The state of economies is usually measured by the Gross Domestic Product (GDP) or other metrics of economic flows. By definition, GDP is the standard measure of the value added created through the production of goods and services in a country during a certain period.
As such, it also measures the income earned from that production, or the total amount spent on final goods and services (less imports). GDP in Zimbabwe for example is expected to reach USD 22 billion by the end of 2021 (Trading Economics) and projected to trend around USD 23.5 billion in 2022. That said, GDP falls short of providing a suitable measure of the actual size of an economy as well as people’s material well-being particularly in highly informalised economies such as Zimbabwe.
In our analysis, we make use of the Phillips curve to demonstrate that the informal economy in Zimbabwe is indeed large. This also makes the application of economic models and theories inappropriate. The Phillips curve is a single-equation economic model that hypothesizes an inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy. Stated simply, decreased unemployment (increased levels of employment) in an economy will correlate with higher rates of wage rises, which in turn causes inflation rates to increase.
Clearly, this theory cannot be applied in the Zimbabwean context as it is given that the “reported unemployment rate” is high whilst inflation rates are also significantly high implying that there is no inverse relationship. However, a different line of thinking is that if we consider informal sector activity in the country, the unemployment rate in Zimbabwe is low.
The reasoning here is that there is indeed a huge informal economy that is not in any way captured through national GDP statistics. However, predicting the actual size of the Zimbabwean economy could prove a fool’s errand, especially when most entrepreneurs are preferring to go informal.
In addition, for as long as the informal sector remains huge, there is a growing danger that it will become entrenched. In fact, the International Monetary Fund (IMF) estimates that Zimbabwe has the second largest informal economy as a percentage of its total economy in the world, after Bolivia.
Out of the 158 economies that were studied, Zimbabwe had a score of 60.6%, second to Bolivia which topped at 62.3%. The informal economy (known by different names such as the hidden or shadow economy), includes all economic activities which are hidden from official authorities for monetary, regulatory, and institutional reasons. We note that the growth of the informal sector in Zimbabwe has largely been a result of the high levels of formal unemployment that has triggered the proliferation of home industries and road-side businesses (RSBs).
All in all, while the informal sector can also drive consumption of local products, the main disadvantage for government is that it limits revenue collections given that informal businesses do not pay direct taxes and other social security contributions.
This has been the major reason for the introduction of the Intermediated Money Transfer Tax in Zimbabwe to tap into the informal sector economy. That said, investors on our market can still play this theme by taking positions in consumer facing companies. It is a no-brainer that those operating from Mbare Musika, Renkini Bus Terminal and Mbudzi round-about will always need some booze, two-piecers (or wings) as well as some groceries for the festive season. BUY Delta, Innscor and Simbisa Brands!
Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com
