An overview of the formal and informal economy in Uganda: why is the informal sector persisting despite the legal framework?

An overview of the formal and informal economy in Uganda: why is the informal sector persisting despite the legal framework?

BY KAKANDE CHRISPUS

Can we ever find a balance in business operations in Uganda? Well, this Article answers and provides solutions to some of the common questions that ruin the entrepreneur sector. As of today very many traders and vendors are haunted by authorities because of carrying out businesses outside the law, given that fact, this Article importantly details, informs, and solutionizes.

In Uganda, the legal framework governing the establishment of businesses is mainly the Partnership act, Company Act, and Uganda Registration service bureau Act. Well, other laws do govern businesses such as Stamp Duty Act, Licensing trade Act, Uganda Revenue Authority Act, and so on but for this article, we shall concentrate on and draw references from the first three. The laws provide a variety of businesses such as partnerships, companies, clubs, sole proprietorships, and so forth, these varieties established by laws form the formal economy.

It is very important that I first define and distinguish between formal and informal. To begin with, the former, formal economy is a sector where businesses are regulated and monitored by the government, such businesses are defined and well-structured under the law, for example, Sec. 2(1) partnership act defines a partnership as, subject to subsection (2), a partnership is a relationship which subsists between or among persons, not exceeding twenty in number, who carry on a business in common intending to make a profit, the definition itself regulates the number of people that can be accommodated by a partnership and this is by law. Formal businesses come into existence following the law thus the procedure, operation, and management are all provided, Sec. 2 Company Act provides that a company means a company formed and registered under this Act or an existing company or a re-registered company under this Act, in essence, if you want to venture in a company business the law regulating so is the company act

It’s with no doubt that the legal framework presents formal businesses as advantageous and come with benefits, among the many advantages like the quick access to incentives such as loans, and job security, the laws present the principle of the corporate personality of a company as a mega tool that ought to be embraced by all business owners, this was discussed exhaustively in the case of Salomon vs A. Salomon & Co. LTD. In this case Salomon carried out a business as a leather merchant which he later converted into a limited liability company, the shares were held by him and his family, and the new company got loans from creditors which some were secured and others weren’t, after some time the company experienced difficulties and eventually, it was wound up, the company had sufficient assets to satisfy the debentures but nothing was left for the unsecured creditors, these unsecured creditors sued to state that Salomon was the company thus couldn’t owe money to himself, thus should have paid them not himself first. HELD. The house of the lords decided against the unsecured creditors stating that by law, Salomon was different from the company, they were two different persons and thus were entitled to the available assets in his preferred position as a secured creditor. Hence this principle is of the view that a company and its owners are both distinct persons. One may wonder, why don’t business owners embrace the formal economy and enjoy such legal protection?

On the other hand, there is no universally accurate or perfectly accepted definition of the informal economy, several scholars and authors define it differently but I will define it this way, an informal sector of business is a sector that operates in a hidden way, this is an economy that is never monitored by the government, in other words, it is neither regulated nor taxed, some sources prefer to call it the “grey economy.” Hans Singer compared the informal sector to a giraffe and stated “difficult to define by usual standards but easy to recognize when you meet one.” Just from the definition, some of the predominant common features of the informal sector are nonpayment of taxes and non-inclusion of such business ventures in the calculation of a country’s GDP or even the GNP

In Uganda the informal sector is widely and commonly perceived as a survival trench for the poor and uneducated, ‘the bulk of businesses operating in the informal sector like eating kiosks, fish selling, and shoe shining among others require no specialized skills to operate were mainly run by primary school dropouts and those with no formal level of education, however, this doesn’t necessarily mean that all those engaged in such a sector are so. It is important to note that most of the informal businesses are either home-centered or street vendors, the statistics show that the informal sector makes up the biggest percentage of Uganda’s working population, in research conducted by Dr. Madina Guloba shows that by 2015/2016 – about 13.67 million persons of the working age (14-16)years are engaged in the informal sector which represents about 98% of the total working age population and the female make up the bigger percentage making the total to 70%.

Why informal businesses???

some of the reasons why people go for informal businesses are doubted and often criticized but in this article, I present a few close to the accurate rationale for informality, but before, NOTE “it cannot go without say, the most accurate reason for informality is that people engage in informal businesses for survival, it is not by choice!!! But rather because such an economy presents itself as the easiest option for the poor.” 

Most businesses remain informal to forego taxes this is mainly derived from the selfish desire to make huge profits, because such businesses operate in a hidden style some with no premises tend to partly forego tax payment, and others remain formal because of the high registration costs most especially entry registration, this becomes a burden to many low capital businesses thus ending up as informal businesses.

The low skills possessed by some labor force that doesn’t meet the formal sector, most of these business owners in the informal sector are prevented from getting to the formal because of limited skills. ‘evidence suggests that their motivation is driven by two key factors namely, wanting to take advantage of an existing business opportunity and failure to find employment in the formal sector

Why is the informal sector thriving??

Well according to W. Arthur Lewis, in the 1950s he estimated that the informal sector would die out with development but after 60+ years it is not so. So why is it so? Research shows that both the informal and formal sectors can co-exist the informal sector contributes to the formal sector, I carried out an oral interview with a woman who supplies fried eats to a registered cafeteria at Livingstone hall, my question was whether she was registered by the laws, her reply was ” not registered.” For as long as this co-existence and interconnection are possible, the informal sector will thrive. It should also be noted that the informal sector is community-based, it always has a person-to-person connection which is convenient thus its prosperity this explains why businesses remain informal.

KEYNOTE: Although the informal sector provides critical employment opportunities for the poor, well which is good, in the long run, it becomes unmanageable, troublesome, and creates havoc in the business community.

Can this have a solution?? 

 lest we forget that integrating the informal to formal is a great policy challenge. The international labor commission (ILC) emphasized that the dilemma associated with the informal sector can be addressed by attacking the underlying causes and not just the symptoms through a multifaceted strategy, but in all their documentation they lay down not even a single example of the symptoms or even the multifaceted strategy, in other words, it was left hanging. Nevertheless, if you take a study into the dynamics in the informal sector, technically businesses can transform. 

  • I recommend a robust on-job-training, most informal sector operators are low-skilled labor that has failed to make it to the formal sector thus to transform this, there should be an advancement of new skills to such people for integration, if the government can come up with sectors ready to teach and grant official approval certificates to half-baked entrepreneurs, this could boost their skills and further formalize them.
  • The policy framework should be integrated to display registration as a poverty eradication tool rather than viewing it as a taxation tool, this can be done by spicing it up with capital loans, tax waivers for newly registered businesses, lowering registration costs, and so on in that line.
  • Technical advice, micro support, and infrastructure upgrading should be promoted by the government.

Further embarking on poverty eradication programs is also a potential transformation tool, as it is noted earlier in this article that people engage in informal businesses because of poverty thus any aim to eradicate poverty is an aim to end the informal economy.

In conclusion, the informal sector is a rival to the formal sector, there is a need to reduce its widespread through policy framework and practical solutions.

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