percent of installed power generation capacity, making the country vulnerable to droughts. Droughts in 2015/2016 and 2019 led to blackouts and power rationing (UNCTAD 2022). Financial challenges at the state-owned electricity utility, a weak coordinating environment, and limited private sector participation further contribute to electricity issues in Zambia (UNECA 2021, UNCTAD 2022).

## 6.4. Regulatory environment and confluence with informality

Formal firms in Zambia compete heavily with informal firms, reflecting difficulties in accessing highervalue markets and amplifying distortions from excessive formal regulatory and tax burdens. Informal firms may hinder the scale-up of formal competitors if their informal status provides them with cost or operational advantages (e.g., lower regulatory or tax burdens), creating an uneven playing field (Amin, Ohnsorge and Okou 2019). Since informal firms are not covered in this analysis, their impact on productivity can be observed as productivity declines among formal firms that experience sales or margin declines, rather than as cross-firm reallocation of resources. According to the 2019 Enterprise Survey, nearly 65 percent of firms compete with informal firms—higher than many peer countries— (Figure 43) and informal sector practices are the third-most cited business environment obstacle. These competitive distortions result from informal competition coinciding with burdensome requirements for formal firms. Senior managers of formal firms in Zambia report spending 8 percent of their time dealing with regulatory requirements, higher than the averages for SSA and aspirational peers (Figure 44). Competition with the informal sector may also reflect weak market access, forcing formal firms to compete with informal firms for a limited pool of local customers.

<!-- Start of picture text --> Figure 43. Firms competing with informal firms Figure 44. Senior management time spent on<br>(Percent of latest Enterprise Survey respondents) regulatory requirements (Average of latest<br>Enterprise Survey respondents)<br>80% 14%<br>70% 12%<br>60% 10%<br>50% 8%<br>40% 6%<br>30% 4%<br>20% 2%<br>10% 0%<br>0%<br>Cross-country averages Structural peers Aspirational peers Zambia<br>Cross-country averages Structural peers Aspirational peers Zambia<br>Source: World Bank staff calculations based on Enterprise Source: World Bank staff calculations based on Enterprise<br>Survey data and the Investment Climate Assessment 2.0 toolkit Survey data and the Investment Climate Assessment 2.0 toolkit.<br><!-- End of picture text -->

# 7. Conclusion

Aggregate labor productivity of formal firms weakened between 2014 and 2021, driven by secular within-firm declines in the non-mining industry and service sectors. By contrast, labor productivity grew in agriculture and remained flat in mining over the same period. Real wage trends for formal workers have mostly mirrored labor productivity dynamics, declining 40-50 percent across non-agriculture sectors but growing slightly in agriculture, largely driven by within-firm shifts rather than between-firm or between-sector dynamics. The declines in labor productivity and wages reflect business environment challenges related to access to finance and electricity, as well as burdensome formal compliance 24