production and productivity, increase job opportunities, and lessening poverty in the lower income earner. The informal sector also contributes to the national economy and account, thus the need for assessment in a regular basis. Through a quality survey it will be possible to accurately measure and quantify the outputs from the informal sector (INE 2006). Some experts are of consensus that the informal sector is increasingly playing an important role in the economy of Mozambique. Therefore, in the recent years these countries have increased the number of surveys (MOA/MSU 1992). The informal sector produces goods and services, as well as providing employment and income for the individuals in those activities.
The informal sector employs greater size of Mozambican workers, because of lack of financial incentives to start-up a formal business, as well as the lack of employment, strictness of labour law and deficiency of employment in the formal sector. Outputs from the national survey of the informal sector in 2005, estimates that the informal sector employs about 7.7 million workers. The formal labour market operates under rigid employment regulations, thus hampering the employment and production growth. Although the wages are low the rigidity of regulations hinders the increase in contracts because the cost of firing is very high (INE 2005).
In addition, the informal sector is the primary source of employment for workers such as disables, Unskilled and female. Evidences suggest that the Sub-Saharan Africa has the largest informal sector of the developing world, ranging from 60 to 80 percent of employment (Charmes 2000). In Mozambique, the informal sector employs 70 percent of the labour force and it continues to spread out in absolute and relative terms (Charmes 1998). Its perpetuation and expansion is due to the weak capacity of the formal sector to absorb and create decent employment and income (Tokman 1990, Sethuraman 1997, Charmes 1998). On other hand the informal sector is declining in countries (such as Southern Asia) that are experiencing sustainable economic growth where by the formal sector can now absorb the informal sector workers and new entrants in the labour force, thus decelerating the expansion of the informal sector (Alonzo 1991, Lubell 1993 & Poapongsakorn 1991).
Given that women are disadvantaged in Mozambique thus, the women are not integrated in the formal economics activities. Therefore the majority of female workers are engaged in the informal activities. Generally most of female workers rely more on informal sector than male do. That is the reason why the share of women in informal sector is substantially higher as compared to men (UN 2000 & Sethuraman 1998). However, within the countries the women's participation in the informal sector employment in terms of their share is mixed. Even though, there is strong evidence that female workers are more represented in the informal sector that is there share in the informal sector surpasses their share in the formal sector (Sethuraman 1998).
Regarding the occupational distribution in the informal sector, women tend to dominate in trade, service and manufacturing than in construction and transport. In addition, in the sub-sector there is a significant difference in relation to activities done by women and men (Lubell 1993). Furthermore, women tend to be discriminated in terms of wage rates, thus they earn less than men regardless the occupational category or activity in the informal sector (Sethuraman 1998).
Findings suggest that poverty is the main reason for the informal sector, and that there is a positive link between poverty and engagement in the informal sector. Assessment based on consumption expenditure, depicts that greater percentage of the informal sector participants are poor. However, the positive relationship between poverty and participation in the informal sector is not consistent within the countries and type of workers, since there is a significant share of informal enterprises which operate in sector as a secondary activity. Consequently, it is not true to say poverty is the main characteristic of the informal sector as a whole (Pradhan 1999).
In summary, one can say that the informal sector in Mozambique started in the late 1980s with small groups of women selling small quantities of their products such as tomato, rice, onion for people who casually passes by. However, these streets vendors suffer from police molestation as to remove eliminate the activity.
There are number of reasons why people engage into the informal sector activities, including high prevalence of poverty within the country, thus people seek for alternative means of survival because the government does not provide social security benefits; increase in tax and excess regulation thus some enterprises cannot afford the tax burden thus, prefer informal activity in order to reduce the business cost and continue competitive; decline in economic performance which results in a retrenchment of workers who would turn into informal operators as an alternative source of income; rural - urban migration and structural adjustment programs(SAP).
Given that the there is not barrier for entry and exit in the informal sector, new business start up and other close almost everyday. Therefore, its difficulty to establish the size of the informal sector in Mozambique. However, studied done in the field suggest that the informal sector is comprised of different activities including trade, transport, construction manufacturing and others. The informal sector employs 77 percent of the total labour force of which 71percent are women.
The informal sector enterprises face similar obstacles to those experienced by the formal enterprises but the former are more vulnerable. These obstacles include physical infrastructure (transport, water, electricity, telecommunication, working premises or hygiene services), Institutional issues (access credit finances and banking institutions, lack of property rights, excessive regulations from the government, lack of social security, no market opportunities such as global market), and Economic issues: High registration and transaction costs, restricted access to technology, lack of operational capital and lack of funds for additional investment.
In Mozambique the informal sector plays a vital function in the economic growth of the country. According to some estimates it contributes with about 20 to 50 percent of non agricultural GDP. Additional, the informal sector employs 77 percent of the labour force and it also a source of income for the majority of the poor population.
According to the world developing report (2001), South Africa became a democratic country in 1994. And its population is about 50 million of who 20 million are economically active. Until 1990s the statistics on informal sector were unreliable because the apartheid system excluded South African living in rural areas, thus the statistics become more reliable and collected systematically after 1994. However, the government avoided setting policy for informal sector preferring to relate it to small, medium and micro enterprises (SMME) (Xaba, Horn & Motala 2002). In general South Africa defines the informal sector as all the economic activities that are not registered and are run in street pavements or informal arrangements.
In general, most informal activities have some common same characteristics. However, the most important reasons are: high level of poverty, inequality in income distribution, increase in tax and burdensome regulations, decrease in economic performance, rapid population growth and rural-urban migration and structural adjustment programs (SAP) (Djankov et.al., 2003 and De Soto 1989).
4.2.1 High levels of poverty
The important determinant of the informal sector in South Africa is high prevalence of poverty. Thus, people seek for alternative means of survival or other ways of supplementing there income. Consequently, the best alternative found for poverty alleviation and income is to engage into an informal activity since the social security provided by the government is not sufficient for the entire household (ILO 2001). However, as in most developing countries, informal activities are considered as secondary and vulnerable activity, since it is not protected by labour law (Souza & Tokman 1976). On other hand, some experts such as Rakowski (1994) argue that the solution to poverty alleviation and development include good institutions and sustainable macroeconomic policy that stresses in spreading out employment and income which is inclusive to the informal sector operations.
4.2.2 Increase in tax and excess regulation
The increase in tax should have a positive incentive that would move the informal operator to the formal one because of the benefits derived that is ensuring property rights and public services outweighing cost. However, it reaches an optimal point at which a further increase would result in a negative incentive to operate in a formal sector thus, resulting in an expansion of the informal sector. For example the Value added tax (VAT) affect the economics agents in South Africa because the market in competitive and price sensitive. Consequently, economics agents prefer to engage into the informal sector and thus evading tax (Saunders 2005).
On other hand, increase in regulation and inefficient bureaucracy increase the opportunity cost of operating in the formal sector. According to De Soto 1989, complex registration requirements increase significantly the business costs. In addition, Portes, Castells & Benton (1989) advocate that a reduction in the government regulations such as registration requirements, labour market regulations and trade barriers, and implementation of efficient and flexible bureaucracy would reduce the prevalence of the informal activities.
4.2.3 Decline in economic performance
When the growth rate of an economy declines enterprises that make up the economy would tend to contract, thus retrenching workers to reduce the cost of operations so as to continue competitive in the market. Consequently, retrenched workers seek for alternative sources of income for survival and in most cases it turns out to be the informal sector employment (Barker 1999 & Tokman 2001). Similarly, ILO (2004) found that the growth of the informal sector and the declining in the employment rate are associated with lower GDP. This was the case of South Africa during the 1990s due to the change in regimes, from apartheid to a multiparty regime associated with the rapid population growth rate that increased therefore the number of job-seekers (Whyte & Rogerson 1991).
4.2.4 Rural- Urban Migration
As in most developing countries, the majority of the population find employments and income in the agricultural sector. Due to apartheid regime that was implemented in South African, the majority of the population also lived in the rural area and would hardly get employed in the urban areas. However, due to a decrease in the agricultural output and with the implementation of the democracy regime in South Africa, huge number of the population migrate from the rural areas to the urban areas seeking for better living condition and employment (Whyte & Rogerson 1991) . However, not only due to lack of skills and high levels of literacy, but also because of mass migration, the urban economy could not absorb the population of migrants thus, most of these migrants did not get formal employment engaging therefore into the informal activities as an alternative mean of survival (Becker 2004).
4.2.5 Structural Adjustment programme (SAP)
The implementation of the structural adjustment programme (SAP) expanded the informal sector because with the privatization and liberalization of the market not only employers were retrenched and some firms seized to exist but also it reduced real wages thus, raising the cost of living. Consequently, it forced household (especially women) members to engage in the informal sector to supplement the household income (Anderson 1998, Ishengoma & Becker 2004). Consequently, retrenched workers were forced to become self-employed and mostly they engage into the informal sector as an alternative source of income and survival. Generally the retrenched labours are those with low levels of education and skills thus adding up to the large share of unskilled workers in the sector (ILO 2004).
The size of the informal sector in many countries in the world as well as in African countries has been increasing in relative and absolute values. Therefore, South Africa is not an exception. More people are engaging in informal activities due to urbanization of rural areas, slow economic growth, decrease in formal employment and the promotion of the SMME and informalisation (Saunders 2005). However, a number of different estimates varying from 6 to 12 percent have been suggested by various scholars using the different measurement methods.
Using Currency demand approach Van der Berg (1990) and Hartzenburg & Leimann (1992) found that the informal sector contributes with about 9 percent of the total GDP. Loots (1991) using labour market approach estimated that the informal sector contributes about 12.6 percent of the GDP. Estimates from the (SARB 1999) using a five year survey of income and expenditure of households found that the informal sector accounts for 7 percent of the South African GDP. All the above estimates highlight the importance of the informal sector to the economic growth and development of the country.
Generally the informal enterprises face similar obstacles to those of experienced by the formal enterprises. However the informal sector is more vulnerable.
4.4.1 Physical infrastructure and public services
The informal enterprises in South Africa similar to the case of most developing countries lack basic infrastructures such as storage facilities, transport, water, electricity, telecommunication, working premises or hygiene services. Most of the informal operators in South Africa are street vendors and cannot afford to invest in infrastructure or outsource from a service providers because it will result in a high business cost (Schneider 2002 & Ishengoma 2004). Therefore, the government should design policies that will enable decent informal operations including the creation of decent locations that have not only proper sanitation facilities but also basic facilities such as storage and electricity.
However, the local government of Durban has taken a step forward, developing a regulatory business policy to support the informal enterprises to grow their business. The regulations include: allocation of permanent places for the street vendors, charging fees for the site instead of taxes. In Durban, the local Government recognized that the informal sector has the similar needs as the formal sector such as safe locations, reliable services as security, water, toilets, electricity, etc (Alderslade, Talmage & Freeman 2006).
4.4.2 Access to credit and insurance
The majority of the informal enterprises in South Africa lack access to financial services, because of lack of collaterals and they also do not meet the government regulation and consequently financial institutions requirements such as business licenses holders (Morrisson 1995). As a result of working in informality, most of the informal enterprises in South Africa do not have access to insurance service. Consequently these makes the vulnerable to minimising risk related to business growth (World Bank 2001).
4.4.3 Property rights
For an enterprise to apply for a loan in a financial institution, its must meet some requirements such registered assets as their collaterals. In the South African case, the informal operator lack property rights thus failing to access loans from the financial institutions. However, property rights are a key factor for the expansion and growth of the informal sector because they equip and allow individuals as well as enterprises to access financial credit from official financial institutions (World Bank 2005). Similarly, De Soto (2000) advocates that the assignment of property rights generate positive externalities by providing informal that can be useful in the business.
4.4.4 Worker's representation and social protection
In South Africa, asymmetric or incomplete information hinders the development and growth of the informal sector. Therefore, workers representation tend to a considerable bargaining power when interacting and communicating with the policy makers for the step up of working conditions. These also turns out to reduce exploitation of the informal workers by there employers as well as unfair trade conditions (ILO 2002). Additionally, the informal operators do not pay tax and as a result they are not eligible to social benefits. However, the important role of the workers representation is to overcome these problems.
The informal sector is vital in the economic growth of most developing countries in Africa. Similarly, in South Africa, the informal sector contributes to the GDP, employment and poverty relief. However, the national surveys (income and consumption surveys) have been overlooking the importance of this sector (Tokman 1990).
4.5.1 Contribution to GDP
The informal sector in South Africa plays an important role in the provision of basic goods and services that are easily accessible and cheap to the lower income earners. These goods and services include: manufacturing goods, transport, construction, processed and non processed food, clothing and others. The informal sector is also responsible for the emerging urban and rural developments (Charmes 2000). According to the South African Reserve Bank estimates using expenditure survey of household, the informal sector in South Africa contributes with 7 to 12 percent of GDP. Similarly, studies by Devey, Skinner & Valodia (2003) using alternative methods for measuring the informal sector found that it contributes between 8 to 12 percent of GDP.
4.5.2 Contribution to employment
According to the South African statistics the number of employees in the informal sector has been growing significantly in the last 15 years. The national household survey 2000, found that from 1997 to 2005 the number of employees in the informal sector increase for about 1.1 million, making up 1.9 million employed the informal sector. However, this increase may be due to improvements in data collection (Valodia & Devey 2007). The informal employment in South Africa is comprised of different activities including street vending, shoe repair, hairdressing, transport, and manufacturing and others. However, the majority of the informal sector workers operators are concentrated in trade activities, followed by construction, manufacturing and services (ILO 2002).
There is a gender dimension in South African informal sector. Women make up the larger share of the informal sector (about 75 percent) of the total informal sector operators since the majority of women are unskilled domestic workers. However, they tend to earn less as compared to men and accounts for most of the unpaid labour. Another important characteristic of the country is that the women do not have the right to inherit property thus, unable to participate in formal activities as they do not have assets or collaterals to access credit from financial institutions (Becker 2004).
4.5.3 Contribution to poverty relief
According to the South African household survey 2000, 1.9 million of South Africans are employed the informal sector. Consequently, the informal sector in South Africa is seen as an alternative solution to problems such employment and poverty alleviation (Braude 2005). However, the jobs offered by the informal sector are of low quality thus, low wages, and excludes from the social protection (ILO 2003).
Until 1990s the statistics on informal sector in South Africa were not reliable due to the apartheid regime. However, some studies found that since 1994 the informal sector expanded as a result o the implementation of the democracy regime.
Like in the Mozambican case, people in South Africa engage into informal activities as a result of high levels of poverty within the country; increase in tax and excess regulation thus some enterprises cannot afford the tax burden; decline in economic performance which results in a retrenchment of workers who would turn into informal operators as an alternative source of income; rural - urban migration and structural adjustment programs (SAP).
Studies done on informal sector using different kinds of measurement methods estimate that the informal sector in South Africa accounts for 6 to 12 percent of the official GDP. Moreover, the informal sector is comprised of different activities including trade, transport, construction, manufacturing and others. However, the majority of the informal sector workers operators are concentrated in trade activities, followed by construction, manufacturing and services. In addition, the informal sector also employs a significant number of the labour force.
The informal sector enterprises face similar obstacles to those experienced by Mozambique with exception including: physical infrastructure (transport, water, electricity, telecommunication, working premises or hygiene services), Institutional issues (access credit finances and banking institutions, lack of property rights, excessive regulations, lack of social security, no market opportunities such as global market), and Economic issues: High registration and transaction costs, restricted access to technology, lack of operational capital and lack of funds for additional investment. However, the local government of Durban has developed a regulatory business policy to support the informal enterprises to grow their business and allocated permanent places for the street vendors.
5. Chapter 5 should then be a comparison between the informal sectors of the 2 countries, where you focus on similarities and differences. From such a comparison, interesting lessons can be learnt.
5.4 LESSONS THAT CAN BE LEARNT
The aim of the study was to improve the understanding of the informal sector in Mozambique, enabling policymakers to design and implement policies that would address the major issues, needs and concerns of the informal sector enterprises and workers.
It is clear that the informal sector in Mozambique has been not only making rapid paces as an important source of employment but also it has been functioning as a source of survival and income creation for the large share of population in rural and urban areas. The importance of the informal sector is clearly realised if the Government recognises the important contribution of the informal sector operations through removal of the policy bias against the sector including market rigidity, over regulations and taxation. However, the growth and importance of the informal sector will be desirable as it contributes to the growth and development of the economy of the nation.
The informal sector in Mozambique employs a large share of the labour force, due to lower absorptive capacity of the formal sector to employ the available labour force and financial incentives for the participation in the formal sector. Otherwise the population would have to suffer due to lack of income. According to the First National survey 2005 the informal sector employs 7.7 million workers of which 7 millions reported to work in agricultural sector and 700 thousands participate in non agricultural sector.
Contrary to the expectations, the informal sector not only prevailed but also grown and increasing its functions as a poverty alleviator and income generator. Lack of information about the sector growth and difficult access to credit, hinders the opportunities that would lead to the sustainable growth of the sector promoting economic growth and increasing job opportunities.
Like the Shanghai Municipality Government, a "one stop shop" should be created at different levels (locality, municipality district) to assist the registration process and provide information regarding the registration process and assisting them to meet the requirements. Local taxes should be transformed into fees so as to encourage registration and payments. Property rights should be properly assigned so that the informal enterprises would have collaterals that will assist them in accessing credit finance and insurance. Dual labour regulations are needed to enable the informal business to contribute for the social system while continuing informal and offering employment.
Adopting similar approach as South Africa, vocational training should be introduced and employers should allow their employees to attend the training in order to improve skills and employment potential. Moreover, some people informal entrepreneurs and workers have a real business insight, creativity; innovation and dynamism that could be develop if some obstacles were removed and were engaged in training.
Many people engage in informal activities not by choice, but because it is an alternative for survival end income. Particularly, in a situation of high unemployment rate lower education levels and poverty such as the case of Mozambique, the informal sector provides job opportunity and income generation. The informal sector also assists the lower income consumers by providing lower prices for goods and services.
The focal point of the study is to show how the informal sector is important as an alternative device for poverty alleviation, economic growth and development of the Mozambique as well as the need for the expansion of the informal sector. However, for it to take place the government should formulate comprehensive policies for the sector. Effective institutions and legal framework are important for ensuring the smooth performance of business. In contrast, inappropriate institutions raise the business costs and distort the market. However, in the informal sector, by-laws should set standards in provision of public goods and services provided by the informal operators and enables local authorities to collect revenue for payments of services.
First of all, the Government should recognize that the informal sector plays an important role in poverty alleviation and economic growth since it is heterogeneous. Therefore, set policies that would address problems in accordance to the characteristics of each sub-sector within the informal sector (Dana & Galbraith 2006).
Secondly, the Mozambique can learn form countries like India and China, where the state acted actively in developing the sector. Thus, it is crucial that the Government commit itself to develop the informal sector through implementation of sound financing programs, education and employment policies. Like most developing countries, the educational system in Mozambique is biased to the formal sector neglecting therefore the informal segment. Thus, a revised policy for education or vocational training is required (ILO 2004). Many countries were successful in making educational system respond to the informal sector needs by following the strategy of the ILO which includes: Government framework policy should support the informal sector; create training centres in the informal sector to facilitate workers to learn while they earn and to reduce participation cost. This framework would reduce migration from rural to urban areas; the training programs should include information technology so as to be in line with the global technological innovations.
Thirdly, like the case of Kenya, the government should encourage confidence in informal sector operators by subcontracting them to deliver goods and services to the population. This framework would assist the informal entrepreneurs to expand up to a desirable level. For this to happen the Government should recognize the key role played by the associations and networks within the informal sector. Therefore, the associations should collaborate with the government facilitating the flow of information among the informal operators (Narayana, Kaino, & Sekwati 2002). Some countries like Belarus and South Africa, their government incorporated the street traders into the city planning process and also decided to hire sector specialists to deal with the informality. And the major idea was that the specialists should identify market opportunities for the informal enterprises (Braude 2005).
Lastly, the policy framework should also account for social security since the social security system is only available for the formal sector employees. This policy should include health, death, accidents, and old age. Consequently, the informal workers would be contributing to the national income and thus enhancing the capacity of the economy (Schneider 2000).
 Chibalo is a term used to describe forced labour after the abolition of slavery in Portuguese colonies.