Informal Economy

Published in Dawn on January 21 2018

THE 12th Five Year Plan (2018-23) — to be finalised soon — is based on a strategy that combines “inclusive growth with green development”. In recent years ‘inclusive growth’ — growth that benefits all segments of society — has replaced ‘poverty alleviation’ as a catchphrase in development planning. Everyone is talking about it, including the IMF, World Bank, ADB, ILO, national governments as well as those averse to the ‘growth’ paradigm. So let’s hope all players in the international and national arena mean it and are out to promote “equity, equality of opportunity, and protection in market and employment” as defined by the World Bank.

The time has come for Pakistan to address inequity and to tackle the informal economy, which is considered a barrier to inclusive growth as it excludes the majority of people from accessing opportunities of productive growth in the economic realm and deprives them of entitlements at work because of their informal status. In comparison, workers engaged in formal, registered, tax compliant businesses and units are legally covered for social protection.

The government cites its inability to bring thousands of small enterprises under the tax net, while the enterprises point to financial constraints as the main reason for remaining informal. However, both concede that formality is desirable for it benefits all stakeholders in the long run. Yet the goal remains elusive.

Informality is a complex, multi-dimensional phenomenon and involves a number of variables, both tangible and intangible. A weak labour administration, in terms of capacity and staff strength, hinders the state in registering and keeping track of all economic units. The units, on the other hand, are not recording their transactions and activities because of a multitude of reasons: lack of education, complexity and cost of registration, insufficient profit to pay taxes. Intangible factors include cultural resistance to record keeping, distrust of the tax system and the perception (and reality) that the state does not tax industrialists and landlords so ‘why me, the small fry?’

Corruption of labour inspectorates and labour welfare institutions (ie EOBI) is another matter of concern. Informal units think that even if they were to contribute, benefits would not reach workers because the institutions embezzle money. Another factor that sustains the informal sector is lack of political will and a desire to maintain the status quo.

Despite constraints, if one were to dig deep, it’s a doable task. There is no magic wand to turn the disorganised, thriving informal sector into a disciplined, productive formal sector that is tax- and labour-compliant overnight. What works is formalisation in phases, a process of context-specific, integrated measures taken to reduce informality in a specified sector.

Compelling domestic realities and enabling international discourse are encouraging countries to take up the challenge. Several Latin American and Caribbean countries (ie Argentina, Brazil, Ecuador, Dominican Republic, Uruguay) have succeeded in reducing informality through a mix of policy measures in four key areas: improving economic capacity or productivity, legislation, provision of incentives and oversight. In India, efforts have been taken to address informality in the automobile supply chain in Maharashtra, while Nepal and Bangladesh have focused on the construction sector.

Formalisation of the informal economy has been given impetus by the ILO’s landmark Transition from the Informal to the Formal Economy Recommendation, 2015, which provides guidance to facilitate the transition of workers and economic units from the informal to the formal economy.

With the exception of research conducted in 2016 on home-based workers in Sindh that focused on minimum wage regulation, there has been no news of any substantial initiative following the ILO’s recommendation. In its last report, the ILO Committee of Experts on the Application of Conventions and Recommendations noted that the information provided by the Pakistan government in September 2016 indicated the “process of submission of [the ILO’s recommendation] has been initiated”. But information on the process is missing.

Hopefully, the 12th Five-Year Plan will unveil strategies to take the process of transitioning the informal economy forward. Employment generation in the formal sector can be enhanced through extended opportunities of education and training. Simp­lification of rules and regulations for registration, taxation and affiliation to social security can encourage informal sector units for transition. Fiscal incentives may further attract the informal units to register. Capable, trustworthy and transparent labour inspectorates will promote compliance.

There is a need to have faith in the good impulses of our people: informal sector units’ owners care about their workers’ well-being and welfare as much as they desire their businesses to prosper.

Read this on Dawn’s website.

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