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(SENIOR SIX- ECONOMICS)

THE INFORMAL SECTOR:
The informal sector refers to an intermediate sector that exists between the traditional/ subsistence
sector and the modern/ commercial sector.
Individuals in the informal sector are engaged in small-scale labour intensive activities like
tailoring, roadside sellers, car washers and metal fabrications etc.

FEATURES/CHARATERISTICS OF INFORMAL SECTOR:

• It is dominated by small scale firms.
• Production is mainly for the domestic market.
• Produces mainly consumer goods.
• Produces mainly low-quality output.
• Uses mainly unskilled and semiskilled labour.
• Mainly uses simple production techniques/Mainly labour intensive.
• Mainly uses local resources/inputs.
• The sector is dominated by proprietorship.
• Limited or no bookkeeping/Poor or no record maintenance.
• Mainly urban and Peri-urban based.
• Mainly low quantity of output produced by firms/It is characterised by low productivity
generally.
• Limited government control of the firms/ sector.

POSITIVE ROLE OF THE INFORMAL SECTOR:

• Creation of employment opportunities. This is because the informal sector is mainly labour
intensive whereby more units of labour are used in the production process.
• There is production of locally affordable goods. This helps to improve people’s standards
of living.
• It reduces capital outflow; this is mainly because it utilises local resources/inputs.
• It provides cheap training ground for the local labour. This makes the workers in the sector
to acquire skills without incurring a lot of expenses.
• Facilitates development of entrepreneurial skills. The informal sector acts as a training
ground for the future entrepreneurs in the country.
• It contributes some revenue to the government. This is in form of taxes which are imposed
on the activities of the informal sector.
• It facilitates small scale industrial development in the economy. This is because it requires
little capital to start.
• It enhances fair distribution of income. I.e. it reduces income inequality in society. This is
due to the improved earnings by the people employed by such a sector especially the
semiskilled and the unskilled.
• It promotes inventions and innovations. Under the informal sector, there is promotion of
technological development and coming up with new technology to be used domestically.

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• It promotes commercilisation of the economy. This is so because there are many people
who are encouraged to produce for exchange or for sale hence transforming the economy
from subsistence economy to a commercial economy.
• It creates both forward and backward linkages in terms of supplying raw materials or
providing market for the finished products.

NEGATIVE ROLE OF THE INFORMAL SECTOR:

• It leads to increased social costs in the economy such as noise pollution, water pollution
etc.
• It leads to duplication of services which leads to wasteful competition hence wastage of
resources.
• Leads to production of poor-quality products. This is due to the use of mainly poor
techniques of production.
• It gives rise to unemployment and under utilisation of resources due to limited capital
injected in the sector hence producing on small scale.
• It leads to high administrative costs incurred by the government that undertakes the duty
of cleaning of the urban areas from where they operate.
• It causes instabilities in public revenue collected from taxes. This is because most people
in this sector are not registered by the government and therefore evade paying taxes.
• It encourages rural urban migration and its related evils such as congestion in towns which
leads to delays and inconveniences to the people, increased crime rates etc.
• It has hindered the provision of quality services in the country. This is because it is not
easy to control their activities.

PROBLEMS FACED BY PEOPLE IN THE INFORMAL SECTOR:

• Inadequate capital to expand their businesses. This is because it is difficult for the people
in this sector to borrow from financial institutions, since they do not have collateral
security.
• Lack of permanent premises such as houses, majority of the people in this sector operate
from open spaces.
• Lack of legal recognition which leads to harassment by the urban or peri-urban authorities
e.g. town council inspectors.
• Unfavorable climatic changes e.g. during the rainy season it becomes difficult for the
people to operate especially those with businesses in open space.
• Stiff competition among the members where some members are outcompeted hence
leading to the closure of some businesses.
• Limited space where they can operate from.
• Small market size. This is due to the low purchasing power by the majority of the people
who are poor and at the same time the products are of poor quality which attracts low
demand.
• Low levels of technology. The informal sector is faced with poor state of technology which
leads to production of poor-quality products.

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• Limited entrepreneurial ability/ skills. This leads to poor management of the businesses
which results into collapse of such businesses.
• Limited skilled labor. The sector mainly uses semi-skilled and unskilled labour. This
results into low quality products/ output.
• Political instability in some areas. This disrupts the activities in the informal sector.

POLICIES TO REDUCE THE PROBLEMS FACED BY THE PEOPLE THE INFORMAL

SECTOR:
• The government should lower the taxes especially on raw materials or semi processed
goods and other intermediate inputs that are used in the informal sector. This helps to
reduce the costs of production and hence motivating such people to increase production in
this sector.
• The government should improve infrastructural facilities such as power so as to help the
people in this sector to reduce their operation costs.
• The government should help people in this sector to establish permanent structures in order
to enable them to operate without any interruption especially during the rainy season.
• Provide affordable credit facilities to the people in the informal sector. This will enable
such people to get adequate capital to run their businesses.
• Government should carry out research and spread information about market opportunities
for the small-scale producers.
• Restrictions should be put on harassment of the members of the informal sector by the city
authorities
• Producers in the informal sector should be encouraged to form co-operative societies; this
will enable them to expand their businesses.
• The government should register all producers in the informal sector so that they are
officially known by the government; this makes it easy to plan for them.

THE FORMAL SECTOR:

The formal sector consists of the businesses, economic enterprises and economic activities that
are monitored, protected and taxed by the government.

CHARATERISTICS OF THE FORMAL SECTOR IN UGANDA:

• Made up of predominantly registered businesses.
• Mainly provide salaried employment.
• Has proper record keeping.
• Businesses are mainly governed by laws/ Acts of Parliament.
• Dominated by corporate ownership of resources.
• Has employees and employers unions.
• Mainly uses better/improved/ modern techniques of production/Mainly uses capital
intensive technology.
• Mainly produces better/ Improved quality output.
• Mainly Urban or Sub urban based.

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• Mainly uses skilled labor.

• Production is for commercial purposes/markets/profit oriented.

THE STRUCTURE OF SUBSISTENCE SECTOR:

SUBSISTENCE SECTOR:
This refers to a sector that involves the production of goods and services for one’s own/self-use or
consumption.eg, a carpenter making his own chair, a Tailor making his own shirt or a farmer growing
food crops for his own consumption etc.

CHARACTERISTICS/ FEATURES OF THE SUBSISTENCE SECTOR:

• Producers mainly use poor/backward/primitive technology
• There is limited specialisation and trade.
• Mainly produce poor quality output.
• Mainly use unskilled Labor.
• Mainly barter system of exchange is used.
• Mainly family labor is used.
• Mainly produce low output.
• There are limited innovations and inventions due to lack of competition.

REASONS WHY THERE IS A LARGE SUBSISTENCE SECTOR IN UGANDA:

• Because many people are poor and therefore lack capital to carry out commercialised
production.
• Because of low levels of education, producers are not able to carry out commercialized
production but rather concentrate on subsistence production.
• Because of poor technology. This makes it hard to produce high quality products in case
the producer has to sell.
• Conservatism by the people and therefore resist change from subsistence production to
commercial production.
• Because of poor infrastructure. This makes it very difficult to take the products to market
especially agricultural products.
• Because of the small market which cannot sustain commercialised production.
Advantages/ Merits/ Positive Implications a Subsistence Sector:
• There is limited wastage of resources since whatever is produced is consumed by the
producer.
• It is cheap; this is because it uses cheap and abundant (unskilled) family Labor.
• It uses simple tools that are easy to get by the low-income groups e.g. hand hoes, knives
etc
• It is easy to manage, this is because it is organised on small scale; therefore require limited
managerial and supervision skills.

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• It is the main source of food.

• There is no transport cost involved since the producer is the consumer.
• It is highly flexible. Subsistence productions easily change from one activity to another.

Disadvantages/demerits/shortcomings of subsistence sector:

• It leads to low tax revenue because people in this sector do not pay taxes.
• Leads to limited innovations and inventions in the sector due to lack of competition, this
discourages technological development in the economy.
• It leads to slow economic growth rate/ low quantity of output.
• It leads to the production of poor-quality output because they use poor technology and also
due to lack of competition.
• It leads to high levels of under- employment and seasonal unemployment because
producers rely on family labor.
• It leads to underutilisation/under exploitation of natural resources because production is
on a very small scale.
• It leads to limited specialization and trade which hinders commercialization of the
economy since the goods produced are not for exchange.

THE NEED TO REDUCE THE SUBSISTENCE SECTOR:

• To widen the tax base in the country, this is so because commercial producers are in
position to pay taxes imposed on their output.
• To encourage innovations and inventions in the economy, this is possible because the
monetary sector is associated with competition which encourages research so to come up
with modern technology.
• To accelerate the rate of economic growth. This is because the monetary sector involves
high output levels.
• To encourage production of high-quality products, this is so because the monetary sector
involves competition since production is for the market.
• To reduce seasonal unemployment. This is so because the monetary sector involves the
use modern methods of production like irrigation farming which ensures continuous
production throughout the year.
• To promote resource utilisation/exploitation. This is so because the monetary sector
produces for the market which necessitates high output levels thus promoting the
exploitation of the would be idle resources.
• To promote specialisation and trade. This is because the monetary sector encourages large
scale production which promotes concentration on a particular economic activity.

(b) MONETARY SECTOR:

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This is a sector that involves the production of goods and services for sale or for the market in order
to make profits. E.g. a carpenter making chairs for sale, a farmer growing crops for sale, tailor
making clothes for sale etc.

FEATURES/CHARACTERISTICS OF MONETARY SECTOR:

• Producers are mainly profit oriented/motivated.
• There is specialization because the producers sell their output in order to get what they do
not produce.
• They mainly produce high quality products because of the need to compete in the market.
• They mainly employ skilled Labor.
• They mainly use improved techniques of production.
• Production is mainly on large scale.
• The exchange of output is basically done using money.
• Production mainly involves research into better means of production and adding value.

MERITS/ POSITIVE IMPLICATIONS OF THE MONETARY SECTOR:

• It contributes to government revenue; this is because the commercial production activities

are taxed by government.
• It leads to improvement in quality of goods; this is because commercial production involves
competition, use of skilled labor, modern technology etc.
• It facilitates economic growth because of increased output due to production on large scale.
• It encourages technological development because producers carry out innovation and
invention into better techniques of production
• Economies of scale are enjoyed in the fields of transport, marketing, technical development
and management which reduces the cost of production.
• Specialisation in production is possible because of large size of the production plants and
hence the advantages of specialization such as improved quality and increased output.
• Commercial production facilitates the development of infrastructure since there is constant
need for transporting final output to the market or need for producers to transport inputs to
the production unit.
• It generates more employment opportunities, this is because production is organised on
large scale and involves many activities like actual production, processing, transporting,
warehousing, marketing etc.
• Leads to increased export earnings, this is so because some output from commercial
production is exported to other countries, this eventually leads to improvement in the
country’s balance of payment position.
• It leads to increased utilisation of the country’s resources, this is because of production on
large scale which necessitates the utilisation of the would-be idle resources such as land.

DEMERITS OF THE MONETARY SECTOR:

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• It is expensive; this is because it involves high costs of production like high cost of hiring
skilled labor, buying modern machinery, paying high indirect taxes etc, these reduce the
profit margin of the producers.
• It leads to resource wastage; this arises in case of over production where producers remain
with unsold output.
• In case of change in demand or change in tastes of consumers against a product, the
producers suffer great losses leading to wastage of resources.
• There is danger of technological unemployment as a result of mechanisation in production
where human beings are replaced by machines at work.
• It leads to rise in the cost of inputs such as raw materials and other intermediate products;
this is due to the increased competition for such inputs by many commercial producers.
• It leads to quick depletion of resource; this is due to over exploitation of resources as a
result of large-scale production.
• It leads to diseconomies of scale in the long run. This is because large scale production
results into management problems, transport problems, supervision problems etc. All these
result into increased cost of production.

LIMITATIONS OF MONETARY SECTOR:

• Small market.
• Limited capital.
• Poor infrastructure.
• Conservatism.
• Limited Labor skills.
• Limited entrepreneurial skills.
• Political instability.
• Poor technology.
• Poor land tenure system.

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