The Role of the Private Sector in Economic Development

The role of the private sector in economic development

The private sector in an economy is formulated under government policies but owned individually or privately. Although the private sector provides services to the public, it aims at maximizing profits. In a private sector, there are two components, namely the formal and the informal sectors.

Components of the private sector and importance of the formal sector in economic development

The formal sector

The formal sector encompasses all jobs with normal hours and regular wages, and is recognized as income sources on which income taxes must be paid. This sector is composed of all those private firms established legally by the registrar of companies. Their businesses are legally performed, opened at an area known publicly. They pay tax and other duties to the government.

Examples of businesses undertaken in the formal sector are:

• Industries
• Agriculture
• Commerce and trade
• Transport and communication

The owners of these sectors of the economy follow rules and regulations established by the government.

Importance of the formal sector in economic development

1. Provides employment opportunities to skilled, semi-skilled and unskilled labour. People are employed according to their skills in a particular job. Thus, their living standard increases.
2. Helps to mobilize aid from foreign countries and international organizations like the International Monetary Fund (IMF) and the World Bank.
3. Increases income to the country as owners of the firms pay tax to the government. The government utilizes the tax in various development projects in the country.
4. Brings in foreign exchange, skilled power and capital.
5. Encourages competition because of the existence of the formal sector.
6. Creates availability of goods and services which are of good quality due to competition.
7. Provides support to the people who have been affected by disasters.

The informal sector

The informal sector has many names; some of them are:

1. Invisible sector
2. Non-planned activities
3. Unstructured sector
4. Informal economy
5. People's economy
6. One-person enterprise
7. Urban subsistence sector

Definition

The informal sector or economy, as defined by governments, scholars or banks, is the part of an economy that is not taxed, monitored by any form of government, or included in any Gross National Product (GNP).

Description

In describing this sector, one should bear in mind that the informal economy is not a deviation of the formal economy. The sector shows the initiative of people who have failed to get formal employment engaging in various economic activities to earn a living.

Characteristics of the informal sector

The informal sector involves economic activities that are not regulated by labor or taxation laws or monitored for inclusion in the Gross Domestic Product (GDP) estimates.

There are two types of the informal sector activities, namely:

1. Coping strategies (survival activities)
2. Unofficial earning strategies (illegality in business)

Importance of the informal sector in economic development

1. Provides jobs which reduce the unemployment problem.
2. Generates income for individuals linked to these activities.
3. Helps to alleviate poverty.
4. Bolsters entrepreneurial activity.
5. Helps to bring commodities to the customer's doors. This helps those customers who stay away from the city center.
6. Makes easier the supply of goods and services since the exchange takes place on the same day.
7. Contributes income to the local government.

Problems facing the informal sector

1. Many jobs are low-paid and the job security is poor.
2. There are no proper places set for them to conduct their businesses.
3. Lack of transportation means.
4. Some of the businesses do not address the issue of hygiene.
5. Lack of enough capital, which limits the expansion of the businesses.
6. Lack of warehouse for traders to keep their stock or commodities.
7. Lack of creativity among the members due to low levels of education.
8. The authorities do not recognize them and therefore there is no freedom in doing their businesses.
9. No fringe benefits from institutional sources because the activities are not recognized.
10. Absence of trade union organization.

Ways of improving the informal sector

1. The government should recognize the sectors by registering all the owners of these businesses.
2. Proper places should be located where people can operate their activities comfortably.
3. People should be educated on how to conduct their activities properly and the importance of cooperation and unity. If they are united, it will be easier for them to get loans from financial institutions.
4. Health officers must visit these areas to inspect and educate people on all issues relating to health.