By Gyan Pathak
Over 60 per cent of the world’s adult population have been facing a threat to their survival. They are about two billions in number. They are informal workers, working chiefly in informal sector. Informal workers working in formal sectors may add millions to this figure. COVID-19 had hit them hard, particularly in developing countries, being not covered by existing social protection schemes. The urgent need is to provide a lifeline to them, bringing them under social security cover, temporarily providing minimum basic income guarantee during the continuing pandemic, and reducing informality in the long run.
The informal economy is a globally widespread and pervasive phenomenon. Although mostly prevalent in emerging and developing economies, it is also an important part of advanced economies. Whereas workers and firms may choose to operate in the informal sector to avoid taxes or regulations, 85 per cent of all informal workers around the world are in precarious employment in small production units, mostly due to lack of opportunities in the formal sector. An ILO estimate says that only about 11 per cent of the informal workers are working in formal sector.
It has several macroeconomic consequences. First, informal firms tend to be small, with low productivity, and do not contribute to the tax base. Therefore, countries or regions with higher informality also grow below their potential. Moreover, they do not collect sufficient taxes and cannot provide basic goods and services to the whole population, which reinforces informality. Secondly, informal worker are more likely to be poor and to earn lower wages compared to their peers in the formal sector, both because they lack social protection and access to credit and because they tend to be less educated. Third, women are more likely than men to be not only in informal employment but also in the most precarious and low-paying categories of informal employment, in part because they lack equal access to education and health services.
The sense of urgency of doing something for the informal worker has only been reinforced by the COVID-19, which has crushed informal activities, particularly in developing countries, where large segments of the population are not covered under any existing social protection schemes. Strict lockdowns destroyed the livelihoods of taxi and minibus drivers, street and market vendors, and bar and restaurant owners depending on daily incomes for survival. Yet, countries with thin or nonexistent social safety nets have formulated ad hoc and sometimes innovative cash or in-kind transfers plans in a matter of weeks
Since March 2020, 139 countries and territories around the globe have done this on ad-hoc basis. As the pandemic continues, there is clearly a need to set up more permanent mechanism to expand social protection, and provide vulnerable individuals or firms with adequate incentives to join a national register as a step towards formalization of the informal. Other tools can include a combination of support to small and medium-sized enterprises (MSMEs) such as incubators, preparation of financial accounts etc, as well as tax policy, and administration measures, such as adequate minimum threshold for VAT, simplification of tax payment procedures, incentives to be part of the taxpayer registry etc.
The size of the informal economy by GDP in Sub-Saharan Africa and Latin America is 34 per cent, South Asia 28 per cent, Middle East and North America 22 per cent, East Asia 21 per cent, Europe 19 per cent and OECD countries 15 per cent. In low income countries category it is 36 per cent, Emerging economies 28 per cent and Advanced economies 14 per cent.
The world needs a new design of effective policies to address informality, because the present one is complicated by multiple causes and forms of informality, both across and within countries. Informality is shaped by each country’s unique socioeconomic and institutional setting, which means that on one formula can address informality. Nevertheless, four broad policies can effectively address the root causes of informality. An IMF study has suggested four broad policies to effectively address the root causes of informality – Improved access to quality education, tax system design should not inadvertently increase incentives for individuals and firms to remain in the informal sector, enhanced financial inclusion programmes by promoting expanded access to formal or bank-based services, and a range of structural policies to increase incentives and lower the cost of formalization.
A book titled “The Global Informal Workforce: Priorities for Inclusive Growth” scheduled to be release in an IMF-ILO high level event on July 23, has given this very saddening account of the present condition of the informal workforce. The book offers a timely fresh look at the informal economy around the world and its impact on macroeconomic and development outcomes, analyzing the interactions between informality and labour and product markets, gender equality, fiscal institutions and outcomes, social protection, and financial inclusion.
The book sheds new light on the informal economy by looking in more detail at how to measure informality, analyzing its drivers and economic consequences, and discussing possible policy responses. A key message is sustainable and inclusive development requires a reduction in informality over time, but this process will inevitably be gradual because the informal sector in currently the only viable income source for billions of people. (IPA Service)