Professional Documents
Culture Documents
Contents
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INFORMAL SECTOR OF PAKISTAN
PAKISTAN ECONOMIC POLICY
1. LETTER OF ACKNOWLEDGEMENT...................................................................................3
2. INTRODUCTION.......................................................................................................................4
3. DIFFERENCE BETWEEN FORMAL AND INFORMAL......................................................5
INFORMAL SECTOR....................................................................................................................5
FORMAL SECTOR...............................................................................................................................6
4. ADVANTAGES AND DISADVANTAGES...............................................................................7
Advantages:......................................................................................................................................7
Disadvantages:..................................................................................................................................7
5. TYPES OF INFORMAL SECTOR............................................................................................8
6. SIZE OF INFORMAL SECTOR...............................................................................................9
7. CONTRIBUTION TO PAKISTAN ECONOMY....................................................................10
8. COMPARISION TO INDIA AND CHINA.............................................................................11
CHINA:.............................................................................................................................................11
INDIA:..............................................................................................................................................12
PAKISTAN:.......................................................................................................................................13
9. LEGALIZATION......................................................................................................................14
IMPORTANCE.............................................................................................................................14
PROBLEM.....................................................................................................................................14
STEPS TO LEGALIZE................................................................................................................15
1. ROLE OF GOVERNMENT......................................................................................................15
2. PUBLIC APPEAL....................................................................................................................15
3. OFFER INCENTIVES..............................................................................................................15
4. LEGAL ACTION.....................................................................................................................16
5. SIMPLIFY RULES...................................................................................................................16
6. LEGALIZATION THROUGH E-COMMERCE............................................................................16
7. ASSURANCE FO SECURITY...................................................................................................16
10. CONCLUSION......................................................................................................................16
REFERENCES....................................................................................................................................17
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INFORMAL SECTOR OF PAKISTAN
PAKISTAN ECONOMIC POLICY
1. LETTER OF ACKNOWLEDGEMENT
We are thankful to Almighty Allah who gave us the knowledge, courage and strength
to accomplish in preparing the assigned term report. We are grateful to our instructor
and mentor Dr. Zia Abbas Rizvi for supporting us and guiding us in completing this
report. It has been a great knowledgeable and learning experience which will benefit
us in our academic and professional life.
During the preparation of this report, we acknowledged that theoretical studies are
unproductive if not applied in practical experience. Summing up, we are thankful to
Dr. Zia Abbas Rizvi for all his positive support and encouragement.
Regards
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INFORMAL SECTOR OF PAKISTAN
PAKISTAN ECONOMIC POLICY
2. INTRODUCTION
Pakistan currently is facing an economic crisis in the country. The inflation is all time
high, the country’s currency has depreciated and the country has to pay back huge loans
along with the interest on it. This is due to the short term policies and approaches
adopted by the previous government on order to manage the country’s economy. Since
the recent election of the recent government the country has seen a major downfall in
its economy and there are several reasons behind it and one of those reason is the
highest percentage of the informal sector existing in Pakistan.
Informal sector means that it is not formal or certified and approved by the government
sector. It is a part of the economy which is not documented, not taxed and neither
controlled by the government bodies. Informal economies are considered a barrier to
inclusive growth and exclude a majority of people from accessing opportunities of
productive growth in the economic realm, depriving them of entitlement at work
because of their informal status.
According to IMF, the informal sector in developing countries is dominant due to its
huge size. The growing influence of the informal economy, especially in developing
countries is a big challenge for political and economic managers. However, compelling
domestic realities and enabling international discourse are encouraging countries to
take up the challenge of either eliminating the informal sector or reducing its size to the
minimum.
In comparison, workers engaged in formal, registered, tax-compliant businesses and
units are legally covered for social protection. The undocumented economy or the
informal economy also hinders proper economic planning for socio-economic
development.
The informal economy in Pakistan is large where workers have limited access to labor
welfare services. The key sector of employment in the informal economy are wholesale
& retail trade manufacturing, community/social and personal services, construction and
transport.
The incidence of child labor is also prevalent in the informal economy. Pakistan’s only
child labor survey of 1996 indicated that 3.3 million under the age of 14 years were
working in Pakistan. The government is committing to eliminating the employment of
children less than 14 years of age, and the employment of those between the ages of 14
and less than 18 years will be strictly controlled, through a combination of stronger
legislation and the introduction of labor extension services.
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PAKISTAN ECONOMIC POLICY
The word informal economy is described through various ways in the existing literature,
such as black, shadow, hidden, irregular, unofficial, unobserved, underground and grey
economy (Gylys 2005). First of all, there is no difference between the informal economy
and the underground economy, because several countries called informal or
underground economy or some other names. However, the approach and objective of
both (informal and underground) are the same. The informal economy is renowned with
diverse appellations around the world. For instance, the Japanese recognize it as ‘Hidden
Incomes’, the French identify it as ‘Travail au noir’, Italy considers it as ‘The Lavorno
Nero’, the English call it ‘Fiddle’, the Swedish Russian term it as ‘Hidden Economy’, while
in Pakistan it has been analyzed as an ‘Hidden Economy’ or ‘Informal Economy’. Such
kind of economic activities, which are not reported in National Income Accounts, come
under the definition of the informal economy. It is also called the subordinate zone of
the overall economy, which can play a positive role for the growth of the overall formal
sector of any economy (Gulzar, Junaid, and Haider 2010).
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PAKISTAN ECONOMIC POLICY
An informal economy (informal sector or grey economy) is the part of any economy
that is neither taxed nor monitored by any form of government. The informal economy
has observed speedy growth in the last three decades as compared to the formal
economy and the informal economy has 35 percent share in the Country’s GDP which is
highest in the developing countries. The informal economy is accounted for more than
70 percent of the employment in main jobs outside agriculture sector. The several
reasons behind increasing informal economy include lack of employment opportunities
in formal sector, increased cash transactions, widening tax gap and poor performance of
the public sector institution. Afghan trade transit has also a major portion in informal
economy.
FORMAL SECTOR
Sector which encompasses all jobs with normal hours and regular wages, and are
recognized as income sources on which income taxes must be paid. Opposite of informal
sector. The formal sector does offer, in general, higher wages but the hours of work per
week are much more rigidly fixed.
In Pakistan agriculture is not included in the definition of informal sector activities.
Excluding agriculture, the bulk of Pakistan’s workforce is unorganized, and the labor
market is dominated by the informal sector. More people are employed in the informal
rather than the formal sector. Thus, the informal sector accounts for 73%2 of
employment in jobs outside agriculture in rural and urban areas. The informal sector
workers include self-employed workers as well as wage workers doing diversified work
from petty traders to small producers and from rickshaw drivers to shoe shiners. Their
contribution to GNP, estimated at 36.8%,3 is quite significant.
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PAKISTAN ECONOMIC POLICY
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• The government cannot measure the actual state of the economy to help make
policy and cannot collect the taxes that it should.
• Consumers are not protected from people selling fake/unsafe goods.
• Workers don’t accumulate government pension benefits.
• Informal businesses have to stay small to avoid attracting attention. Big
companies are more efficient and safer.
• Those working in the informal economy, and especially women, face many
challenges, including low and fluctuating incomes, difficult working conditions, lack of
legal protection, numerous legal and physical risks, and often low social standing.
• The problems related to informal sector could be divided into two categories:
broader problems and narrower problems.
BROADER PROBLEMS:
Underground economy
Technological underdevelopment
Irresponsible business practices
Restrictions against small enterprise
NARROWER PROBLEMS:
Street children
Unregulated street vending
Exploitation of child labor
Lack of specialized technology
Insufficient operating capital
Under provision of basic urban services
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PAKISTAN ECONOMIC POLICY
According to WB, Pakistan ranked 136 out of 190 countries in the EoDB index while it
ranked 173 regarding ease of taxpaying. In 2006 Pakistan ranked 60 in the global index
of ease of doing business, however, doing business became more difficult in the last
decade. Prime Minister Imran Khan while taking the notice of difficulties in business
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PAKISTAN ECONOMIC POLICY
instructed the relevant departments to bring Pakistan on 100th rank in global index of
doing business.
According to ILO 5 million child labor is part of informal economy in Pakistan who can be
part of formal economy if Government make proper mechanism for their education and
training. Public sector organization associated with traders, industrialists, investors and
public should be make more transparent in order to curb corruption and people may
conveniently get their rights.
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PAKISTAN ECONOMIC POLICY
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PAKISTAN ECONOMIC POLICY
to trade in the informal economy (also known as “system D” trade). In some regions in
China, local governments have adopted policies designed to encourage the informal
economy to alleviate unemployment.
INDIA:
India’s informal sector is the backbone of the economy. It employs the vast majority of
the work force, and the formal sector depends on its goods and services. The nation’s
quality of life hinges on things becoming better for masses of informally employed
people.
In its Economic Survey of 2015/16, the Government of India spelled out a major issue in
rather simple terms: “The challenge of creating ‘good jobs’ in India could be seen as the
challenge of creating more formal sector jobs, which also guarantees worker
protection.” Indeed, India’s masses need decent work.
The bitter truth, however, is that India’s formal sector is doing a bad job of providing
such jobs. It employs only about 10 % of the nation’s workforce. Merely 48 million of
India’s 472 million economically active people were working in the formal sector in the
financial year 2011/12. The vast majority was slaving away in the informal sector in
harsh conditions. These data are from the 68th National Sample Survey, which also
showed that the share of formal-sector jobs had increased in comparison with seven
years earlier. In absolute numbers, however, the growth of the informal-sector still
exceeded the growth of the formal one.
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PAKISTAN ECONOMIC POLICY
PAKISTAN:
Decades of internal political disputes and low levels of foreign investment have led to
underdevelopment in Pakistan. Pakistan has a large English-speaking population, with
English-language skills less prevalent outside urban centers. Despite some progress in
recent years in both security and energy, a challenging security environment, electricity
shortages, and a burdensome investment climate have traditionally deterred investors.
Agriculture accounts for one-fifth of output and two-fifths of employment.
Textiles and apparel account for more than half of Pakistan's export earnings; Pakistan's
failure to diversify its exports has left the country vulnerable to shifts in world demand.
Pakistan’s GDP growth has gradually increased since 2012, and was 5.3% in 2017. Official
unemployment was 6% in 2017, but this fails to capture the true picture, because much
of the economy is informal and underemployment remains high. Human development
continues to lag behind most of the region.
In Pakistan the only sector where informal sector is not seen much is the agriculture
sector. I
In Pakistan there are so many sector where informal working is applied. Mostly in all the
sectors whether the government or private sector.
Decades of internal political disputes and low levels of foreign investment have led to
underdevelopment in Pakistan. Pakistan has a large English-speaking population, with
English-language skills less prevalent outside urban centers. Despite some progress in
recent years in both security and energy, a challenging security environment, electricity
shortages, and a burdensome investment climate have traditionally deterred investors.
Agriculture accounts for one-fifth of output and two-fifths of employment. Textiles and
apparel account for more than half of Pakistan's export earnings; Pakistan's failure to
diversify its exports has left the country vulnerable to shifts in world demand. Pakistan’s
GDP growth has gradually increased since 2012, and was 5.3% in 2017. Official
unemployment was 6% in 2017, but this fails to capture the true picture, because much
of the economy is informal and underemployment remains high. Human development
continues to lag behind most of the region.
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PAKISTAN ECONOMIC POLICY
9. LEGALIZATION
IMPORTANCE
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.
According to different surveys and reports, the informal economy in Pakistan accounts
for 35-50 percent of the total economy. The informal sector in money terms is well in
the range of $85 billion. For a country like Pakistan, which is confronted with serious
economic challenges, it is absolutely essential to focus on documenting the economy.
Countries in our region such as India and Bangladesh are also vigorously pursuing
policies aimed at eliminating informal economies.
PROBLEM
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 labor 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 that the state only benefits that
industrialist and land lords.
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PAKISTAN ECONOMIC POLICY
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. The
infrastructural, institutional, and economic issues beset the informal sector; and lack of
focus on the informal sector is a major ‘disconnect’ in the economic policy formulation.
In terms of infrastructure, there is poor access to storage, transport, utilities, and
physical premises etc. In terms of institutional issues, there is lack of capacity building
both in terms of labor skills and management expertise, as well as, limited access to
enterprise and other property rights registration, and project finance. Therefore, there is
much more reliance of the SMEs on ‘informal institutional arrangements’ as the
cumbersome government procedures indirectly pushes them towards informality. There
is also limited access to information and market processes such as the capacity to
comply with the international standards that could widen the SMEs’ sales market.
In terms of the economic issues, there are issues such as the high transaction cost of
doing business and getting registered, limited access to technological upgradation, lack
of ability to buy inputs in bulk due to restrictive working capital, lack of investment, and
often the unfavorable terms of finance offered by the institutions. All of these contribute
to the problems the informal sector faces and it often prevents it from transiting
towards formalization.
Informal sector is a major part of our country and it needs to be addressed and the
people need to revisit and rethink in order to legalize it.
STEPS TO LEGALIZE
Doing business in a legal way, paying taxes and holding movable and immovable
properties in a legitimate way is not only a legal responsibility of every citizen but also a
moral duty towards the state and fellow citizens. Despite constraints, if one were to dig
deep, it’s a doable task. Turning the thriving informal sector into a disciplined,
productive formal sector that is tax and labor oriented will need to take some serious
long term policies. The following are some steps that can be taken in order to turn the
informal economy into the formal economy:
1. ROLE OF GOVERNMENT
In order to bring the informal sector into formal sectors, the government needs to play a
key role. The current government has recently launched the amnesty scheme which had
two purposes: documenting the economy, and welcoming the business and trading
community to participate in the legal economy. The unverified business should
immediately be brought into the control of the business. The government agents should
work freely without any political influence. The government should monitor its agent as
well so that they don’t indulge in practices of nepotism or bribery.
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PAKISTAN ECONOMIC POLICY
2. PUBLIC APPEAL
During the dam fund, the Prime Minister urged the public to contribute in it and the
public played its role realizing the need for the dam. The government should pursue the
policy by appealing to the general public to contribute to the economy and creating
awareness that this will not only benefit the informal sector but also the whole country.
The government needs to appeal to its people to verify their businesses.
3. OFFER INCENTIVES
The government can offer incentives to people who are documenting and legalizing their
businesses this will increase the motivation of the public to legalize their businesses.
4. LEGAL ACTION
The government needs to draw a sketch or a report by gathering intelligences that which
businesses are not legalized. The government than can impose on them heavy fines,
imprisonment or punishments in order to bring them in the tax net.
5. SIMPLIFY RULES
The government needs to simplify rules as registering the companies requires lots of
documents. The government needs to bring those rules down and less requirement of
documents must be necessary in order to formalizing business as fast as possible.
6. LEGALIZATION THROUGH E-COMMERCE
Registration of companies should be made easy. The best way to do it is to introduce e-
commerce in it and an online registration portal would result in an enormous flow of
businesses in the tax net.
7. ASSURANCE FOR SECURITY
The government should ensure and provide security for the businesses who recently register
themselves. In this way people will respond to government more effectively.
10. CONCLUSION
The informal sector is a major source of employment after agriculture and it has not
been properly studied, focused, and prioritized in the governmental policy making.
There is need for a ‘strategy’ or ‘vision’ for the informal sector; given its huge role and
linkages with the formal private sector growth; and its ability of absorb low-skilled and
low-educated labor force, particularly the youth.
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 labor 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. Informal economy owners care about their businesses and gain.
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PAKISTAN ECONOMIC POLICY
By providing the above said security and assurances, we can get a huge sector into the
tax net and the country can progress on the way to prosperity.
The country belongs to all of us and its future development and prosperity depends on
our sense of patriotism and realization of our obligations towards the state as its
citizens.
REFERENCES
1. http://www.finance.gov.pk/survey/chapters_19/Economic_Survey_2018_19.pdf
2. https://blogs.imf.org/2019/10/30/the-global-informal-economy-large-but-on-the-decline/
3. https://www.pakistantoday.com.pk/2019/11/17/understanding-the-informal-economy-of-
pakistan/
4. https://www.ilo.org/islamabad/areasofwork/informal-economy/lang--en/index.htm
5. https://www.dawn.com/news/1384308
6. https://fp.brecorder.com/2019/01/20190110438457/
7. https://dailytimes.com.pk/444778/the-informal-sector/
8. https://www.askedon.com/pakistans-informal-economy-a-way-forward/
9. http://www.aerc.edu.pk/wp-content/uploads/2017/06/The-real-size-of-underground-
economy.pdf
10. https://www.thenews.com.pk/print/489805-a-documented-economy
11. https://www.tandfonline.com/doi/full/10.1080/20430795.2020.171150
1
12. https://fp.brecorder.com/2019/01/20190110438457/
13. https://www.ilo.org/islamabad/areasofwork/informal-economy/lang--
en/index.htm
14. http://www.sbp.org.pk/publications/wpapers/2010/wp33.pdf
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