Formalization Dynamics and Sustainable Development: A Case Study of Uganda

Abstract

In recent years, the dynamics of economic development in emerging economies, have caught attention due to the prevalence of the informal sector. This sector accounts for a substantial portion of the global workforce and presents challenges and opportunities for sustainable development, particularly in developing countries. This paper explores the interplay between formalization efforts and sustainability practices within the Ugandan business landscape, where a high level of entrepreneurial activity coexists with economic informality. Drawing on diverse perspectives obtained through interviews with local entrepreneurs, Ugandan authorities, and representatives from relevant organizations, this study aims to provide a comprehensive understanding of formalization and sustainability in Uganda. The analysis shows that the main challenges for the companies that are in the process of formalization are a lack of knowledge of the process, tax avoidance, and a lack of financial resources. The formalization process is revealed to not be straightforward and the information is difficult to find. Businesses usually follow different processes and may seek help from associations. Furthermore, our research revealed that the Triple Bottom Line (TBL) framework had to be adapted to fit a developing country context. We developed a figure that puts the three parts of the TBL (people, planet, profit) into the shape of a triangle to showcase the different priorities that developing country businesses have. The refined model demonstrates that there is some level of influence from formalization, which varies across different institutions. However, the distinction between formal and informal firms is not always clear, and it remains difficult to define a definitive pattern between formalization and sustainability in terms of the TBL due to the complexities of developing countries firms. Finally, the paper presents policy recommendations to address the informal economy and responsible practices of businesses. The government should formalize the informal economy, educate associations on the processes of formalization, and cultivate trust in government institutions. To address the TBL, the government should also prioritize capacity-building initiatives focused on enhancing financial literacy among businesses and improve its social and environmental regulations. Moreover, sharing comprehensive knowledge about responsible practices with business associations should enhance their adoption. The results from this case study offer an insight into the formalization process in Uganda and its influence on the TBL, which can offer valuable lessons to developing countries with a prevalence of the informal sector and similar institutional environments.