Informal economy

_ Informal sector is defined as non-argicultural, unregistered, unincorporated enterprises that produce

goods and services for sale

_ Constitues a substantial and important portion of the labour force.

_ Refers to all economy activities by workers that are – in law or in practice – not covered (or
insufficiently covered) by formal employment arrangements.

_ Includes a lack of protection for non-payment of wages, retrenchment without notice or

compensation, unsatisfactory occupational health and safety conditions and an absence of social
benefits such as pensions, sick pay and health insurance.

_ Informal economy tends to absorb most of the expanding labour force in the urban areas.

_ The expand of urban informal economy in Asia due to the explosive growth of urban population and
the increase in service-sector employment

The cause of Informal economy

_ Internal migration (rural to urban), economic slide, wealth creation and tax evasion are some of the
main causes of the rapid growth of informal sector and the subsequent decline of the formal sector

_ The informalization of the economy results in government revenue reduction, collapse of the formal
sector and corruption; while identified benefits include creation of employment, as well as lower costs
of commodities.

_ High population growth rates reinforced by massive migration failed to keep pace with economic
development such that created employment opportunities were inadequate to absorb new entrants
into the labour force. This gave pressure to employment opportunities, hence a rise in unemployment.
With the rising unemployment, survival fueled the informal sector activities.

Key factors:
_ Informal employment is predominant in rural areas (85.2 percent of employment) and is almost half
of employment (47.4 per cent) in urban areas

_ Southern Asia and South-Eastern Asia and the Pacific have higher shares of informal employment than
Eastern Asia. In 2016, shares were 50.7 per cent in Eastern Asia, 75.2 per cent in Southern Asia and the
Pacific and 87.8 per cent in Southern Asia

_ The share of informal employment ranges from the highest level of over 90 per cent (94.3 per cent in
Nepal, 93.6 per cent in Lao and 93.1 per cent in Cambodia) to the lowest with proportions below 20 per
cent in Japan.
_ Informal employment is a greater source of employment for men (63.0 per cent) than for women
(58.1 per cent). Out of the two billion workers in informal employment worldwide, just over 740 million
are women.

_ Women are more exposed to informal employment in most low- and lower-middle income countries
and are more often found in the most vulnerable situations.

Facts:
Two of the report’s authors, Florence Bonnet and Vicky Leung, point out that while not all informal
workers are poor, poverty is both a cause and a consequence of informality. “The report shows that
the poor face higher rates of informal employment and that poverty rates are higher among workers in
informal employment,” said Leung.

To what extent should government regulate this sector:

Positive (informal economy should be encouraged) Negative

_ Employment
+ Informal economy provide jobs and income for
low-educated people, create employment
opportunities for all citizens who lack high-
specialized skills in rural areas to feed their family.
+ Creating a flexible economy for all people to
participate in since entry is generally easier than in
the formal labor market, while the incomes are
always lower
_ Lower price commodities:
+ Informal activities take place in the backyard
where rent is cheaper and cheap labour is used
which usually result in lower costs such that lower
prices are charged for their commodities.
+ Informal sector players have significantly low
overheads, compared against the formal sector
players. This is a benefit to the consumers since
higher price charged in the formal sector reduces
the consumer surplus
+ Providing with a variety of goods for low-income
people to purchase when prices of products from
formal sectors are too high to afford for them
_ Low labour costs:
+ The low costs of labour emanate from the fact
that most informal sector employees are relatives
of the business owners and are usually paid low
wages or not paid at all in some circumstances.
+ Most workers of informal sectors are owner’s
family members. Because of the small business
scale, they don’t need to hire the large number of
workers like formal sectors. Therefore, saving
_ Poor working conditions:
+ For hundreds of millions of workers, informality
means a lack of social protection, rights at work
and decent working conditions. For enterprises, it
means low productivity and lack of access to
finance
=> Government should regulate to enhance the
standard of working and living of
entrepreuneurship.
+ The high incidence of informality in all its forms
has multiple adverse consequences for workers,
enterprises and societies and is, in particular, a
major challenge for the realization of decent work
for all and sustainable and inclusive development.
_ Unfair competition:
+ Informal sector participants have very low
overheads. They do not contribute to taxes, social
security and at times, do not even pay rent
o Evidence from labour force survey (2011)
shows that 30% of the informal economy
enterprises operated in their own homes
o 11% on footpaths
o 80% of the informal economy enterprises
had no employees.
+ Unfair competition to the entities in the formal
sector which pay the required tax and obtain
licenses as well as operating from an official site
where they pay rent to the responsible authorities.
_ Lost in state revenue
+ Informal sector players do not comply with the
government and local authorities’ obligations, they
them money for labour’s pay
_ Contribution to the development:
+ During the economic crisis period (2000-2008),
the informal sector had become a means of
creating wealth in response to hyperinflation and
cutbacks in public services taking advantage of the
misalignment in the economy
+ After the crisis period the informal sector
continued to exist mainly because of the need by
households to supplement formal sector incomes.
It may be argued that growth of the informal
sector may be desirable as it is equally critical for
the growth and development of the overall
economy
Budget deficits: thâm hụt ngân sách
Inclusive development: sự phát triển toàn diện
Decent work: công việc tốt
Consumer surplus: thặng dư tiêu dùng
Emanate: bắt nguồn từ
don’t pay tax to the government and do not have
license from the respective authorities as such the
state lose revenue
+ Result in budget deficits and forcing the
government to raise tax rates or reverting to
expensive external borrowing. Most of the
informal sector players do not keep proper books
of trading accounts, hence difficult to enforce from
a Revenue collectors’ perspective
 Government regulate policies to apply
taxes for all enterprises. However, it is still
a long way to go because most of the
informal sector players do not keep proper
books of trading accounts, hence difficult
to enforce from a Revenue collectors’
perspective.
_ Easy corruption:
+ Informal operators don’t have enough
documents so that they become vulnerable to
corruption, harassment and even confiscation of
poverty.
+ Informal traders are usually chased away from
their workplaces usually by law enforcement
agents from the local authorities and it is mostly
common to vegetable vendors who sell along the
streets.
 Government and agencies at all level
should build up appropriate place for
vendors to make likelihood without
affecting the urban aesthetic and the
business interest of formal sectors
* The challenge for policymakers is to create an
environment where the formal sector can thrive
while creating opportunities for people working in
the informal sector to maintain or improve their
living standards. Some of these measures include
reducing the costs of doing business, tackling
corruption, and improving access to finance and
services.
Policy recommendation:
Formalization of the informal sector is needed It is recommended that the informal operators formalise
their activities by registering with registrar of companies, tax authority, local authorities and pension
authorities. This would entail complying with business rules, laws and regulations in anticipation of
reducing costs such as corruption and embarrassment. Other advantages of formalising are broadening
of the tax base; provision of higher quality, better incomes and more sustainable jobs; reinforcement of
the social contract between citizens and the state; strengthening of the reliability of agreements
between firms; as well as building investor confidence.