Transitions in Business:

Challenges and Opportunities

By
Andrew Rugasira
Chairman, Good African Coffee Ltd

Informal is the `new Formal

Informal Sector A Snapshot

50% of GDP (UBOS, 2014) from 43% in 2002
Employs 80% of the labour force
Women constitute 92% of Informal Sector
Sector informality:

v Agriculture 27%
v Wholesale and Retail 24%
v Food Processing 15%
v Manufacturing 14%

Sector Characteristics:

v Labour intensive, low technology activities

v Employs between 1-5 people mostly unskilled family members
v Lacks social protection schemes like NSSF; non-tax registered/
complaint

Informal Farmer
- Unsecured property rights;

- No access to extension;
- No social safety nets;
- Limited access to credit

Informal Urban Entrepreneur

- Not on any tax/business register;

- No social security; no titled assets;

- Unskilled but sector has educated people;
- Wholesale/retail trade; limited credit

Contribution of the Informal Sector

Provides alternate employment to people that
have failed to be absorbed in the formal sector
Produces cheap local products for the local market
Major linkages between the informal/formal sectors:
vFirms in the formal sector buy inputs from those produced
in the informal sector (forward linkage)
vFormal sector firms supply inputs to these in the informal
sector (backward linkage)
vCustomers from all sectors buy final products from the
informal sector (consumer linkage)
vOften informal sector obtains credit from formal sector and
visa versa (credit linkage)

What Drives the Informal Sector?

v Urban bias provides a bright light to rural dwellers.
v Difficulty in Establishing New Firms 27 days vs 8 days OECD (World Bank, 2016); 122/169 ease
of doing business index
v Regulatory Barriers compliance procedures are burdensome are costly. Government
regulation is the most significant determinant of informality.
v Fees and Financial Requirements complex tax regulations and high cost of initial business
registration. Entrepreneurs biased about ability to comply
v Inadequate supply of jobs 400,000 young people come into the job market chasing 9,000
available jobs
v Insufficient employable skills with a fast growing population
v Corruption - Uganda is 139 least corrupt nation out of 175 countries, according to the 2015
Corruption Perceptions Index reported by Transparency International
v Lack of Key Business Services property rights (land titles), infrastructure
v Weak institutional capacity of business associations.

Benefits of Formalisation
- Provide higher quality better paid/sustainable jobs
- Reinforce social contract between citizen and state
- Strengthen the reliability of agreements between firms
- Broaden tax base and potentially lower tax rates

FORMALISATION

INFORMAL ECONOMY
Follow No Rules

Follow All The Rules

Recommendations

Establish an enabling environment/supportive regulatory framework

Organize informal workers where appropriate/feasible, grassroot

associations

Access to appropriate training - vocational training programs

stressing entrepreneurship/apprenticeship

Increase ability to obtain property titles & credit (Dead Capital, H

de Soto)

Improve national databases

Mindset shift: change mentality of the informal sector being seen as

uncaptured