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Focus on drawing the informal to the formal sector

[Tanzania] Vegetable vendors in Dar es Salaam, part of the informal economy that the country relies on, but remains largely unrecognised, 18 September 2003.
Vegetable vendor in Dar es Salaam, part of the informal economy that the country relies on, but remains largely unrecognised. (IRIN)

Even at its quietest, downtown Dar es Salaam bustles. At traffic lights, the day's newspapers, freshly roasted cashew nuts and an assortment of mechanical tools are thrust through car windows to potential customers. Fruit vendors wheel their produce the wrong direction along one-way streets and second-hand shoe salesmen block the pavements.

The machingas, as these street hawkers are commonly known, are everywhere, and keen to do business.

Alongside farmers in the countryside, who account for 80 percent of the population and 50 percent of the overall gross domestic product (GDP), these hawkers form the backbone of Tanzania's informal economy, operating outside the official financial system.

And, with the World Bank estimating that the informal sector accounts for 60 percent of the national GDP, one of the highest percentages in the world, the country's parallel economy is a massive employer. However, a few of the people in this sector feel that they have benefited little from Tanzania's economic turnaround, which has seen inflation drop to 4.3 percent and growth rise to over 6 percent.

In order to tackle this, the government recently invited Prof Hernando de Soto, a renowned Peruvian development economist, to help turn the macroeconomic successes of Tanzania's decade of reform into a reality for the large majority of the population.

Introducing de Soto to government leaders on 8 September, Tanzanian President Benjamin Mkapa said that the next steps Tanzania takes, which would follow the economist's principles, would mark the second phase of the country's reforms and highlight the need to shed light on the "conspiracy of silence" and accept the informal sector as a "reality of life".

"The government pretends those people in the informal economy do not have assets so they do not have property rights, and those people pretend they do not have assets so they do not have to pay taxes on them or follow rules and regulations," Mkapa said.

De Soto, author of "The Mystery of Capital: Why Capitalism triumphs in the West and fails everywhere else," was in Tanzania to help the government realise the potential of its informal sector.

His economic model attempts to reverse the predicament of poor people who are unable to obtain credit because of lack of legal property. Because they cannot acquire credit from their assets, notably land, de Soto argues that the poor are "trapped in the grubby basement of the pre-capitalist world".

A social geographer at the University of Dar es Salaam, George Jambaya, told IRIN on Thursday that Tanzania operates under a leasehold system, whereby the president owns all the land on behalf of the republic.

"Some of the land falls under village land legislation and, if you are a member of that village, you have a right to that land," he said. "But, at the same time, medium and large-scale farmers outside the villages have to get long-term leases and titles in order to work the land."

He said that because of parts of the village law, it was difficult to capitalise on village land. Meanwhile, even if you can get a title to a tract of land outside an urban area, there are further problems due to the lack of an efficient land market.

Observers say that the leasehold system and the highly bureaucratic procedures involved in securing title deeds for land have, for a long time, prevented Tanzanian farmers from rising above subsistence farming.

This is a charge the government has acknowledged. "Many people own livestock and land, some both, and in large numbers. Yet these are the poorest people of Tanzania, living on less than one dollar per day," Basil Mramba, finance minister, said during the meetings.

"This is because the assets are economically and legally dead, because they are not recognised by financial institutions and government agencies," he added.

Therefore, under de Soto's guidance, the government has agreed to tackle the problems and develop a proper legal framework, which recognises the assets of the informal sector and creates a system of protecting and giving value to the property of the poor so they can access capital from financial institutions.

This will involve a complete re-examination of the existing regulatory framework, further understanding of the notion of dead capital and a public awareness programme, the government concluded in a statement after the meetings.

The initiative was generally well received, though commentators said it was only part of a solution to kick-start an extremely underdeveloped system.

"It is a positive move because the problem of getting capital within the system we have is very big," Christopher Mwakasege, executive director of the Tanzania Social and Economic Trust, told IRIN on 11 September.

"But this is just part of the problem for the majority of poor Tanzanians," he said. "What about marketing the goods? What about the poor infrastructure? And what about understanding how the market works?"

He said that after so many years of socialism, monopoly markets and fixed pricing, most farmers were unprepared for the pressures of market economies. "So it is a question of changing and preparing people's attitudes," he said.

A law professor at the University of Dar es Salaam, Chris Peter, said the informal sector was extremely important and had to be looked at more closely, and that the question of land in Tanzania has to be dealt with carefully.

"There is a determination to change the Land Act [to facilitate the capitalisation of assets], but the people in government are already seeing the danger," he said. "It will be very easy for people to take up a loan without thinking about the consequences properly."

He added, "Questions about land are serious. It is our last guarantee, where we can always plant our cassava."

This article was produced by IRIN News while it was part of the United Nations Office for the Coordination of Humanitarian Affairs. Please send queries on copyright or liability to the UN. For more information: https://shop.un.org/rights-permissions

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