Addressing Policy Gaps in Informal Sector Growth in Ethiopia

05.18.2021 | Helen Alemayehu, Getachew Sileshi, Naomi Sand

Nearly one-sixth of Ethiopia’s urban employment is reportedly in the informal sector as of 2020. While it hasn’t been measured yet, that figure is likely much higher today. The current rise in informal sector employment is due to a variety of factors, many of which were exacerbated by the COVID-19 pandemic. The uptick of migration from rural to urban areas, inaccessibility of credit and land leasing to formally open a shop, and the onerous tax burden placed on small businesses operating formally have all been noted by Ethiopian academics as push factors driving the move towards informality. For a growing population of young Ethiopians, informal sector work offers them the ability to support their basic needs and feel self-sufficient; for others, it is their only option to make ends meet.

While personal freedom and a lack of regulation are attractive aspects of informal sector work to some, youth in the informal sector are subject to a wide range of challenges and legal obstacles. Members of the informal sector cite harassment and abuse by law enforcement, a lack of security, inability to safely plan for the future, and seizure of goods as major barriers to their operations. What is more, many note a sense of neglect on behalf of the government when issues are raised, as well as a lack of inclusion in the decision-making process when government does become involved. Overall, there is a lingering sentiment among youth in Ethiopia’s informal sector that the government has not created a system that encourages the legalization of informal businesses. Against the backdrop of the COVID-19 pandemic and alarming rates of poverty and unemployment, the informal sector cannot be ignored as a dominant factor of Ethiopia’s economic future.

A Solution

As Ethiopia looks ahead and addresses COVID-19 recovery efforts, it is vital that the voices of informal sector youth are included in the process. To facilitate dialogue on the economic effects of COVID-19 on marginal economic actors – particularly women, youth, and the informal sector – CIPE coordinated radio programs on Fana and Ahadu, two highly influential Ethiopian radio channels. These discussions brought together youth engaged in the informal sector, government officials from the Addis Ababa Trade Bureau, Addis Ababa Job Creation and Food Security Commission, and Addis Ababa Law Enforcement Office, as well as academics from Addis Ababa University and staff from CIPE’s East Africa Regional Office.

During these discussions, participants were able to discuss the challenges and opportunities faced by informal sector youth and raise key priority areas to address as part of upcoming policy on economic recovery. Overall, it was made clear that creation of jobs for Ethiopia’s youth will do more than simply support COVID-19 recovery efforts, but can also serve as a step toward peace and economic growth for the national as a whole. Below are tangible recommendations put forward during the radio programs by informal sector youth and expert participants to address the challenges mentioned above.


  • Informal sector youth recommend that the government facilitate and support existing businesses looking to operate legally by designating areas for informal businesses to operate and addressing service gaps that prevent formal business operations. Expert participants mentioned the common challenges faced by informal businesses. These include difficulties affording suitable workspaces, access to finance, and burdensome taxation.
  • Informal sector youth recommend that before mandating that informal actors legalize, city administrations first arrange a convenient place for businesses to operate.
  • Expert participants recommend that government shift its approach to small businesses away from the practice of solely supporting those organized into groups and instead support individual businesses that have demonstrated capacity and indicate interest in doing business. They also recommend finding a middle ground in the support services offered to youth doing business in a way that doesn’t hamper their ability to operate on their own following government intervention.
  • Expert participants recommend that young people focus on organizing themselves into groups with a common vision to maximize the impact of government engagement with the informal sector and public service delivery.
  • Expert participants recommend that the government continue working to reduce youth migration from rural to urban areas and take further steps to address unemployment. While the current ten-year development plan and efforts on behalf of the government aim to expand rural job creation and increase employment, experts underscored the need for proper implementation of these initiatives. Experts also recommended that the recently established Job Creation Council should be present at the regional level as well as federally.