Integrating Informal Economy into Official Economy in Southern Africa: Identifying Barriers and Possible Solutions

Abstract

In the Lewisian model, the informal sector was thought to automatically formalise with time. This was known as the Lewis Turning Point. However, with time as industrialisation increased, the so-called informal sector was not diminishing, rather at times it was increasing. This tends to suggest the existence of structural barriers to formalisation, which the authorities should address. This study sought to identify these barriers basing on theoretical arguments by empirically testing the significance of the causes of the informal sector as they become barriers to formalisation. The structural equation modelling (SEM) approach was used in a multiple indicators, multiple causes (MIMIC) framework. This study presents the findings that barriers to formality are high tax burden, poor institutional quality (poor control of corruption), high government consumption, unemployment rate, and low trade openness. This argument has been built theoretically and has been suggested empirically by the results. This paper suggests the creation of Quasi-Lewis conditions through adopting the following possible solutions: reduce tax burden and resort to sovereign wealth fund (SWF) as a source of income, reduce government size, create more jobs, and provide credit and business development services to informal operators, introduce simplified bureaucratic procedures, and liberalise trade.