DEBRE

MARKOS UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ECONOMICS

TITLE: CONTRIBUTION OF INFORMAL SECTOR TO URBAN

POVERTY REDUCTION IN DEBRE MARKOS TOWN

PROPPOSAL SUBMITED TO THE DEPARTMENT OF ECONOMICS

INPARTIAL FULFILLMENT OF THE REQUIRIMENT OF THE BACHELOR
OF ART IN ECONOMICS

SECTION A

NAME ID NUMBER

1. BIRUK ATINKUT................................................……………………………….........DMU/1306285/13
2. ELDA TADESSE …………………………………………………………........ …….DMU/1306369/13
3. ASMARE LISANEWORK……………………………………………………………DMU/1308560/13
4. ETSUB ENDASHAW …………………………………………………………….......DMU/1305468/13
5. GATLUAK DUER……………………………………………………….….................DMU/1306071/13
6. BESUFIKAD TAYE ……………………………………………………….…..............DMU/1305938/13
7.BETELHEM DEGEFU………………………………………………………………….DMU/1305941/13

ADVISOR: Mengistie G.

APRIL, 2024
DEBRE MARKOS,ETHIOPIA
 Abstract
Ethiopia is one of the least developed country in which poverty is persuasive and deep
rooted. This study will aimed at assessing the contribution of informal sector in urban
poverty reduction in the case of Debre markos Town. The study will conducted based on
primary and secondary data. A primary data will conducted from sample of 87 informal
sector operators through structured questionnaire and simple random sampling technique
will used to those samples of operators. Simple statics analysis will used in data analysis
and interpretation. Based on finding lack of working capital, adequate markets, lack of
finance and adequate place are found to be the major impediments for informal sector
operations. The informal sector witnessed that their livelihood improved after the joined the
sector. Those operators are educated, younger, females and have culture of saving have
depicted better livelihood improvement. Given the immense contribution that the sector has,
therefore, the government needs to consider the sector as one of the fundamental pillar to
poverty reduction and should be encouraged to join the informal sector by lessening the
bureaucracy to get license, minimizing inter cost such as lowering licensing cost etc.
Table of Contents Page
Abstract...............................................................................................................................................0
CHAPTER ONE..................................................................................................................................3
INTRODUCTION...............................................................................................................................3
1.1 Background of the study............................................................................................................3
1.2 Statement of the problem...........................................................................................................4
1.3 objectives of the study...............................................................................................................5
1.3.1 General objective................................................................................................................5
1.3.1 Specific objectives of the study..........................................................................................5
3.4 Research Question.....................................................................................................................5
1.5 Significance of the study............................................................................................................5
1.6 Scope of the study……………………………………………………………………………………………………………………6

1.7 Signiificance of the study…………………………………………………………………………………………………………6

1.8 Organization of the sudy…………………………………………………………………………………………………………7.

CHAPTER TWO.................................................................................................................................7
2. Review Related Literature...............................................................................................................7
2.1 Theoretical Literature Review...................................................................................................7
2.1.2 The motives for the participation in the informal sector.........................................................7
2.1.3 Areas Of Informal Sector Activities......................................................................................8
2.1.4 Contribution Of Informal Sector To Reduce Urban Poverty..................................................9
2.1.4.1Contribution of the sector in employment creation.......................................................9
2.1.5 Strategies of the sectors..........................................................................................................9
2.1.6 Reasons for the activities of informal sector........................................................................10
2.2 Empirical literatures.................................................................................................................10
2.3 Conceptual framework.................................................................................................................11
...........................................................................................................................................................11
...........................................................................................................................................................11
CHAPTER THREE...........................................................................................................................12
3. Methodology of the study..............................................................................................................12
3.1 Description of the study area...................................................................................................12
3.4 Sampling Technique and Sample Size.........................................................................14
3.5 Method of Data Collection..................................................................................................15
3.6 Method of Data Analysis.....................................................................................................15
I Work Plan.......................................................................................................................................17
II REFERENCE................................................................................................................................18
III Appendices....................................................................................................................................20
 CHAPTER ONE

INTRODUCTION

1.1 Background of the study

->In most developing countries the urban economy is characterized by high rate of
population growth, low domestic saving, massive of income, lack of higher education, poor
health centers, and poor infrastructure facilities (Todaro, 2003).

Ethiopia is one of the least developed countries in which poverty is persuasive and deep
rooted(brown and Teshome, 2007), accordingly at national level the proportion of the
people in Ethiopia was absolutely poor(44% in 2003).these have a total consumption
expenditure was less than USD12428 per year(Asmamaw,2007).poverty take economic,
political, social and cultural forms. It can be manifested in urban areas being either
homeless or living in substandard dwelling taking basic communities, unemployment
security, absence of different economic sequence, limited participation in decision making
and vulnerable to number of shock, risk and stress(Degeffe,2008).

Urban poverty incidence has increased from 33% in 1995/1996 to about 35.1 in
2004/2005(Tegegne and mehert, 2020).
Urban poverty is reduced by increment of informal sectors/small scale micro enterprises.
Because the minimize poverty and unemployment level through creating job opportunities
and generating income to either skilled or unskilled labor section of the poor society.
The government of FDRE has employed the promotion and development of informal
sectors as tools and strategies for reducing poverty, creating employment and bringing about
overall growth in the sectors. The FDRE plan accelerates the reduction of urban poverty and
employment by promoting small scale in formal section. This creates 1.5million new job
opportunities (M OFED, 2006).
 Informal sector employment account over 60% the total employment, where 40 million
African Workers earns live in the world’s poverty countries for most them live in daily
struggle for survival, low health status forced to be reckoned every day. One in five people
in the world in lack of access to clean water a necessarily of life nearly two out of the five
people live without sanitation poor good health hundreds of millions of people do not have
enough to eat(IIo,1990).
Interest its contribution to GDP, the informal sector account for between 25% and 4%
annual Amount in developing countries in Africa and Asia (World Bank, 2050).
Informal sector play an important contribution urban poverty service 21 breeding ground
for new entrepreneurs and contribute for the reduction of urban crime and violence. The
size of informal sector economy could be that order in similar developing economics in
Ethiopian gap 60% in 2008-2009 excluding a agriculture 20% in 2005 urban population in
Ethiopia will grow to 11.7% million or 16% out to total Ethiopian population of
economically activities population evolved 15% by informal sector. Among the grow
engaged informal sector occupation a higher proportion of male (16%) than female(13%)
in East gojjam zone informal Sector (Befekadu and Berhanu 1999/2000).

1.2 Statement of the problem

Informal sector consist of entrepreneurial activities and associated micro and small
enterprise that provide suitable condition for reducing urban poverty through creating job
opportunities and generating earning from them(Daniel and mead,1998).Government of
least developed countries are allocating sample resources for promoting informal
sector/small scale activities because they are engine of employment, tools of alleviating
urban poverty and improving income equality distribution among the
societies(Gomez,2008).
Urban poverty rate is reducing by increment of informal sectors; in the creation of job
opportunity to the community. Informal sectors have a number of potential uses for those
of least developed countries by utilized demotic resources and labor intensive technology.
This sector contributes for national outputs and help to reduce the level of urban poverty.
However promoting informal sector is not possible without living the problems related to
informal sectors.
The major problems of informal sectors activities were lack of capital, lack of awareness,
lack of access to facilities from government support in the study area. More over as to our
knowledge no research was conducted in the study area. we will investigate on the
contribution of informal sector in poverty reduction in Debre markos town to identify the
significant contribution of informal sector in poverty reduction in the town.

1.3 objectives of the study

1.3.1 General objective
The general objective of the study will to examine the contribution of informal sector to
reduce urban poverty in the study area in east gojjam incase of Debre markos town.

1.3.1 Specific objectives of the study

The specific objectives of the study will:⁹

 To assess the contribution of informal sector to reduce urban poverty.

 To identify problem or constraints that faces the development of informal sectors.
 To identify the reason that motivate people to join informal sector activities

3.4 Research Question

 What are the contributions of informal sectors to reduce urban poverty?
 What are the problems that face the development of informal sector?
 What are the reason that motivate people to joining informal sector activities?

1.5 Significance of the study

The urban informal sector has the potential to reduce urban poverty. Therefore the current
study provide relevant information to the policymaker showing some recommending
marks, it may also use as reference for individuals who are interested at undertaking further
research on informal sector.

1.6 Scope of the study

The study will under taken in East gojjam in Amhara regional state particularly in Debre
markos town only informal sector because of some constraints like: budget, time and so on.
Thus the studies are confined to examine and identify the major contribution of informal
sector to reduce urban poverty in the town.
The scope of the study will be delimited to unregistered informal sector operetares in Debre
markos city Administration. the sample to be selected will includes street venders, home
made fund, staff producers ( baltina), home to home service providers and Trader and
skilled vocational workers The study also will demarcate to approaching relevant
government offices doing with the issues at hand.
1.7 Significance of the study
->The study will be used as a reference for other researchers that are
going to the place in this area the contribution of informal sector to
urban poverty reduction. Informal sectors use many mechanism to
reduce the poverty of ones country so this study will address those
mechanisms ande their role in adjusting the poverty
-> Finally, the study on this is justifiable in order to identify informal sectors of urban
poverty reduction mechanisms

1.8 limitation of the study

 The study faced some constraints while conducting the research. Those problems
are:
 Financial constraint
 Time constraint
 Lack of enough reference materials
 Lack of full information from sectors
1.9 Organization of the study

-> The study is organized in to four chapters. Chapter one consists background of the study,
statement of the problem, objective of the study, significance of the study, scope of the
study and limitation of the study. Chapter two include literature review which consists of
theoretical and empirical literature review. Chapter three consists about research
methodology which includes Background of study area, source and method of data
collection, sampling technique and size, and method of data analysis. Chapter four includes
work plan and budget break down.
 CHAPTER TWO

2. Review Related Literature

2.1 Theoretical Literature Review
Informal sector will viewed from several perspectives such as national policy makers and
international development agents that results a number of definitions. The policy makers
focusing on the legal aspect, concerning tax and other legislative procedure consider the
informal sector as an activity which does not follow established business. On the other hand,
scholars and development actor focusing on social view of point put urban informal sector
as a non-farm urban micro enterprise that are engaged in trading, manufacturing service
rendering etc.

Informal sector produce goods that have more appropriate for the poor and appropriate
means of reducing poverty. Informal sector refers to home based individual activities
operating by the owner with few employees. They are the most small and low level of
productivity and low income which tends to have little access to organized market, formal
training and public services, they concerned on income earning activities to reduce poverty

2.1.2 The motives for the participation in the informal sector

The motives for the participation in the informal sector are varying. Some of them are the
following

 Labor market flexibility: many of the participants particularly women prefer this
sector because it offers flexibility in participation.
 Existence of profitability opportunities:-some enters to this sector voluntarily
because there are profitability opportunities.
 Being small units: there are in advantageous position to exploit the make niches
weighting to be exploited by offering tailored service.
 Noncompliance with regulation: many offer units choose to be small and remain an
Unregulated or United Nation licensed that is indivisible and thus miss labeled in to
 the informal sector. So that, they avoid compliances with some or all the regulation
since compliances with them generally have a cost burden.
Informal sector or small scale sectors are close blend of organization that escapes the cover
of many regulation and do not receive access privileged facilities .It is usually does not
adhere to norms of minimum wage, retirement plan and un employment compensation.
They do not pay taxes and they receive tittle government support. These sectors are not
illegal in the strict sense but them convenient for the government to look the other way.

An informal sector activities include laundry service, taxi and United Nation registered
buses, black market transaction, money lending,etc

2.1.3 Areas Of Informal Sector Activities

In Ethiopia most of informal sector or micro enterprises are generally small scale and
operated by on main or assisted by family members. They involve highly labor intensive
and traditional technology requiring relatively little capital. Informal sector can be
categories on different areas of the sector operations

 Agricultural informal sector: these are small scale farm operations or activities
performed in rural areas. It includes rearing animals for milk and fattening,
beekeeping, marketing crops and animals, poultry rising etc.
 Manufacturing, handcraft, cottage industry etc.
 Service informal sector activities including laundry, shoe repairs, photography,
entertainment etc.

2.1.4 Contribution Of Informal Sector To Reduce Urban Poverty

Although informal sector activities viewed as unregulated, they have generate employment
opportunities for rapidly growing labor force. In African countries around 75% of the total
non-farm work force is engaged in urban informal sector and the share the sector over all
gross domestic product and non-agricultural gross domestic product are 20% and 35%
respectively.

In Saharan Africa countries employment in the sector shows an increment of 67% annually

Generally the contribution of informal sector is:

  Create new jobs with minimum capital requirement.
 Mobilize the local resource to the sector activities.
 Adopt market fluctuation to the sector goods and service.
 Provide a means for poverty alleviation mechanisms and unemployment through
creating job opportunities.

2.1.4.1Contribution of the sector in employment creation

Informal sector are characterized by high diversified activities that can create job
opportunities for substantial segment of the population. This indicated that the sector a quick
remedy for unemployment to new job seekers and self-employment on a direct intervention
and crucial support of the government .

Informal sector will also acted as an important economic shock absorber by making
unexpected significant contribution to new job creation. They are labor intensive and land to
useless capital scarce resources. They can be established in least developed countries and
help to increase income of poor household by improving distribution of income and a result
help to minimize overcrowding in urban area .

2.1.5 Strategies of the sectors

The majority of the Ethiopian people living in subsistence agricultural that the people are
those individual and households in informal sector whose income are insufficient to provide
their basic needs. Although, we do not intended to the poverty line to separate the poor and
non-poor society, the World Bank adapted the global poverty line of United State Of
America and 370 per annual to determine the number of the people in the world.

The informal sector has linked with other sectors that allow excess labor escape from
extreme rural poverty and underemployment. Although, under living and working
conditions for income that are not closely connect with formal sector, the formal sector
depend on informal sector in cheap inputs, wages and goods. The informal sector also
depends on formal sector in a good promotion of their income and clients. Informal sector
has an important role in recycling waste materials engaging in collection of goods ranging
from scrap material to cigarette .
2.1.6 Reasons for the activities of informal sector
There are many different reasons why people join into the informal sector activities for the
establishment informal sector activities to minimize the level of poverty for the poor society
.Among these: low initial startup capital, higher expectation of earning income, no
alternative to live hood, advice and influency of family/family tradition, own interest/self-
decision of the operator of the sector and some other are the major one.

2.2 Empirical literatures

The important of the sector has been widely attributed to the process of economic
development. This enhances national income that help to minimize poverty and United
Nation employment level .

In Ethiopia there were 584913 informal sector activities that contribute the economy
through creating job opportunities, improving the income the poor society by response the
reduction of poverty

Informal sector or small enterprises are favorable to majority of the vast informal sectors
are favorable to the majority of the vast population whose income is very low. Given this
lower income level and associated low effective demand that the sector become an ideal to
satisfy the demand of narrow domestic market. The sectors play significant contribution to
reduce urban poverty through creating job opportunities for the majority of the poor
population .

The structures of informal sector in Ethiopia are usually dominated by consumer goods. But
this is vary from place to place because the variability of inputs used for providing products
and goods that initiates operators, employees and person engaged the sector activities. The
informal sector classified under products of beverages, chemicals, food textile, construction,
electronics, metal work, laundry, tailor..etc..The involvement of the sector in different
economic activities strength their role in creating both forward and backward linkage with
other sectors of economy. The forward linkage occurs when the relation between large and
medium enterprises happen. The output of large enterprises is observed by the informal
sector.
The large number of informal sector purchase large amount of output than large enterprises
that facilitate the backward linkage of informal sector

Informal sector enterprises use simple technologies that have lower capital intensity. Some
of the enterprises are highly dynamic, innovations are taking place in inputs, working
patterns and output which make them able to adopt new situation and exploit market
opportunities

2.3 Conceptual framework

NEGATIVE POSITIVE

EVICTION AND
LABOUR INTENSIVE,
DEMOLITION,
INFORMAL URBANIZATION AND
DON’T ADDRESS IN
ECONOMIC URBAN GROWTH,
PLANS & policies
SECTOR POVERTY
considerd as lillegal
REDUCTION
business
 CHAPTER THREE

3. Methodology of the study

The part of the study would, shows the techniques to collect analysis and interpret the data
which will be obtained from primary and secondary source. The researcher will use
descriptive methodology analysis tells the relevant information about the contribution of the
informal sector in poverty reduction in Debre markos town

3.1 Description of the study area

The study is carrying out in Debre markos town. Debre markos is town found in east gojjam
in Amhara region, Ethiopia. Debre markos is 300 km from Addis Ababa , which is capital
city of Ethiopia, Debre markos has latitude and longitude of 10°20′N and 37°43'E
respectively and with an elevation of 2446 meters above sea level.

3.1.1 Population, religion and culture

According to the data gained from the town’s administrative office in 2015 reported a total
population for this town has , of whom 91,581 were men and 99,652 were women. The
majority of the inhabitants said they were Ethiopian Orthodox Christianity, with 93.34% of
the population reporting they observed this belief, while 6.5% of the population practiced
Muslims and other religion.

3.1.2 Climate and socio-economic profile

Debre markos has the total of around 20 kebele with total population of 193,233. Most of
the kebeles, including those selected for this study, are considered. Although the amount
and pattern vary locally, rainfall is bimodal in distribution; a short season from March to
May is known as belg, and a longer rainy reason from July to September is known as meher.
Although endowed with high underground water, The opportunity to access irrigation for
the households that could afford the irrigation infrastructure. Deep wells, open pits, and
ponds were used to access. The average annual lowest and
maximum temperatures are 7°C and 27°C, respectively, with annual minimum and
maximum rainfall of 14.5 mm and 307 mm.
 This Photo by Unknown Author is licensed under CC BY

Figure 1 Map of the study area (developed using ArcGIS 10)

3.2 Research approach

-> research approach can vary depending on the specific research question and goals of the
study. Some common research approaches

The research is qualitative research is used :-

-> Quantitative research: Focuses on collecting numerical data and analyzing it using
statistical methods to draw conclusions.

3.3Type and Sources of Data

The researcher will collected data from both the primary and the secondary data sources.
The Primary data source was collected from the respondents through distributing
questionnaires. Secondary data source was collected from Debre markos town and other
offices annual report and from different published materials. The secondary data was used
for achieving second objective of describing the current contribution of informal sector in
the town.
3.4 Sampling Technique and Sample Size
It is not applicable enough to cover the cost of the research to study on all elements of the
population. For this reason; the study was conducted on the selected samples. To select the
sample of the study the researcher was used simple random sampling techniques. This is
because, simple random sampling technique gives equal chance for the target population,
reduce biases and makes researcher task easy. At the first stage Debre markos town was
purposely selected due to more informal sector are there in the town, which was important
to reduce poverty and unemployment reduction in the study area.

In the second stage the researcher was selected one sub city from 3 sub city by using simple
random sampling. In the third stage, from the selected sub cities a sample of the respondents
was selected by using simple random sampling techniques.

The sample size of the respondent was determined by Yemen Taro formula (1967). The
degree of variability and degree of precession 10 percent was used.

n= N/1+N (E) 2

Where n=sample size

E=level of precession equal to 10 percent

N= total population of 3 kebeles

The target population of selected kebeles are 667; hence the sample size was determined as
follows:

Then give that;

N= 667

e =10% = (0.1)2=0.01

n=667/1+ 667(0.1)2= 87

The sample size as computed by using the above formula is equal to 87.
3.5 Method of Data Collection
Data for the purpose of the research was collected from the selected respondents by asking
the questionnaire and filled by enumerators.

This approach was used since some of the respondents in the sample are illiterate.The
researcher was used interview mechanism to get necessary information from those illiterate
respondents. Before the distribution of the questionnaire the researcher will checked wether
the required information and variables are included or not. After collection, all responses
were checked for missing and some editorial problem before the process of data
classification. Besides secondary data were collected by going to the concerned office
personally

3.6 Method of Data Analysis

The method would be used to present the data in this study will Qualitative method. The
collected data from the source would be organized and classified according to their
similarities using table and percentage to describe the contribution of informal sector and the
variables that can hinder

The data will be analyzed in Two ways as follow

1. Quantitative Data

The data is easily analyzed by generating frequencey Table and Computing Percentage.
Then the Finding were identified discused and conclusion is drown for each items

2. Qualitative data

As For the Qualitative data which is generated From the Open-ended Questions Summaries

of the major or interesting points are made and reported as the results of this survey
I. Work plan

time breakdown

NO Activities

January February March APRIL

1 Title XXX
Selection

2 Literature XXX
Searching

3 Finalizing XXX
Proposal

5 Data collection XXX

6 Data analyzing XXX

7 Report writing XXX

8 Summation of XXX
proposal
Budget breakdown

NO Items No of unit Cost per unit Total cost in

Requirement Birr Birr

1 Pen 2 20 40

2 Paper 30 2 60

3 Transportation 8 20 160

4 Miscellaneous(tea 10 15 150
and coffee)

5 Total 265 56 1,185

 II REFERENCE
AndualemTegen. (2004). “Challenges in the effective development and promotion of
misses in Ethiopia. Addis Ababa”.

AbrarSuilman (1994). “Financial support program for the informal sector. Addis Ababa”

Abraham Tekeste. (1996). “Urban informal sector and its production”

African economic outlook (2001/2002). “New York’

BefikaduDegefe and BirhanuNegga. (1999/2000). “The Ethiopian economic association

annual report on Ethiopian economy. Addis Ababa”

Bluinch Niles. (2001). “The informal the revised”

Brown and fiber. (1996). “Poverty and informal sector”

Charmers J. (2000). “The contribution of informal sector to GDP in developing countries.

Assessment. Methods estimates. in orientation for the future. Geneva”.

CSA. (1997). “Urban informal sector in Ethiopia”

CSA. (2003). “Urban informal sector in Ethiopia”

Degeffe.(2008).Urban poverty problem decision making and Vulnerable.

EBDSN. (20002). “Short over view of informal sector”.

Getachew. (1996). “Urban informal sector”

Gomez.(2008). “Alleviating Urban poverty”

Han senne. (1991). “Characters of informal sector”.

Hayat. (1991). “Activities of informal sector”

H.Sharma. (1998). “Concern of urban informal sector”

ILO. (1990). “Urban informal sector Africa, Addis Ababa”

Kebade. Tilahun. (1990). “Small enterprise in Ethiopia”

M.P Todaro. (2003). “Economics for developing world 7th edition”.

EMTI. (1999).“Micro and small enterprises development strategies in A.A”.

MOFED. (2006).“Job opportunities of urban informal sector”

SUHATO. (2003). “The focus of informal sector”

S.V sethurman. (1997). “Urban informal sector: a critical assessment of current strategies
UNPP”.

Tagene and Mehert.(2002). “Urban Poverty incidence”

Yeman Taro.(1997).”Sample determination formula”

Tadesse.(2004).”Reducing urban poverty”

World Bank.(1990). “Global Poverty line”

https://en.wikipedia.org/wiki/Legambo

http://www.statsethiopia.gov.et/wp-content/uploads/2023/08/Population-of-Zones-and-
Weredas-Projected-as-of-July-2023.pdf
 III Appendices
Debre Markos University
College Of Business And Economics
Department Of Economics
Questionnaires
This questionnaire is prepared by third year economics students and its aim to study the
contribution of informal sector to urban poverty reduction in debre markos town.
Information you give essential to complete the study successfully. This information it using for
academic purpose only. Therefore you are kindly requested to give genuine responses for answer
will be anonymous and strictly confidential throughout the whole survey
1. Sex
Male Female
2. Age
Below 30 45-59
30-44 60-74 above 75
3. Your education level
Illiterate primary school level
Secondary and preparatory school level college diploma
Degree and above
4. What type of informal sector you are engaged in ,………………….?
5. When did you start the business ………………………………..
6. What was your source of capital?
Own saving gift from family
Loan from financial institutions other
7. Did you face problem when you established the sector ?
Yes No
8. If your answer for question No 7 is “yes” what was the problem you confronted?
Lack of work place lack of startup capital
Lack of raw material government policy
Infrastructure problems other
9. How much is your monthly income do you get you’re your business?
 ………………………………………………
10. Do you think that your informal sector business accomplished your goal?
11. If you say no what is the reason for question number 10?

12. How much is yearly income do you get from your business ……….?

13. Which society is participate in your types of informal business ………………….?

A. Older females or males
B. Young females or males
C. Both of them
14. Did the government benefited from your business?
A. Yes
B. No
C. Do not sure
15. Did the government give especially incentive to informal sector in Debre Markos town?
A. Yes
B. No
C. Do not sure