The literature on the role of the informal sector in driving economic growth and efficient allocation of resources presents polarised conclusions. The dualist model portrays the informal sector as a backward traditional sector with high market frictions, low productivity and a highly segmented labour market. As a result, it should be erased to generate productivity growth. On the other hand, the structuralists portrays the formal and informal sectors as two competitive and integrated economic systems. The informal sector is an important economic unit in most low-income countries. In Zimbabwe, it co-exists with the formal sector since early 1990s and there are strong distribution and production linkages between the two sectors. The informal sector could thus play a key role in driving the recovery in economic growth and manufacturing within Zimbabwe.
This project aims to examine the potential role of the informal sector as source of future sustainable growth in in Zimbabwe. In particular, the projects analyse job reallocations, employment and productivity growth in a fragile economy with high market frictions. These issues are of particular importance to Zimbabwe - an economy that has faced over a decade of weak economic growth that has coincided with a decline in the importance of formal manufacturing, relative to informal manufacturing, as a source of employment and output. The study is built on a framework where firms are heterogeneous and where frictions in output and input markets generate within and across sector inefficiencies.
From a policy perspective, this research is of considerable importance to any low income country that has a large well-established and structured informal manufacturing sector which contributes significantly towards GDP and employment. Understanding manufacturing firm behaviour and its interaction with policy is key to the process of reviving the manufacturing sector in Zimbabwe. This study aims at understanding the nature and motives of the informal economy, which will help to design effective policies to address this economy.
