Download The Informal IS Normal

“The Informal IS Normal”
Marty Chen
WIEGO Network
Harvard Kennedy School
Panel on OECD Publication
PREM Learning Event
April 29, 09
REMARKS
• Informal IS normal
– significant share of total employment
– links with formal economy
– expanding in good times, and bad
• Informality is heterogeneous – this requires:
– different causal theories
– different policy responses
• Is informality the problem?
• Is formalization the solution?
• Economic Vision: A Hybrid Economy
THE INFORMAL ECONOMY
• Official International Statistical Definitions:
– Enterprise-based Definition adopted by International
Conference of Labour Statisticians in 1993
Informal sector = unincorporated enterprises owned by
households which fall below a certain size and/or are not
registered
– Employment-based Definition adopted by International
Conference of Labour Statisticians in 2003
Informal Employment = all forms of employment without
social protection, both within and outside the informal sector
• Informal Economy Broadly Defined: all economic activities,
units, and actors that are not regulated or protected by the state
INFORMAL EMPLOYMENT
IS THE NORM
Worldwide: around 66% of total employment (OECD 2009)
Developed Countries: 25-40% of total employment (ILO 2002)
Developing Countries: 50-90% of total employment (ILO 2002)
• Highest: Sub-Saharan Africa + South Asia (as high as 90% in
many countries)
• Medium: South East and East Asia + Latin America (around
65% in most countries)
• Lowest: North Africa + West Asia (around 50% in most
countries)
INFORMALITY EXPANDS
DURING GOOD TIMES AND BAD
• Some informal activities expand during economic downturns or
crises
– survival activities
– informal jobs
– industrial outwork
• Some informal activities expand during periods of economic
growth
– dynamic enterprises
– informalized jobs
– industrial outwork – notably in global value chains
THE INFORMAL WORKFORCE
IS HETEROGENEOUS
• Self-Employed: in unincorporated enterprises
– micro-entrepreneurs who hire others
– own account operators who do not hire others
– unpaid contributing family members
• Wage Employed: in jobs without social protection
– informal employees of both formal and informal firms
– casual day laborers
– industrial outworkers
– contracted workers
HETEROGENEITY REQUIRES
DIFFERENT CAUSAL THEORIES
• Different Causal Theories
– Choice: whose choice?
» entrepreneurial activities (micro-entrepreneur)
» informalized jobs (formal or informal employer)
» industrial outwork (formal or informal contractor)
– Necessity
» survival activities (own account operators)
» informal jobs (those who cannot get formal jobs +
those who cannot negotiate better contracts)
» industrial outwork (those who do not have market access)
– Tradition
» hereditary occupations
HETEROGENEITY REQUIRES
DIFFERENT POLICY RESPONSES
• Different Policy Responses: appropriate mix of
– Regulation: and taxation
– Protection: legal and social
– Promotion: policies and programs to promote…
» more and better opportunities
» more and secure assets: physical + financial + human
» better terms of doing business
» reduced constraints: supply-side + demand-side +
institutional
IS INFORMALITY THE PROBLEM?
• Tax Evasion?
– some pay taxes
– many fall outside tax structure/brackets
– most willing to pay taxes – if benefits guaranteed
• Low Productivity?
– capital output per worker is often low
– capital input per worker is also low
– most would prefer higher productivity – if this means higher
earnings
• Poverty?
– average earnings are low + poverty risk is high in the informal
economy
– most informal workers are poor + most working poor are
informally employed
– reducing poverty requires increasing earnings + reducing risks
in the informal economy
IS FORMALIZATION THE SOLUTION?
• If being formal (as opposed to being informal) means…
– being registered and paying taxes
– being legally and socially protected
– being productive and remunerative
– being organized and having voice and power
• Then formalization (of the informal economy) should involve…
– getting registered and paying taxes
– being covered by legal and social protection
– receiving support to become productive and remunerative
– becoming organized and gaining voice and power
ECONOMIC VISION:
A HYBRID ECONOMY
• Formalizing the Informal: not just regulation + taxation but also…
– protection
» legal rights: commercial + labor + property
» social protection
– promotion
» opportunities + assets
» productivity-enhancing support
» enabling environment
– organization and representative voice
• “Informalizing” the Formal: reform of economic policies and institutions
to include the informal economy/workforce as legitimate…
– part of the total economy
– target of economic policies + incentives
– stakeholder in policy-making and rule-setting institutions