From Street Stall to Registered Business: What Ethiopia’s Informal Workers Reveal About the Path to Formality

In the bustling market towns of western Ethiopia, millions of people earn their living outside the reach of the state: selling fruit and vegetables from handcarts, shining shoes on street corners, frying snacks for passersby, or working from home with no employees, no contract, and no safety net. This vast informal economy is easy to enter but hard to escape, and a new study argues that helping it cross into formality may be one of the most consequential development challenges of the decade. Research published in Discover Global Society by Habtamu Bekele Bishe, Omana Gopichettiar Sajitha and Isubalew Daba Ayana of Wollega University examines how informal businesses in the Wallaga Zones of Ethiopia can be brought into the formal sector, what they gain when they arrive, and what keeps so many of them waiting at the gate.

The timing is no accident. Formalizing the informal economy sits at the heart of Sustainable Development Goal Target 8.3 and the International Labour Organization’s Recommendation No. 204, adopted in 2015, which calls on member states to ease the transition of workers and economic units into the formal economy while protecting fundamental rights and income security. Ethiopia, a signatory to the Recommendation, has pledged to promote decent jobs and prevent further informalization. Yet the stakes are enormous: in a country where rapid urbanization collides with limited formal job creation, the informal sector absorbs unemployed youth, migrants and low-skilled workers at a scale the formal economy cannot match, while offering them little in the way of productivity, legal protection or access to credit.

What distinguishes the new study is its conceptual framing. Rather than treating formalization as a simple act of registration, the authors interpret it through two complementary theoretical lenses: the Sustainable Livelihood Framework, which analyzes how financial, human, physical, social and natural assets interact with institutional conditions to shape livelihood strategies, and Amartya Sen’s Capability Approach, which asks whether people possess the substantive freedoms to achieve outcomes they value. Seen this way, formalization is meaningful only when it genuinely expands entrepreneurs’ capabilities, including access to finance and markets, better working conditions, social protection and greater economic security. A business license, in other words, is worthless if the institutional environment makes it impossible or irrational to use.

Methodologically, the study is a qualitative case study built on sixteen key informant interviews with officials from four institutions directly involved in regulating and supporting informal businesses: the Trade Office, the City Labour and Social Affairs Office, the Revenue Authority Office, and the Micro and Small Enterprise Development Office. One informant was selected from each institution in each of four purposively chosen cities, Nekemte, Gimbi, Shambu and Dambi Dollo, ensuring equal representation across urban settings that are rarely studied. The researchers triangulated interview data against government policies, legal documents and statistical publications, then applied thematic analysis using both deductive codes derived from their theoretical framework and inductive codes emerging from the interviews themselves. The study received ethics approval from Wollega University’s Research Ethics Review Committee in August 2025.

The pathways to formality that emerged from the data form a coherent package of institutional reforms. First, officials described decentralizing registration and licensing services down to the kebele, the lowest administrative tier, and in some cases deploying mobile registration services and designated focal points in local markets. As one informant explained, this reduces travel time and cost for small operators who might otherwise spend a full day’s earnings simply reaching an office. Second, the government has introduced presumptive tax systems, simplified registration procedures and temporary tax exemptions for newly formalized businesses, acknowledging that fear of heavy tax burdens and opaque procedures keeps many traders outside the fiscal system entirely. Third, access to finance emerged as a critical lever, with informants noting that most informal operators depend on personal savings or informal lending groups that are insufficient and unreliable for anyone hoping to register, pay taxes or expand.

Two further pathways round out the picture. Linking formalization to social protection, including government-sponsored social security schemes and employee benefits, gives both employers and workers a tangible reason to formalize, since many informal enterprises offer no health insurance or occupational safety protections at all. And skills development matters: the Micro and Small Enterprise Development Office provides training in bookkeeping, business planning and customer management, targeting the entrepreneurial, financial and managerial deficits that limit both business growth and the capacity to meet formal sector requirements. The authors are careful to note that international evidence tempers optimism about any single measure. Experiments in Benin and Malawi found that registration support alone often failed to improve business outcomes, and Georgia’s simplified tax regime produced only short-lived compliance gains, suggesting that these pathways work best in combination rather than isolation.

What, then, do businesses gain when they do formalize? The study identifies five interlocking benefits. Registered enterprises enter the tax net through business licenses, value-added tax and income tax, broadening municipal revenue and, in principle, funding better public services and infrastructure. Legal status also functions as an institutional gateway to finance: with business licenses and tax identification numbers in hand, operators acquire the legitimacy that banks require before extending loans. Employment quality improves as well, though the authors draw a subtle distinction between job creation and job upgrading, formalization may contribute less to generating new jobs than to making existing ones more stable, legally protected and decent. Formalized firms also gain access to government training, technology and market programs that boost productivity and competitiveness, and the aggregate effect is a more inclusive urban economy in which marginalized groups such as migrants, women and youth acquire legal identity and labor rights.

Yet the barriers are formidable, and the study’s most striking finding concerns readiness. Many informal operators, informants reported, are struggling simply to survive, lacking the capital and fixed business premises that would make formalization feel like an opportunity rather than a burden. As one official put it, operators see formalization as an additional cost rather than a benefit when their immediate concern is meeting basic livelihood needs. A second constraint is institutional: Ethiopia’s policies, laws and regulations do not adequately recognize the diverse structures and operating realities of informal economic units, creating a mismatch between formal regulatory design and livelihood realities. A third is implementation. Although numerous initiatives are underway, from simplified registration to credit schemes, their effectiveness is undermined by fragmented policy frameworks, weak coordination among responsible institutions, and inadequate adaptation to the circumstances of the businesses they are meant to serve.

The theoretical payoff of the study is its reconceptualization of formalization as an institutionally enabled livelihood transition rather than a matter of individual compliance. The Sustainable Livelihood Framework explains how limited financial and physical assets constrain the strategies operators can feasibly pursue, making formalization unattractive when it demands resources that are already scarce. Sen’s Capability Approach adds that the mere existence of formalization procedures does not mean operators have the substantive freedom to use them. Together, these lenses shift the policy question from whether informal businesses are willing to formalize to whether the institutional environment makes formalization feasible, beneficial and sustainable, a reframing with real consequences for how governments design and evaluate their programs.

The authors’ recommendations follow directly from this logic. Registration and licensing should become simpler and more accessible through decentralized, mobile and market-based services. Formalization should be paired with tangible benefits, including predictable tax arrangements, transitional incentives, affordable credit, business premises, training and social protection, with financial support singled out as especially critical because lack of capital can prevent businesses from formalizing in the first place. Policies should differentiate among informal businesses rather than applying uniform requirements that disproportionately burden the most vulnerable, and institutions responsible for registration, taxation, finance, enterprise development and labor protection should coordinate through a unified local mechanism. Finally, success should be measured not by the number of businesses registered but by whether formalization actually expands access to livelihood assets, social protection and decent employment. The study’s limitations, a qualitative design that cannot quantify effects, a reliance on official perspectives rather than operators’ own voices, and a focus on four cities, point toward mixed-methods and comparative research. But its central message travels far beyond Wallaga: informality persists not because workers are unwilling, but because institutions have yet to make formality worth the price of admission.

Subject of Research: Formalization pathways, socioeconomic benefits and constraints of the urban informal sector in Ethiopia's Wallaga Zones

Article Title: Investigating pathways to socioeconomic benefits and constraints of urban informal sector formalization in Wallaga Zones of Ethiopia

Article References: Investigating pathways to socioeconomic benefits and constraints of urban informal sector formalization in Wallaga Zones of Ethiopia. (n.d.). https://doi.org/10.1007/s44282-026-00628-8

Image Credits: AI Generated

DOI: 10.1007/s44282-026-00628-8

Keywords: informal sector, formalization, Ethiopia, urban economy, social protection, access to finance, Sustainable Development Goals, decent work, small enterprises, tax incentives, livelihoods, qualitative research