Institutional Barriers to Formalization of the Informal Economy of Addis Ababa

Abstract

The informal economy remains a cornerstone of urban livelihoods in Addis Ababa, being a source of the 40% of the employment opportunities, yet formalization efforts have yielded minimal success despite policy initiatives such as Regulation No. 88/2017. This mixed-methods study investigates the institutional barriers shaping informal traders’ decisions to formalize, drawing on survey data from 384 traders, 18 key informant interviews, three focus group discussions, and document analysis. Findings reveal that while 96.9% of respondents recognize potential benefits, including access to finance (65%) and business opportunities (60.6%), only 8.6% intend to formalize, due to pervasive institutional distrust, complex bureaucratic procedures, high compliance costs, and inconsistent enforcement. Gender disparities are pronounced, with women facing lower awareness and heightened exposure to arbitrary evictions. The study demonstrates that formalization is mediated by regulative, normative, and cognitive dimensions, where parallel informal institutions often function more reliably than formal ones. Institutional failure is not merely administrative but deeply normative: state actions are perceived as predatory rather than protective, eroding legitimacy and fostering reliance on informal networks for survival. The study concluded that sustainable formalization requires a paradigm shift, from top-down regulation to co-governance that centers trust, equity, and participatory design.

Keywords: informal economy, formalization, institutional barriers, Addis Ababa, Ethiopia, gender, governance