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Prejudices and change of mindset regarding the informal economy.

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Prejudices and change of mindset regarding the informal economy.

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Dear SEPTies!

In this video there´s an example of an internationalized informal business. It´s an Ugandan company located in the border between this country and Kenia, that imports their products from Kenia and sells them mostly in Uganda.

Taking a step back in the focus of the paper, I would like to include the "inivisibility" suffer by many informal businesses around the world in the conversation. This video talks about this situation in Africa but it also applies to Mexican reality.

Taking the informal economy as "illegal economy" is reducing this sector (one that contributes from 60 to 80% to the GDP growth rate of Africa) to the same level as smuggling. The first step to develop policies and programs to aid all these companies (yes, companies) is to understand their reality and don´t consider them as smugglers or tax evaders. Only with this first step a full scope to internationalize them (not talking about the Born Global ones) can happen.

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The hidden opportunities of the informal economy | Niti Bhan

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This article illustrates the internationalization of informal firms in Ghana. What about your home country? How do informal firms internationalize? What are the enabling factors? 

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This article illustrates the internationalization of informal firms in Ghana. What about your home country? How do informal firms internationalize? What are the enabling factors? 

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In this video he explained the importance of informal economy on the global development

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Robert Neuwirth: The power of the informal economy

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The role of informal sector in Urban Development

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The role of informal sector in Urban Development

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I came across this article by UKaid which suggests and analyzes the role of policy frameworks in formalizing the informal sector in Uganda. Therein, the author highlights recommendations such as:

1. Registration Reforms as a means of legitimizing the informal sector which in turn opens opportunities for such businesses in the national borders and beyond.

2. Technology and Innovation to increase competitiveness and remain relevant in the market place.

3. Governance Institutions should be strengthened to facilitate governments collaboration with informal trade associations and stakeholders

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The Role of Informal Sector in Urban Development

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Born Global Firms and Born Regional Firms as occasioned in the Uppsala Model is described in this doodle video

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Born Global Firms and Born Regional Firms as occasioned in the Uppsala Model is described in this doodle video

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Anthony

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Informal business is becoming quite dynamic in china in recent years, especially after technologies-such as online transactions and instant communication were applied to the whole country. Promoting and selling products or services online is becoming much more manageable, even for the peasants in rural villages. And the government is also encouraging entrepreneurs capable of selling online in large quantities to cooperate with local producers to solve the problem of sales. Local producers can also expand business by social media or online platforms because they can be connecting the end consumers. The trend allows more informal entrepreneurship to emerge and participate in the national trading of products from local agriculture to personalized handcrafts. Usually, the informal business does not directly participate in international business due to small scale and not obtaining the required qualification for international trade. The informal business tends to work as suppliers or subcontractors to large firms in the formal business before entering international business independently.

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This study seeks to fill the existing knowledge gap by exploring the internationalization challenges faced by sharing economy firms from an emerging African market perspective. It's also seek to understand the internationalization process of African sharing economy firms. Finally we seek to provide solutions on how African sharing economy firms can manage the challenges they face. This research was conducted using qualitative case studies of eight companies. Two have internationalized within and beyond Africa. Four have internationalized within Africa while two are yet to internationalize.

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In my country Uganda efforts are being made by government agencies however a big part of cross-border transactions still remain informal and a large number of small businesses seem not to embrace the notion of internationalization mainly due to low productivity, poor governance, excessive regulations among others.

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In my country Uganda efforts are being made by government agencies however a big part of cross-border transactions still remain informal and a large number of small businesses seem not to embrace the notion of internationalization mainly due to low productivity, poor governance, excessive regulations among others.

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Informal economy – cause or symptom of economic challenges? 

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Informal economy – cause or symptom of economic challenges? 

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This article in a Zimbabwean news journal is titled ‘World Bank, IMF Using Flawed Logic In Quest To Do Away With Informal Sector’. It relates not only to Zimbabwe, but to all developing countries with significant informal economies and provides a critique of the alleged superficial approach that the World Bank and IMF have towards the informal economy resulting from a flawed understanding of its causes and symptoms. In summary and as presented in the article, WB and IMF frame informality as a cause deterring economic growth and argue that its abolishment would lead to more tax revenue. Thus, the two organisations maintain that an approach targeted at increasing the costs of informality while decreasing the costs of formality will be a beneficial one.

However, the authors of the news article argue that informality is rather the symptom than the cause and a policy should address the underlying structural issues that lead to informality as opposed to focusing too much on taxes.

Sounds like good grounds for a debate..

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MANY low and middle-income countries face a myriad of challenges. But policies that can address them are few and far between. The challenges include high and rising inequality, budget crises and the ongoing pandemic.

In a set of recent outputs, the World Bank and the International Monetary Fund (IMF) presented an approach that they argue can tackle all three crises at the same time: fighting informal economies.

Their arguments are premised on the claim that informality undermines efforts to both slow the spread of the pandemic and boost economic growth. They also believe that abolishing informality will lead to more tax revenues.

However, based on our organisations' extensive research into informality and taxation we argue that their analysis is fundamentally flawed in its understanding of both the causes and consequences of informality.

This is not a mere academic issue. Their reports endorse policies that will fail to deliver on their promises of higher growth and tax income.

Blaming informal workers, rather than the structural conditions that leave them with no option but informal work, effectively blames the victims of global inequality while wondering why they're not picking themselves up by their bootstraps.

In addition, what's put forward as pro-poor interventions in the reports in fact risk actively increasing inequality and further disadvantaging vulnerable populations.

Blame the symptoms or the structures?

Recent flagship reports and accompanying by both the IMF and the World Bank demonstrate a somewhat flippant approach to causality.

They do this by framing informality as a cause, rather than a symptom of a weak or faltering economy.

The authors of both reports start off on safe ground. They observe that countries with high levels of income inequality also generally have high rates of informal employment (informality).

They also correctly note that they can't demonstrate causality and that there is no 'one size fits all' policy approach.

But the reports then go on to abandon their own caveats when they get to the analysis or policy recommendations.

Demonstrating a similar logic, one World Bank blog, for instance, insinuates that an increase in unemployment in Peru is the result of informality, rather than the Covid pandemic.

This is not just a harmless analytical sleight of hand or benign semantic error. The result is that the bulk of the policy recoomendations that stem from this analysis aim to eliminate the informal economy. They suggest that by simply removing informality, inequality would then decrease.

The World Bank's odd approach to causality allows it to frame any policy that cracks down on informality as also addressing inequality, while largely ignoring a wider set of targeted interventions that aim to improve the livelihoods, security, stability and earnings of the most vulnerable workers.

Informality and taxes

The second fundamental flaw in the reports' analysis relates to the assumption that eliminating informality will automatically increase tax revenues. This relies on the idea that tax evasion is "at the core of informality". This is then baked into key concepts and measurements.

However, this simply does not match the reality of either informality or taxation in much of the Global South.

Tax evasion does indeed exist, including in a subset of the informal economy. But the analysis still mischaracterises the majority of the sector. Critically, it conflates deliberate evasion with the non-payment of taxes by workers who would typically be far below any tax thresholds.

Indeed, much employment in the informal sector is comprised of survivalist own-account operators. These are likely to be earning too little to be 'evading' tax in any substantial way.

In emerging and developing countries, direct measures of informal employment show that 78.1% of all economic units are own-account workers in the informal sector.

This is even higher in African countries at 87.3%. By contrast, only 4.4% are informal sector employers.

As a further indication of limited tax liability, the share of the working poor in informal employment ranges from 50.4% to about 98% in developing and emerging countries (at US$3.10 PPP per capita per day).

Informal workers do pay taxes - notwithstanding these low levels of earnings. The regressive way in which the informal sector is already (over) taxed is well documented.

For instance, a 2013 World Bank study of informal micro-enterprises in Uganda found that 70% were below the national business tax but still paid a substantial share of their profits to local authorities. The poorest payed the highest share of profits.

Carrot and stick

Based on their flawed premises, these analyses further assume that the informal economy can be eliminated by lowering taxes for formal enterprises (the carrot) while increasing taxes for unregistered or informal businesses (the stick).

For example, the World Bank argues that it is necessary to
streamline tax regulation to lower the cost of operating formally and increase the cost of operating informally.
But this understanding of the root causes of informality and the benefits of formalisation is ungrounded. It also leads to policies that don't raise much tax revenue, while actively distracting from policies that can help those in informal employment.

This often happens in two ways. First, policy interventions to better 'include informal economies in the tax net' - or formalise them - are often sold with bold promises about the potential public revenue that they can generate. This suggests that informality is hiding a 'gold mine' for public coffers.

But many informal workers aren't eligible for national taxation due to very low incomes. The risk, therefore is, that not a lot of revenue is actually brought in - all while adding further financial burdens on the poorest groups in society.

Critically, they may serve as distractions from taxing economic actors that could bring in significant revenue. These include politically connected businesses or unregistered independent professionals such as lawyers and dentists.

Second, focusing on taxation risks crowding out meaningful support that people in informal work require. There are real and complex challenges faced by people in informal economies: they range from harassment by authorities to unsafe working spaces to low incomes and a lack of access to finance or social safety nets.

Focusing primarily on eliminating informality risks creating an impression that formalisation can happen simply by getting people on tax registers or lowering the 'costs of formality'.

This ignores the question of what the benefits of formality are and how accessible they are. And it risks drawing attention away from the wide and complex set of reforms that are needed to support people both in informal work, and vulnerable work more widely.

A more productive way forward

The policy recommendations that follow from this reasoning won't be helpful in addressing inequality. In fact, they may actually increase it by not addressing the underlying issues that lead to informality and informal employment.

Indeed, the suggestion that redistributive policies are bad for the poor in the informal economy, but that heavier taxation is good for them is a puzzling, at best, and deeply cynical, at worst, conclusion of the reports.

Rather than focusing on eliminating the informal economy, influential international actors like the World Bank and the IMF and domestic policymakers would have a greater impact on inequality by focusing on progressive taxation and the expansion of social protection for the poor, regardless of employment status.

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World Bank, IMF Using Flawed Logic In Quest To Do Away With Informal Sector - NewZimbabwe.com

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Spread This NewsThe Conversation Africa MANY low and middle-income countries face a myriad of challenges. But policies that can address them are few and far between. The challenges include high and rising inequality, budget crises and the ongoing pandemic.

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SME Internationalisation from an Emerging Market to a Developed Market: A case study from Ghana

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SME Internationalisation from an Emerging Market to a Developed Market: A case study from Ghana

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This resource emphasizes how to understand internationalization of Small and Medium Enterprises (SMEs) from the perspective of an emerging economy to a more developed economy. Precisely, it studies how the textile industry in Ghana most of which are informal businesses internationalize or sell to foreign markets.

The findings reveal that institutional actors are important in the internationalization of businesses in an emerging market into advanced market. Also, to enter into advanced markets, businesses in emerging economies such as Ghana need to build both local and foreign relationships with and must possess adequate resources in a form of knowledge and entrepreneurial spirit.

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Hello SEPTies!
I found this infographic very interesting. Much is said about the benefits of formalization in companies, but it is also important to mention the important role that informal companies play in our countries.

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Diana Enriquez is an economic researcher and urban explorer for Locus Analytics, a Think Tank based in New York City. She runs surveys on informal economic ecosystems and designs maps to explain these ecosystems in the context of local economies. Diana is exploring the lines between formal and informal economies, highlighting places where formal and informal economies intersect, interact and learn from each another. Her previous field work includes research in Bogota and Medellin, Colombia, Mexico City, Mumbai, Boston, New Haven and New York City. She writes about the undocumented immigrant population in the United States, the US-Mexico Border, Remittances, black markets in Latin America, Drug Cartel activity in Mexico and Colombia, and Organizational Structures. She loves the TEDx community and co-founded TEDxYale in 2012. She graduated from Yale University in 2013.

About TEDx, x = independently organized event In the spirit of ideas worth spreading, TEDx is a program of local, self-organized events that bring people together to share a TED-like experience. At a TEDx event, TEDTalks video and live speakers combine to spark deep discussion and connection in a small group. These local, self-organized events are branded TEDx, where x = independently organized TED event. The TED Conference provides general guidance for the TEDx program, but individual TEDx events are self-organized.* (*Subject to certain rules and regulations)

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Lessons from the informal economy | Diana Enriquez | TEDxMünchen

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Global Inequality effect as a result of the informal economy and as well as the COVID effect

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Global Inequality effect as a result of the informal economy and as well as the COVID effect

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Hello SEPTies,
I want to share this podcast to better understand the relation of the Informal (not illegal) activities and how it helps growth the Gini index specially in growing economies.
And also how in emerging markets, given the COVID effect in the economy, the projection is to increase even more the informality in SMEs.

Hope you can enjoy the podcast

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The World Bank Group's flagship international development podcast takes a deep dive into a new analysis of informal work around the globe - and its relationship to economic inequality during the COVID-19 pandemic.

- and no, we're not talking about drug smuggling or other illegal commerce.

In this edition of The Development Podcast, the team takes .

From Cidade Estrutural - one of the poorest neighborhoods in Brasília, Brazil - we hear from Abadia Teixeira de Jesus, who has spent her life climbing out of the economic shadows and into formal employment - only to be knocked back into informality by COVID-19.

Back in Washington, Raka and Paul speak with Franziska Ohnsorge, the manager of the World Bank's Prospects Group, about her new book, The Long Shadow of Informality, and what these stunning datapoints mean for the long-term development goals of emerging market and developing economies.

About the Development Podcast:

The World Bank's Development Podcast takes you on a journey around the world of international development, revealing the latest data, research, and solutions to reduce global poverty and achieve a sustainable future.

Listen here or subscribe for free on your favorite platform - Apple Podcasts, Spotify, Google Podcasts, Stitcher, and more!

Transcript:

Raka Banerjee:
Hello, and welcome to the Development Podcast coming to you from the World Bank Group in the United States and around the world. I'm Raka Banerjee alongside Paul Blake.

Paul Blake:
Today, the informal sector, jobs and companies outside the line of sight of governments in emerging markets and developing economies.

Franziska Ohnsorge:
There is ample evidence that .

Raka Banerjee:
We're diving into a new, comprehensive analysis of informality, what it means for the COVID-19 recovery and economic development over the long term.

Paul Blake:
From Brazil, we hear from those working in the economic shadows.

Abadia Teixeira:
It was a tough job. Working conditions were terrible. Because this was such an unsanitary environment, people would often get sick.

Raka Banerjee:
All that and more over the next few minutes, but first, let's take a look at the data.

Paul Blake:
Before we jump into the data, can you sort of start us off by first just saying what exactly is informality exactly? How is it defined?

Raka Banerjee:
When we talk about informality in terms of the informal sector, we're basically talking about things that are hidden from public authorities. All right? That can be goods. It can be services, anything related to the market or to production, right? One way to think about it is anything that would be part of GDP normally if it were not hidden.

Paul Blake:
I'm picking up on that word hidden. Explain to me why these goods and services are hidden from public authorities?

Raka Banerjee:
Well, actually there are a bunch of reasons. It could just be to save money, just to avoid paying taxes, or making contributions to social security. That's one reason. It could be to avoid heavy regulations if the country just has a lot of government bureaucracy and people just want to sidestep red tape. It could be if a country has a lot of corruption or weak rule of law. If the formal institutions and the government are not trusted, people might turn to informality.

Raka Banerjee:
It could also just be because of a lack of skills. If workers don't have skills, don't have resources, it makes it harder for them to find work in the formal sector. They might end up just selling vegetables from their garden at the market. That would be informal, too, but one thing I should say is that informal doesn't mean illegal. It's work that would be legal, but it's not accounted for. It would normally be part of GDP, but it isn't.

Paul Blake:
What about something like childcare. If a teenager is looking to make a little extra cash and is babysitting the neighbor's kids while the parents are away, would something like that count?

Raka Banerjee:
It depends basically. If it's a paid service that normally would be part of GDP, like a nanny where you normally would be reporting that income to IRS, but it's not being reported, that's informal sector. If it's part of routine, unpaid household labor, like a teenager caring for their kid siblings while the mother's away, that's not part of GDP. That would be excluded.

Paul Blake:
Okay. I think I understand kind of what is and isn't informal. Explain to me how big of a deal this is globally. I'm thinking it probably plays a pretty big role in lower income countries based on what you were saying about the definition of informality.

Raka Banerjee:
Yeah. It's actually kind of a shocking difference. In the recent World Bank Report, The Long Shadow of Informality, great name, the authors find that while in advanced economies, informal sector is about 20% of GDP and 16% of all employment. In contrast, they're looking at emerging markets and developing economies, called EMDEs. There, the informal sector accounts for a third of GDP and an astonishing 70% of all employment.

Paul Blake:
Just to underline that, 20% of GDP, 16% of employment is informal in advanced economies, but in sort of EMDEs, emerging markets, developing economies, the informal sector is a third of all GDP and it's 70% of all employment in those countries. I mean, that's huge. It makes me think that there are probably some pretty big consequences when it comes to governments collecting revenue, tax revenue, or other forms of revenue when so much of this informality is taking place in their economies. I guess at the same time, too, there's also a chicken and egg thing. That informality is there because of the government, how it is or because of policies it has, and the government can actually contribute to higher levels of informality in a country. Am I kind of onto something there?

Raka Banerjee:
It's hard to draw any causal directionality.

Paul Blake:
That's quite the phrase, "causal directionality".

Raka Banerjee:
Yeah. I mean, causality, right, basically is what we're talking about.

Paul Blake:
All right.

Raka Banerjee:
Which way it's going, chicken or egg. We can say that when countries have better governance and higher levels of human capital, financial resources, informality tends to be lower, but which way it goes, it's hard to say. The authors compared government revenues in countries that have above average informality with countries that have lower than average informality, right, just to try to see the difference in revenues between the two. Revenues were five to 12 percentage points lower for countries that have higher levels of informality.

Paul Blake:
Wow. When a country has higher levels of informality, the government is bringing in less revenue, which means it's more limited in its ability to, I don't know, intervene in a crisis, whether it's a natural disaster or, I don't know, a pandemic like the one we're in right now.

Raka Banerjee:
Yeah, exactly. Not only does the government have less access to resources that it can mobilize against our current pandemic or, in more normal times, to help build human capital, but the higher levels of informality also affect the workers. Right? In a time of pandemic like now, they're not able to tap into formal systems of support, like social safety nets, unemployment, pension funds, all of this stuff.

Paul Blake:
What regions, what parts of the world, where do we see this most being an issue? How does informality vary across countries and regions?

Raka Banerjee:
Looking regionally at the informal sector when it comes to percentage of total employment, Sub-Saharan Africa has the highest level of informality at about 62%. Then after that, we have South Asia where informality is about 59% and then it goes down from there. On the low end, the Middle East and North Africa is the region with the least level of informality with less than a quarter of employment being informal.

Paul Blake:
Okay. Hold on, hold on. I'm confused. Geek out with me on this. You mentioned that Sub-Saharan Africa has the highest level of employment informality at 62%, but earlier we were saying that informality around the world accounted for more than 70% of unemployment. How do those numbers add up? What's going on there?

Raka Banerjee:
Yeah. Glad you caught that. This is really where we get into data land. Both the numbers are right, but they're using different definitions of informality. The data that the authors are relying on for the 70% statistic from the beginning, they don't have good coverage. That data doesn't have good coverage when it comes to all countries over long periods of time. Instead, for the regional breakdowns, they're looking at self-employment as a share of total employment, which is a common proxy for informality. Basically these things always come down to the data that we have and the way that things are measured. That's why I'll put in a plug for why we need to invest in better data.

Paul Blake:
Just as we sort of wrap up here, how about other demographic characteristics? Do informal workers tend to be mostly men? Are they mostly women? Is it pretty even? What's the data show there?

Raka Banerjee:
Women are actually more likely to be employed informally than men. 42% of all women workers are employed in the informal sector, and that's compared to 32% of men, but in fact, in low-income countries, up to 92% of all employed women are working in the informal sector. That's a huge number. That's, again, different data. That's from the international labor organizations, the ILO. What's really interesting is that, in my opinion, emerging markets that have higher levels of informality also tend to have higher levels of gender inequality. Again, chicken and egg, but they do seem to go hand in hand.

Paul Blake:
Wow. Well, thank you so much.

Raka Banerjee:
My pleasure!

Paul Blake:
Well, in a few minutes, we'll be talking to the World Bank's Franziska Ohnsorge about a new comprehensive analysis of informality.

But first, we want to take you to Cidade Estrutural on the outskirts of Brasilia. The community was founded in the shadow of what was one of the largest trash dumps in Latin America. Members of the community long supported themselves by picking through the landfill, looking for items of value that could be resold or recycled. Today, it remains one of the poorest neighborhoods in Brazil's capital. The World Bank Group's Mariana Kaipper Ceratti found out that COVID-19 has pushed many in the community out of formal employment and into informality.

Mariana Kaipper Ceratti:
Just 20 kilometers from the towering beauties and monuments of Brazil's capital city, [inaudible] or structural city in English. For decades, economic life in Cidade Estrutural has revolved around one piece of infrastructure, a trash dump. It's in this land fill that Abadia Teixeira worked for several years, picking over waste for anything of value.

Abadia Teixeira:
It was a tough job. Working conditions were terrible. Because this was such an unsanitary environment, people would often get sick.

Mariana Kaipper Ceratti:
Abadia's one of the community's more fortunate residents, finding and seizing the opportunity to train as a seamstress.

Abadia Teixeira:
I've been working since I was very young. In addition to working with recycling, I've been a domestic worker. Later in life, I was able to train as a seamstress. I've sewn custom garments for 30 years. In 2008, I started teaching sewing lessons to women in another neighborhood.

Mariana Kaipper Ceratti:
The chance to teach her craft and the consistent income that it provided represented a boost in fortunes for Abadia. Then COVID struck.

Abadia Teixeira:
Then the pandemic struck and these courses, which provided me with a fixed income, were shut down. I now do piecemeal work from home. I make pillow covers and curtains among other items for people who already knew my work. I no longer get a salary. When you're an informal worker, if you don't do anything and you don't get paid anything.

Mariana Kaipper Ceratti:
She's not alone. The pandemic has pushed many others in Cidade Estrutural back into informality. Abadia, who is also community leader, estimates that 80% of her neighbors are informal workers.

Abadia Teixeira:
People are now selling candy and drinks at the bus stops. They are selling masks, doing everything possible to earn a little money. They are recycling and selling aluminum cans, selling food. At every bus stop, you will see someone selling coffee or homemade bread, for example, but considering the infrastructure here is so poor, you can imagine how hard it is to keep good cooking hygiene.

Mariana Kaipper Ceratti:
While specific data on how COVID-19 has impacted informal workers is too forthcoming, research from the World Bank Group and others suggest that the pandemic has been particularly severe on the informal sector with informal workers more likely to lose their jobs or surfer severe income losses during lockdowns. These can prove devastating for informal workers who are largely excluded from formal social safety nets, have low incomes, and limited buffers, such as savings or access to government support programs.

Abadia Teixeira:
I always say that Cidade Estrutural is a microcosm of Brazil. Unemployment rates and hunger are very high today. Many people are dying of several diseases. Women are the most impacted because they have to do domestic work on top of everything else, but men are also struggling to find jobs.

Mariana Kaipper Ceratti:
Abadia and the residents of Cidade Estrutural aren't giving up. She and her neighbors have organized to get funding from a public scientific institution called Fiocruz. They now put their sewing and craft skills to work, designing and producing masks, soap, and other goods to help protect their community from the virus.

Abadia Teixeira:
This project has benefited the community for at least three months. We made 2,500 masks, 500 kilos of bar soap, and 500 liters of liquid soap, and we distributed them to the community. It was a great experience.

Mariana Kaipper Ceratti:
The initiative, known as Healthy and Sustainable Estrutural Committee, has proven successful and is now moving to a second phase, one preparing the community for life after the pandemic, teaching residents how to grow their own edible gardens among other skills, skills that could prove useful as cash transfer schemes fall short of supporting the informal workers like those in Cidade Estrutural. Mariana Kaipper Ceratti for the World Bank Group in Brasília, Brazil.

Paul Blake:
Thanks to Abadia for sharing her story and to Mariana for sending it to us.

Raka Banerjee:
This is the Development Podcast from the World Bank Group. We'll be right back.

Paul Blake:
Well, we've gotten the view from informal workers in Brazil whose economic security has been further threatened by the pandemic.

What are some of the broader implications of informality? Just how widespread is informal employment and what does it mean for economic development around the globe?

To get answers to these questions and more, we recently spoke with Franziska Ohnsorge. She's the manager of the World Bank's Prospects Group, which recently completed a new report analyzing informality around the world. We started by asking her to paint a picture of informal workers, who they are and the type of jobs they perform.

Franziska Ohnsorge:
Okay. What we consider an informal worker is someone who is active in legal activity. It's someone who is conducting a market-based activity, but who just happens to be out of the sight of the government. It has to be legal, so the drug dealer is not informally employed. It's illegal.

Paul Blake:
Right.

Franziska Ohnsorge:
That's not informal employment. It has to be market-based. You going to a neighbor and mowing the lawn, that is not informal employment.

The informal economy has lots of faces, and in part that's because there's so many different reasons to join the informal sector. For some, working in the informal sector is a choice, but for others, it's a last resort. Some are self-employed. That's about half of those working the informal sector. Others are subsistence farmers or they're actually informal employees, even. Generally, women are more likely to be informally employed, much more likely to be informally employed. Also, informal workers tend to be younger. They tend to be lower skilled and they tend to be less experienced. They are generally also lower paid. In fact, on average, informal workers are paid 19% less than formal workers. This gap really largely reflects their lack of experience and their lower skills.

Paul Blake:
I understand that the informal sector had actually been shrinking before the pandemic. How did the pandemic, how did COVID-19, impact the informal sector around the globe?

Franziska Ohnsorge:
Yeah, that's right. Over the past three decades, the share of informal output in GDP has fallen by about seven percentage points. It is now about one third of GDP in the average EMDE. Informal employment, another aspect of informality, has also fallen by 10 percentage points over these three decades. That has all been embedded in this broader development process where per capita incomes have been rising and extreme poverty has been falling rapidly.

Franziska Ohnsorge:
Now, your second question, has COVID disrupted this declining trend? Well, the 2020 data will not be available for a while, not for at least another year, if not more, but we do know that the informal sector was hit hard by the pandemic. That's in part because so much of it is concentrated in services, where consumer foot traffic simply plummeted. Just bear in mind that almost three quarters of firms in the services sector are informally average EMDE, three quarters. That compares with about one third in manufacturing.

Paul Blake:
Talk to us about the more on the ground impacts. How were informal workers impacted by the pandemic? Can you give us kind of any anecdotal evidence, even if the data kind of isn't available for another year or so?

Franziska Ohnsorge:
Yeah, yeah. Yes. This has hit the informal workers and informal firms just as much. They face a particularly severe shock because they were all employed, so many of them are employed in the services sector, but they also had very few buffers to fall back on to absorb the shock. Many couldn't switch from in-person to online operation. In fact, you may remember these Word Bank Group phone service to households and firms, and about a hundred emerging markets in developing economies showed that it was large and formal firms that managed to switch to operations online, much more to a much greater extent than the smaller informal ones. Many of them couldn't access government support systems.

Franziska Ohnsorge:
Almost by definition, the informal workers are typically not covered by social security and the social security programs are very threadbare in countries with high informality. Take, for example, the average emerging market and developing economy with above median, so in the upper half, by informality. Only 4% of the population in these countries is covered by social security, by unemployment benefits. There's very little government support that they could access.

Franziska Ohnsorge:
In these countries, also there was much less fiscal and monetary stimulus to just buffer the economic shock, so generally their economies were more exposed. Fiscal support packages were smaller. Then if you look at monetary policy stimulus, it was blunted because monetary policy stimulus operates through the formal financial system, but informal firms workers typically don't access the form of financial system. For example, again, in these emerging markets and developing economies with above median informality, just about 19%, less than a fifth of firms, can access formal bank financing for their investment needs. It's much less, 10 percentage points less than in other EMDEs. Whatever monetary stimulus was put in place in these countries just didn't reach the informal sector.

Paul Blake:
You're talking about the wealthier section of EMDEs have these sort of dire statistics. I imagine it's even worse for the less wealthy, the lower income countries in that group.

Franziska Ohnsorge:
Well, informality is particularly high in low income countries. It's really very strongly associated with development. The largest informality is where per capita incomes are the lowest. This is a very simple proxy, but another thing you have to bear in mind is, so what we spoke about were the government support systems, the help that came from outside. There's also very little help inside the households where informal workers work because they themselves have very few savings to fall back on in times of distress. For example, if you take, again, these countries with the worst informality, one third of the population says that they would be driven to poverty if they have to cover out of pocket direct payments for some healthcare emergency. That's exactly what COVID-19 does. It drives people into healthcare emergencies.

Raka Banerjee:
I'm wondering, is it fair to say that this pandemic has widened the inequality within countries between workers in the formal and informal sector?

Franziska Ohnsorge:
There is a lot of evidence that some aspect of this is happening or has happened, even if you don't have the informal economy data yet, but this is happening well beyond the informal sector. In particular, there's quite a bit of evidence that now shows that the sectors where workers at the lowest average earnings faced somewhat a more stringent lockdowns in 2020. The shock to their livelihoods was much more to those that are employed in these sectors and they happen to be lower wage. We've showed that in our other flagship report for the June 2020 Global Economic Prospects.

Paul Blake:
I don't want to dwell too much on it, but when we talk about the impact of informality on governments and public policy, and we spoke previously about limited access of informal firms and informal workers to social safety nets, the other side of that coin is governments and their ability to collect revenue.

Franziska Ohnsorge:
That's right.

Paul Blake:
Can you explain the impact on government revenues and expenditure by the presence of informal industry?

Franziska Ohnsorge:
That's exactly one of the crucial bottlenecks at the moment. Governments of countries who have hight informality simply have fewer resources to spend. Overall, over the past two decades, their revenues have been five to 12 percentage points of GDP lower than in other emerging markets in developing EMDEs. Of course, these lower revenues are reflected also in lower spending. Which type of lower spending? Well, it's education and health. Actually, over the past two decades it's exactly those emerging markets and developing economies with above median informality that have had about one third number of doctors and nurses per thousand people, of course, than other emerging markets in developing economies. That lack of government resources in these economies has eroded exactly the government services that would now be needed to fight the pandemic, but is also eroding the ability to implement support packages because they just don't have the revenues to finance them.

Raka Banerjee:
Zooming out to the big question that we asked at the top of this podcast, is there evidence that the informal sector increases global inequality, that basically the countries that have higher levels of informality do less well around the world?

Franziska Ohnsorge:
There is ample evidence that countries with hight informality have a whole host of development challenges. Informality is associated with higher poverty, lower per capita incomes, less progress towards the sustainable development goals, there are many of them, greater inequality, less human capital, weaker productivity investment, and perhaps that's the most important, weaker governance as well. Just to illustrate one of these factors, take, for example, those emerging markets and developing economies, again, that have above median informality. In 2018, which is our latest data point, those countries had 26% of their populations living in extreme poverty. That's a quarter. A quarter of their populations were living in extreme poverty. That's much more than a 7% of the population in other emerging markets in developing economies. Yes, informality, widespread informality is associated with a whole long list of development challenges.

Paul Blake:
Take me back to basics here, though. I mean, you've kind of hinted at this throughout, but what are some of the factors? When you're looking at all these different countries and obviously they have kind of different dynamics in each one, but what are some of the common thread between them? What some of the factors that help an informal sector flourish? What are some of the regional trends you've seen? What are some of those kind of common, across the board factors that cause an informal sector to thrive?

Franziska Ohnsorge:
What is common across all emerging markets in developing economy regions is that there is a lot of informal activity. In some regions, it's more about output, a lot of output being produced informally. In other regions, it's more about a lot of employment, low productivity employment that is informal. For example, this output informality is highest in Europe and Central Asia, in these countries.

Raka Banerjee:
One thing that's so interesting was that I know that the ILO, the International Labor Organization, recently changed its definition of employment to exclude subsistence agriculture. Are they still being counted within the [crosstalk] that you're looking?

Franziska Ohnsorge:
We are counting them as informal. We are counting them as informal and we are counting them in total employment as well because they have an activity, maybe not employment in the formal sense of employment contract, but they are employed in the same way as a self-employed professional would be.

Raka Banerjee:
Absolutely.

Franziska Ohnsorge:
For all purposes, they're defined as employment, but there is another kind. You brought up also this difference in the types of informality across regions. We spoke already about these large agricultural sectors that drive informality in South Asia and Sub-Saharan Africa, but elsewhere, in other reasons, there are other facets of informality that are important, for example, Europe and Central Asia and Latin America and the Caribbean, but also parts of the Middle East and north Africa. Informality in good measure reflects heavy regulatory and tax burns. Yeah. This is just heavy handed regulation in the backdrop of weak institutions.

Paul Blake:
If I'm understanding, is that sort of this idea that the regulation is so complicated, or burdensome essentially? Let's say you and I come up with a business idea. We say, "You know what? Let's just do this off the books because it's too complicated, or too expensive, or just too burdensome in some way to go register, and figure out all the tax codes, and figure out all the kind of regulatory environment." Am I understanding that correctly?

Franziska Ohnsorge:
Yes. That's the spirit. Yeah. The formal activity, it's just very costly. It's just very costly to comply with all these regulations and taxes. It's just very costly and it discourages people from being formally employed. Because there is widespread corruption in some of them, institutions are weak, this is an option. This is the kind of informality that is a choice, whereas in much of South Asia and Sub-Saharan Africa, this large agriculture informal employment is often not a choice. It's just very difficult for these informal employees to switch to formal employment.

Raka Banerjee:
In general, you were referring to the other areas outside of Sub-Saharan Africa and Asia, do you see a pretty strong correlation between the regulatory burden and informality? The levels, do the levels hold pretty constant if you're comparing those?

Franziska Ohnsorge:
Yes, there is a correlation and we show that in one of the chapters of a book actually in detail, but you have to bear in mind that there are really these two types of informality. There is the type that it's a choice, and that is often about regulation. There is a type where there is really not much choice, where informal employment is the last resort. That is not so much about regulation. This is about education. This is about access to fertilizers and resources. It's about access to finance. It's a very different kind of challenge.

Paul Blake:
Less choice, more kind of desperation in some of these instances. You mentioned earlier that there was some success in reducing informality before the pandemic. What was driving that? What are some of the most effective policy responses to help informal workers and help, I guess, governments reduce the level of informality within their economies?

Franziska Ohnsorge:
Yes, that's the million dollar question. If there is a silver bullet for reducing informality it is yet to be found. What countries have often found instead is unintended consequences. Those happened especially when programs were narrowly drawn and when they were very short-term. It's sort of try to short-term fix. Generally the most successful strategies for reducing informality have been those that were very comprehensive, tailor to country circumstances, and embedded in these long-term development strategies. That's important because there's so many reasons for informality that we've already discussed. Many of these reasons are really deeply ingrained in the fabric of economies.

Paul Blake:
Very specific to those economies, I imagine is what you're saying.

Franziska Ohnsorge:
Exactly.

Paul Blake:
Yeah.

Franziska Ohnsorge:
For those workers and firms who informality is a choice, you might want to prioritize streamlining, and better enforcing regulations, and then have governance to encourage them to move to the former sector. Reduce the cost of being formally employed, but also give a bit of a push to move to the formal sector.

Paul Blake:
Create some incentive.

Franziska Ohnsorge:
Of course, that would not help those workers and firms for which informality is that last resort, who just cannot be productive in the formal economy. For them, you are talking about better human capital, easy access to resources, and just generally broader social safety nets that can encourage them to move to the formal sector.

Raka Banerjee:
That makes sense. What about supporting the formal sector with regards to the pandemic? Are there ways that policymakers can help businesses flourish?

Franziska Ohnsorge:
Yes. In the end, these matters to allow the formal sector to flourish are critical to lowering informality. It means removing all your obstacles that now motivate people to go into the informal sector. Whether it's heavy handed regulation, or corruption, or lack of education, but the good news is that a lot of the reforms that we just discussed, they would, of course not only lower informality, but they would also promote growth in the formal sector.

Paul Blake:
Franziska Ohnsorge is the manager of the World Bank's Prospects Group. Well, that's it for this edition of the Development Podcast. I've got to say I was really struck by Abadia's story. I mean, just what an incredible person to have gone from working in landfills to becoming a seamstress. Then just the whole thing underscores how devastating the pandemic has been for the poorest and most vulnerable.

Raka Banerjee:
Absolutely, and a huge thanks to Mariana for sending us that story, and illustrating the on-the-ground realities of informality, and what it really feels like to be informally employed.

Paul Blake:
For sure. If you'd like to get in touch with us, do drop us a line. We love getting your emails. We're at thedevelopmentpodcast@worldbank.org. Until next time, goodbye.

Last Updated: May 24, 2021

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Is the informal economy increasing global poverty?

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and no, we're not talking about drug smuggling or other illegal commerce. In this edition of The Development Podcast, the team takes . From Cidade Estrutural - one of the poorest neighborhoods in Brasília, Brazil - we hear from Abadia Teixeira de Jesus, who has spent her life climbing out of the economic shadows and into formal employment - only to be knocked back into informality by COVID-19.

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OECD Report on informal sector entrepreneurship 

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OECD Report on informal sector entrepreneurship 

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This paper discusses different public policy options to help and favour the transition of informal entrepreneurs from a government level. Throughout the paper, informal entrepreneurs are defined as those starting a business or are the owner/manager of a business who engage in monetary transactions not declared to the state for  tax, benefit and/or labour law purposes when they should be declared but which are legal in all other respects. The research provides a really complete overview of what are the causes that lead entrepreneurs to operate in the informal economy and what are some policy options that countries can undertake to facilitate this transition. The report can be found in the following link:
https://www.oecd.org/employment/leed/Background-Paper-PB-Informal-Entrepreneurship-final.pdf

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9 FACTS ABOUT THE INFORMAL ECONOMY IN LATIN AMERICA

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9 FACTS ABOUT THE INFORMAL ECONOMY IN LATIN AMERICA

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I would like to share this article and emphasize on a fact that I found very interesting (and surprising).

" The informal economy in Latin America represented 34 percent of its average gross domestic product (GDP) from 2010-2017, which is higher than any other region in the world."

However, Latin America has one of the lower percentages of informal work, 40%  compared to the 85.8 % of employment in Africa.

In fact, the article mentions that, according with ILO´s, 90.1% of all employment in Ghana are informal and they contribute by 28% with the national GDP.

This fact make me think… what measures have been taken by the Latin-American governments to overcome a very high percentage of informal economy... Could that also be applied to African countries?

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The informal economy is a fluid area of work that people may drift in and out of. Certain companies may live in both the formal and informal job sector as well. The International Labor Organization (ILO) distinguishes between the informal sector and informal employment, stating that the former is an "enterprise-based concept and is defined by the characteristics of the enterprise in which workers are engaged" while the latter occurs on a case-by-case basis regarding the employee's relationship to the enterprise. For example, some companies operate within the formal sector but hire certain employees "informally." In other words, one can define the informal economy as "firms and workers that stand outside a country's tax and regulatory systems. "

It is important to note that the informal economy is not synonymous with the black market or the underground economy. Additionally, the informal market is not necessarily illegal. However, many countries do not mandate the social benefits and protections included in the formal economy. Informal work can include a variety of jobs including street vendors, subsistence farmers, seasonal workers, industrial workers and others. Given this characterization, below are nine facts about the informal economy in Latin America.

9 Facts About the Informal Economy in Latin America

1. A total of 140 million people work in occupations involving social vulnerability, limited rights and precarious conditions. According to the ILO, this number translates to roughly 50 percent of total employment in the region. It is a little less than the global average but more than double for the developed region.

2. The percent of informally employed workers varies greatly across the region. Costa Rica had the lowest rate of informally employed workers as of 2013 at 30.7 percent. In addition, Guatemala had the highest at 73.6 percent.

3. An International Monetary Fund study found four main contributing factors to the expansive informal economy in Latin America. Some of these factors include the heavy tax burden on corporations and individuals as well as minimum wage constraints. Another factor is the importance of agriculture because informal employment is much higher in the agricultural sector.

4. Although there are poor and non-poor alike across the informal and formal sectors, empirical research has displayed that those working in the informal economy may be at a higher risk of poverty than those employed in the formal economy. The exact relationship between the informal economy and poverty is difficult to determine. This is due to a variety of circumstances that can affect poor households. For instance, the income an individual brings home may not technically be below the poverty line, however, it may not be sufficient to support five people. Regardless, informal employment is often unstable due to inconsistent wage earnings and a lack of social protection.

5. The informal economy affects youth in Latin America. According to the International Labor Organization, there are an estimated 56 million Latin Americans in the age range of 15 to 24 in the workforce. A little over 7 million are jobless and 27 million are working informal jobs. Many quit without much of a choice as six out of the 10 jobs available to them are in the informal economy.

6. In 2013, 44.5 percent of the non-agricultural informal employment in Latin America was male while 49.7 percent was female. However, globally males make up a higher percentage because they make up a larger portion of the workforce. In contrast, when looking across developing countries, 92 percent of all women have informal employment compared to 87 percent of all men.

7. The informal economy in Latin America represented 34 percent of its average gross domestic product (GDP) from 2010-2017, which is higher than any other region in the world. This is true despite Latin America being in possession of one of the lower percentages of informal work, 40 percent compared to the 85.8 percent of employment in Africa.

8. The informal economy has been reducing in Latin America and the rest of the world for the past 30 years. This could partly be due to a reduction in the challenges to register a business.

9. Improving transit infrastructure and access to education can reduce the size of a country's informal economy. A case study of Mexico City found that high transit costs can lead to an increase in the percentage of workers on the outskirts of cities choosing informal work. Furthermore, by improving access to cheaper and more efficient transit services, informal employment can decrease. Meanwhile, a case study in Peru showed that it is easier to obtain formal employment if one has higher education. This was true even for indigenous groups in the country who often face discrimination when entering the formal sector.

Informal work remains an ambiguous topic requiring more research. Nonetheless, it is important to keep in mind that the informal economy is not inherently bad. While many struggle because of their informal work, they often cannot afford the costs of transitioning to the formal sector. For instance, one may deem small businesses that have under 10 workers as informal, and therefore, they would not have to pay social benefits, thus saving them money. In other words, in some circumstances, informal workers may require additional support, but would not necessarily benefit from transitioning into the formal sector.

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9 Facts About the Informal Economy in Latin America - The Borgen Project

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The informal economy is a fluid area of work that people may drift in and out of. Certain companies may live in both the formal and informal job sector as well.

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This video throw light on the role informal sector plays and the need to ecourage and stimulate its growth.

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Understanding the Formal and Informal Sector

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This article is still useful to reading wide. Speaks of the extent and nature of the informal sector; the reasons why some businesses operate within the informal sector; the factors encouraging businesses to become formal; examples of good practice on how small businesses could be encouraged and supported to make the transition from the informal economy to the formal economy, etc.

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Small Businesses in the informal Economy

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Academia.edu is a platform for academics to share research papers.

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In this video, the speaker talked about the importance of the informal business to the economy and people's living. How informal business can solve problems and meet needs for local communities. Quite interesting and informative talk that draws my attention to the informal business. The speaker also arose 2 questions: who make the rules? and do they makes the rules in the interest for all of our communities?

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Lessons from the informal economy | Diana Enriquez | TEDxMünchen

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Chris-Group 5

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South Africa Unemployment: Slowing economy takes its toll on job seekers