Opinion: Supporting MSMEs to curb ‘illicit substance economy’

The growing informal sector is a manifestation of mismanagement of critical institutions, high levels of corruption and lack of incentive to formalise businesses.

THE drastic increase in use of illicit substances by Zimbabwe's productive age group population is a major concern, especially with regards to the pace of economic development, as part of achieving sustainable development goal 8 on economic growth and full and productive employment.

Largely owing to the country’s socio-economic state of affairs, resultant drivers of illicit substance abuse include poverty, unemployment, stress, peer pressure, and as a coping mechanism. As a business, the illegal drug industry has witnessed exponential growth with estimated projections showing a 40% increase in the number of people using illicit substances by 2030.

With immense protection from the tenebrous logistical processes operated within the informal sector, theimportation, exportation, production, sale, distribution, use, abuse, and trafficking of drugs cannot be distinctly tracked and curbed.

Also, the country has become an attractive destination for international drug traffickers due to the multi-currency system used in the economy. While this alludes to the need for updating and reforming of policies, such as the Criminal Law (Codification & Reform) Act and the Dangerous Drugs Act Chapter 15:02, transformation of policies around doing business in the informal sector is also required. 

Accounting for over 76% of employment and contributing a significant share to the national income (GDP) the Micro, Small and Medium Enterprises (MSMEs)’s  potential to drive sustainable economic growth and employment is yet to be entirely fulfilled.

The current environment constitutes an important source of income and livelihood for Zimbabwe’s productive age group.

However, owing to operational challenges, such as limited access to financing, lack of business knowledge and skills, and constrained social infrastructure, as well as exposure to climate disaster and Covid-19 pandemic effects, the sector’s growth framework remains feeble.

Products and services within the sector are predominantly low quality, low cost, and widely exposed to exploitation of unstructured business legal frameworks. Around 86% of MSMEs are unregistered and part of them account for the growing underground drug businesses.

It is on this premise that the illicit substance production, sale and trafficking thrives covertly. The country’s policy, regulatory and institutional frameworks have largely focused on contributions from MSMEs, which suppress their growth potential.

These anti-MSMEs policies encourage crime, fraud, inequality and poverty in the sector and subsequently the country’s vast population. 

Formalisation of MSMEs

The growing informal sector is a manifestation of mismanagement of critical institutions, high levels of corruption and lack of incentive to formalise businesses. While the informal sector is currently the main employer, job creation and contributing towards national employment have remained low as the sector is still highly survival activity based.

Barriers of entry into formalisation, mainly associated with high costs and limited resources to incentivise formalisation and supported by policies that criminalise operations of informal MSMEs, have had negative effects on law abidance of business activities, growth, and operations in the sector.

Thus, with benefits of informalisation outweighing benefits of formalisation, underground drug economies thrive as such businesses operate optimally without costs of operations and enjoying maximum profit and recruitment of most productive ages.

Policy options in dealing with drug economies include expanding lucrative and legal business opportunities and funding in poor communities, formalising and de-criminalising certain businesses activities, such as artisanal and small-scale mining, and facilitate and support buying and selling of legal products and services.

Encouraging and supporting MSMEs that supply goods and service in compliance with legal regulations ought to be coupled with supporting the transition of small business into the formal economy by making costs associated with business registration affordable, making processes for registering workers for pay as you earn (PAYE) less tedious, reforming labour regulations to include ability and capacity of employers in the informal sector, as well as organising and standardising costs and processes of issuing payments to street traders.

Successful and sustainable recruitment of productive age group population into legal businesses will starve the illicit drugs economy through legal employment and benefits of formal employment, legal operations and benefits associated, such as access to finance, as well as benefits of regulatory compliance as opposed to risks of criminal offences.

Fair taxation

While taxation is a fundamental tool for domestic revenue mobilisation, tax policies and processes have been widely contested, especially as economies aim to bring the informal sector into tax baskets.

Governments’ views of the informal sector are mainly based on the size of the sector rather than taxing capacity and this gives the detrimental impression that MSMEs are able to contribute more to state coffers.

Notwithstanding the potential tax gaps and leakages within the informal sector structures, MSMEs particularly in the informal sector have a sizeable contribution that they currently make to state coffers both formal , such as VAT, IMTT and customs duty, and informal, such as bribes, as well as regressive tax contributions like licence fees and local levies.

This implies that ushering informal businesses to formalisation should be accompanied by fair tax obligations in order to encourage formalisation and development, while simultaneously discouraging punitive risks of illegal and informal trading.

The illicit substance business also thrives as a result of minimum tax obligations, if any, coupled with benefits of the current cash economy that makes it difficult for the revenue authority and law enforcement to trace and punish peddlers and lords.

The underground drugs economy leverages on the unsuitability of the country’s tax system and remain unrecognized, while exploiting and recruiting more beneficiaries and participants. The MSMEs Act places the government at the centre of promoting the development of MSMEs through coordination and implementation of national policies that have a direct impact on MSME businesses.

Fair tax systems directly impact the ability and willingness for MSMEs to formalise and trade products and services that are within legal regulations thus stifling the attractiveness of the drug businesses, especially for participants that engage out of desperation and survival. 

Enhance skills development.

At least 46% of MSMEs have limited managerial skills and knowledge, most of which prefer real-life engagement with business partners and learning through meetings than attending knowledge and skills trainings.

Furthermore, most operators do not have education and cannot afford formal channels of learning resulting in ‘street-schooling’. However, lack of capacity to conduct sufficient research and development on the industry, effective businesses model and management contribute significantly to low levels of innovation and sustainability in the sector.

Additionally, lack of technology use and knowledge confines most MSMEs to local business operations unable to engage, network and partner with international business prospects.

Due to the lack of knowledge, the illicit substance business thrives mainly on demand rather than knowledge on effects and impacts on drug use on consumers and suppliers. Also, the illicit substance business in non-discriminatory, individuals with little to no formal education and ability to acquire it tend to gravitate towards it and survive on the little knowledge and capacity they have.

Initiatives such as MSME trainings and development programmes encourage innovation performance of MSMEs and the government, through the Ministry of Women Affairs, Community, Small and Medium Enterprises, should implement trainings of MSMEs that cater to low education and financial capacity business individuals.

This will make trading of legal and innovative products and services more attractive and lucrative. This will also help in improving the quality of products and services supplied by MSMEs.

The illicit drugs economy needs to be ended by providing equally lucrative alternatives that are legal and supported. The policy and regulatory environment of drugs and small businesses requires reformation and centering laws on the desperation and poverty of illicit substance runners and users and supporting individual and business transformation from illegal and informal operations to cost effective, incentivised and financially supported formalisation.

  • Jaravaza is a policy analyst and writes in her personal capacity. These weekly New Horizon articles,   published in the  Zimbabwe Independent, are coordinated by Lovemore Kadenge,  an independent consultant, managing consultant of Zawale Consultants (Pvt) Ltd, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — [email protected] or mobile: +263 772 382 852


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