Pic: Street vendor in Kampala. Credit: Edgar Batte
The informal sector is a large part of employment in African cities. The International Labour Organization estimates that more than 66% of total employment in Sub-Saharan African is in the informal sector. With a pervasive informal sector, city governments have been struggling with how best to respond.
On the one hand, a large informal sector often adds to city congestion, through informal vending and transport services, and does not contribute to city revenue. Furthermore, informal enterprises are typically characterized by low productivity, low wages and non-exportable goods and services. On the other hand, the informal sector provides crucial livelihoods to the most vulnerable of the urban poor.
Policy reactions to the informal sector typically vary between two extremes: some focus on punitive and regulatory measures to enforce formalization or evict vendors outside the city, while other approaches focus on unleashing the untapped entrepreneurial potential of the informal sector.
Recent World Bank research in Greater Kampala finds evidence that both policy options may be unlikely to produce positive impacts. Instead, our findings suggest a more varied interpretation of Greater Kampala’s economy.
Are informal firms tax dodgers?
Commonly, city governments perceive the informal sector as a regulatory issue. From this perspective, informal traders are seen as purposefully evading taxes, consequently withholding revenue from the city and unfairly competing with formal, tax-paying businesses.
However, little empirical evidence suggests that Greater Kampala’s informal sector is motivated by tax evasion. Our survey data shows that 69% of the city’s informal enterprises are below the lowest company income tax threshold. City governments also collects annual trading licensing fees. However, firms which operate in a trader’s market, produce handicrafts or are based at home are exempt from requiring licenses.
The majority of Greater Kampala’s informal sector work is in trading and services. These firms will typically operate either in a trader’s market, from home or will trade from the street, with no physical premises. This means that most informal sector firms are either exempt, or ineligible for a trading licence.
