* Urban decay grips Zimbabwe's capital, Harare
* Less than 20 pct in formal employment
* Informal economy becoming the new economic model
By MacDonald Dzirutwe
HARARE, April 3 (Reuters) - On Harare's hardscrabble streets, college graduates compete with peasants scratching out a living selling anything from mobile phone cards to herbal sex tonics, a measure of the decline of Zimbabwe's "Sunshine City" under President Robert Mugabe.
Those among Harare's 1.5 million residents who remember independence in 1980 will have known a city that was swept regularly at dawn, public buildings gleaming with fresh paint, and shop windows so spotless that pedestrians would walk into them, according to urban legend.
Now the streets are dirty and dusty, the roads littered with pot-holes, and water gushes from leaking pipes. The park opposite Harare's only five-star hotel is full of vagrants asleep under the trees. The grass is strewn with paper and, occasionally, human waste.
Nearby is First Street, famous during colonial days for its boutiques, barbers and the aroma of coffee. Now it is peopled by hawkers, and the air is heavy with the stench of urine.
Less than 20 percent of Zimbabwe's people are in formal employment, according to independent economists, and economic growth is flatlining due to shortages of electricity and capital. For many, the only options for survival are petty trading or chancing it as an illegal worker in neighbouring South Africa, the continent's biggest economy.
Tabeth Chireya, a single mother of two with a human resources diploma, sits on the pavement all day selling rat and cockroach poison laid out on a grimy sisal sack.
To her left is an old woman selling potatoes, to her right a man peddling bootleg DVDs, all looking out for customers and for plainclothes police enforcing "clean streets" municipal by-laws.
Chireya, who looks much older than her 22 years, leaves her home in the rundown Harare township of Epworth three times a week to join a long queue at a Chinese shop to buy wares for re-sale, returning to her pavement spot before lunch time.
"I spent $30 buying all this," she said, pointing to needles, nail cutters and rat poison spread on the pavement. "It is the only way we can make an honest living."
"NEW ECONOMIC ORDER"
Zimbabwe's economy shrank 45 percent in the decade to 2009 due to plummeting farming output and hyperinflation. It bounced back for three years after Zimbabwe dropped its own currency and adopted the dollar, but it has since stagnated as companies have failed to find the cash to grow.
Outside the mining sector, nearly all of Zimbabwe's large and medium-sized companies have gone to the wall since 2000, and High Court records show another 400 firms in Harare, Bulawayo and Gweru, Zimbabwe's three largest cities, are being wound up after going bust last year.
Although Mugabe and his ZANU-PF party, which have ruled since independence from Britain in 1980, speak of plans for sovereign wealth funds and multi-billion-dollar platinum smelters, the realities are on a much smaller scale.
A World Bank report released in February says 46 percent of Zimbabwe's 13 million people run individual, small or medium-sized enterprises, a figure that contrasts with 17 percent in South Africa, and 13 percent in nearby and impoverished Malawi.
In a conference speech last month, Finance Minister Patrick Chinamasa said the government had to embrace the commerce of the street as a new economic order.
"This is an economic revolution, and we need to learn how to deal with the small man. The old economy is dead," he said.
The effects of the 'new order' can be seen everywhere.
Large chainstores are closing, replaced by little kiosks that can sell anything from imported electronics and clothes to lipstick and car parts. When a major car dealership closed its showroom last year, a mini-mall with dozens of tiny cubicles emerged in its place.
"The competition is tough in our business, but we are hanging in there," said Never Mapara, who sells mobile phones and accessories from a two square-metre cubicle he rents for $600 a month.
At another mall, street currency traders accost passers-by, waving wads of rand. The black market is thriving, fed by high demand for the currency of South Africa, which supplies 65 percent of Zimbabwe's imports.
For Chinamasa, the main downside to the new economy is that informal traders do not pay tax, depriving Mugabe's administration of cash it desperately needs.
The government collected $267 million in January, missing its $279 million target, and practically all its income goes on recurrent spending such as salaries, leaving next to nothing for capital projects or to repair roads or the decrepit power grid.
In another sign of the cash squeeze facing the authorities, local media reports said the government had deducted union fees from state teachers' salaries in February but had failed to pass the money on to the unions. Chinamasa declined to comment when questioned by journalists on this last week.
The central bank also estimates that as much as $2 billion - half of official bank deposits - is sloshing around the informal economy, again starving the financial system of capital that could be invested.
The shortage of cash has an insidious effect on the country's social infrastructure.
Police patrol the streets, but law enforcement often plays second fiddle to personal enrichment.
The force annexed a car park outside Harare's main police station in 2011, in which officers run a flea market where clothes traders pay $10 a day for space.
The city council says it is "trying to resolve this issue amicably", while a police spokeswoman declined to comment.
On the roads, cavalcades of kombis, as minibus taxis are known, are constantly trying to dodge the long arm of the law, even if it means driving at full speed in reverse against oncoming traffic.
"We are being squeezed everyday by the police, my brother, but if you don't pay, you don't survive in this business," said taxi driver Allen Chigova, weaving through morning rush-hour traffic.
His smashed windscreen bears testimony to ugly encounters with authority, and he is dismissive of official promises to prosecute officers who demand bribes.
"They may as well fire the lot, because every police stop is a toll gate," he said. (Reporting by MacDonald Dzirutwe; Editing by Ed Cropley and Will Waterman)