Transcript Policies and measures to formalize the informal economy

Policies and measures
to formalize the
informal economy
Presentation for the ILO-ITC seminar
on “Employment and Informal
Economy”
March, 2009
Prof. Krastyo Petkov-Bulgaria
[email protected]
CLASIFFICATION AND
FACTORS
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1. Definitions: different criteria and concepts
/black, shadow, underground, hidden economy/;
2. Three sectors of the hidden economy:
Informal /legal/;
Grey /semi legal /;
Black / I legal /;
3. Segmentation of the labour market in the IE
4.Factors for the IE growth:
Global;
Intraregional;
National;
Neo liberal reforms;
First part
INTRODUCTION
Evolution of meanings
Important massage:
Informal Economy /IE/ is not
a temporary, transitional
phenomenon , as it used to be
described in the theory and
practice
Past significance
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Initial considerations of Informal
Economy /IE/ were related to
imaging it, as just an adjunct to
the official economy.
Gradually IE marked a certain
growth. It involved c branches
and regions, thus, engaging
numerous in figures and
sustainable in time, labor and
business groups.
It transformed from a safe-way for
unemployed and low-income
Present importance
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Today, informal work parallels labor,
applied in the formal economy; and
thus, informal employment turns into
a significant source of primary and/or
secondary (marginal) incomes for
individuals. This process happens,
primarily in the developing countries.
National economies, especially in
times of crisis, evolve to new
economic equilibria and dynamics,
rooted at two inter-dependent
economic sectors: the formal and
Second part
STATISTICS
IE size in the transition
countries
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The share of informal sector in Central Europe is
estimated at 15%-20% of the total number of employed.
Percentage levels of this share in the Baltic Region,
Bulgaria, Romania, and Croatia vary in between 20% and
35%. However, in two territorially distant regions,
flourishing of informal economic activity is observed. For
instance, in the states of ex-Yugoslavia, this percentage
range is 40%-50%, and in the Asian teritiries of the exUSSR, this is a range of 50% to 80% of all employed.
IE in 21 OECD countries
Factors for the IE growth:
-Global /including financial
and economic crisis/;
- Intraregional /common
past, present links/;
- National /traditions,;
regulations/;
-Neo liberal reforms
deregulation
paradigm/;
Third part
DEFINITIONS
General definitions
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Mixed criteria-many
definitions:
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IE is a ‘market-based production of
goods and services, whether legal or
illegal,
that escapes detection in the
official estimates of GDP’.
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Or to put it in another way, one of the broadest
definitions of IE includes:
’those economic activities and the income
derived from them that circumvent or otherwise
avoid government regulation, taxation or
observation’.
Concrete definition
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“ The Informal Economy includes all market-based
legal production of goods and services that are
deliberately concealed from governments for the
following reasons:
1. to avoid payment of income, value added or other taxes,
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2. to avoid payment of social security contributions,
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3. to avoid having to meet certain legal labour market
standards, such as minimum wages,
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maximum working hours, safety standards, etc.,
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4. to avoid complying with certain administrative
procedures, such as completing statistical questionnaires
or other administrative forms.
------------Source:
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The Shadow Economy in Germany: A Blessing or a
Curse for the Official Economy?
Friedrich Schneider
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ECONOMIC ANALYSIS & POLICY, VOL. 38 NO. 1, MARCH 2008
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PERC project typology
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In general, there are two types of underground
economic activities: illicit employment and the
production of goods and services consumed
within the household. PERC methodology
focuses on the former type and excludes illegal
activities such as drug production, crime and
human trafficking.
The latter type includes the production of goods
and services, consumed within the household
or childcare and is not part of this analysis
either.
Thus, PERC analysis only focuses on economic
activities that would normally be included in
national accounts but which due to tax or
regulatory burden remain underground.
Forth part
WHY I E
GROWS?
Main Causes of IE growth-1
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1. Tax and Social Security Contribution Burdens
Since taxes affect labour-leisure choices, and
also stimulate labour supply in the shadow
economy, the distortion of the overall tax
burden is a major concern for economists. The
bigger the difference between the total cost of
labour in the official economy and the after-tax
earnings (from work), the greater is the
incentive to avoid this difference and to work in
the shadow economy
2. Intensity of Regulations
Increased intensity of regulations is another
important factor which reduces the freedom (of
choice) for individuals engaged in the official
economy / labour market regulations, trade
barriers, and labour restrictions for foreigners./
Main causes of IE growth-2
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3. Public Sector Services
An increase of the shadow economy can lead to reduced
state revenues which in turn reduce the quality and
quantity of publicly provided goods and services.
Ultimately, this can lead to an increase in the tax rates for
firms and individuals in the official sector, quite often
combined with a deterioration in the quality of the public
goods (such as the public infrastructure) and of the
administration, with the consequence of even stronger
incentives to participate in the shadow economy.
Important note: Countries with more general regulation of
their economies tend to have a higher share of the
unofficial economy in total GDP, is found in their empirical
analysis.
Some Intermediate
Conclusions
1.Smaller shadow economies appear in
countries with higher tax revenues if achieved
by lower tax rates, fewer laws and regulations
and less bribery facing enterprises. Countries
with a better rule of law, which is financed by tax
revenues, also have smaller shadow economies.
2. Transition countries have higher levels of
regulation leading to a significantly higher
incidence of bribery, higher effective taxes on
official activities and a large discretionary
framework of regulations and consequently a
higher shadow economy.
Intermediate Conclusions-2
The overall conclusion is that ‘wealthier countries of the
OECD, as well as some in Eastern Europe, find
themselves in the ‘good equilibrium’ of relatively low
tax and regulatory burden, sizeable revenue
mobilization, good rule of law and corruption control,
and a [relatively] small unofficial economy.
By contrast, a number of countries in Latin America
and the former Soviet Union exhibit characteristics
consistent with a ‘bad equilibrium’: tax and regulatory
discretion and burden on the firm are high, the rule of
law is weak, and there is a high incidence of bribery
and a relatively high share of activities in the
unofficial economy.
Fifth part
IE in the
CEE/SEE regions
Informal Economy Stages
Boom:
Proliferation
Second half
of 90-es
Emergence
End 80,s Beginning
90’s
Structuring
Segmentation
And
Partial
institutionaliz
ation
After 2000
What is behind this trajectory?
/Some arguments from PERC analysis/
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Informal employment appeared simultaneously with the
political changes in the 80s, which period of time is known
as the “perestroika”. During the totalitarian period of time,
each informal activity (excluding home-centered activities),
was considered, as a rule, to be illegal and was penalized by
official authorities. Another exception to this generalization
are the small segments of agricultural activities in the field
of land cultivation, mutual service exchanges among households, where there is relatively no direct state intervention in
labor market relations of private/family nature (Poland,
Hungary, Bulgaria, and others).
Since 1989 a period of forced and chaotic informalization
came, due to the neoliberal economic reforms, imposed in
the 90s within the whole vast region of the Central and
Eastern European Countries. The boom of unregulated
employment is a result of the specific and compressed in
time processes of privatization and economic restructuring
of the big state-owned and state-managed companies in a
large scale. These processes were coupled with mass
liberalization of labor force without applying adequate
measures for support of the emerging labor markets. Some
How it happened in the CEE /
PERC Project/
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Countries from the first round/circle, included in the
ITUC/PERC project /SEE–former Yugoslavia/ and in
the second circle /NIS-ex-USSR/ conducted two
interlinked changes:
-Transformation One – it was typical for the ex-Soviet area:
and transition from state-planned to market-driven
economy was completed;
-Transformation Two – represents transition from
one-party governance to political and trade unionist
pluralism;
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National Mapping Reports show that both
transformations were conducted in parallel, and there
were times, where they were discontinued every now
and then by economic cycle crises or corrections in
the models for reforms /Ukraine, Serbia, Georgia/; by
political crisis – and more specifically, by local
destabilization /including ethnic-based conflicts/ and
Chronology of the events
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Emerging of IE is related to increasing insecurity and
freedoms of movement of people and work force.. Transition
from regulated employment, mainly from occupations in
state-owned companies to occupations in the emerging
informal private businesses is a result of the spontaneously
derived strategy for survival in crisis situations.
The other impulse for spontaneous informalization is due to
the prevailed economic chaos, which occurred after the
elimination of the party-state, top-to-bottom control
mechanisms /that is, elimination of the commandadministrative system/. The embargo regiments, applied in
the region of the Western Balkans are the other generator of
unregulated trade, illegal migration and proliferation of
trans-border informal economic networks.
In terms of chronological order, ethnic and religious
conflicts (including armed conflicts in the Western Balkans
and the Caucasus) were first, then transition times came
(time of economic reforms, imposed by the IFI’s and applied
by the respective national governments, who followed the
The Informal Economy
Boom
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All countries without exceptions, in both
sub-regions, are turning from industrialagricultural or mainly agricultural states
into economic areas with domination of
services, retailing and dispersed microproduction factories, based on subcontractual relations.
This is demonstrated by the branch
distribution of informal activities in all
nine countries, subject to the
ITUC/PERC project
Positive Effects
- finding jobs (which diminishes unemployment
rates); the process of accruing additional
incomes for individuals (which diminished
poverty;
- evolving the way services are provided to the
market (which was limited by the party-state
system );
- producing demanded goods – mainly in the
processing industry, information industries
(internet, and mobile technologies, which allow
individuals to work from their homes, or from a
distance; the e-economy, in general);
- greater use of labor potential of households
and so on…
Negative effects
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To the negative effects all national analysts
relate:
- at first place, direct and indirect practices
to circumvent labor and social standards and
acts.
-diminishing tax incomes and social
security proceedings into national treasury
turns into financial burden for the state and
social burden for the individuals.
More examples of negative effects may be
given here, such as non-loyal business
competition /social dumping/, woman and child
labor exploitation, criminalization of businesses
/where shadow and black segments are
organically inter-mingled/, administrative
corruption, and others.
Sixed part
FORMALISATION
OR
IDENTIFICATION?
Evolution of concepts and
polices
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Transformation by economic sectors takes
comparatively long time /half a century, at least/;
during this period of time economic theories
and political views evolve, in terms of their
relation to informal activities.
Although official data for developing countries
show that even today the share of unregulated
labor is comparatively low , the phenomenon
“informal economy” becomes a focal point for
the strategic analysts and decision-makers.
Processes of the last decade changed
significantly EU’s official position and attitude
towards the process of “informalization” of the
economy. The very accent of the EU policy
altered the banning norms /restrictive / into
curative regulations and gradual legalization of
Three Competing Views of the Informal
Economy and Economic Development
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By definition, informal businesses are
hidden from the eyes of the state and so
most of what we have relies on
estimations and very micro-level
studies.
An cross-country report that appeared
in the Brookings Papers on August 2008
aims to improve the understanding of
the relationship between economic
development and the informal economy.
The romantic view
According to this view informal firms
are actually or potentially extremely
productive, but held back by
government taxes and regulations as
well as by the lack of safe property
rights and access to finance.
If such barriers were lowered, informal
businesses would register and take
advantage of the benefits of their formal
status. Thus, this view assumes that
unofficial firms are fundamentally
similar to official ones.
The parasite view
The parasite view states that informal
firms need to stay small to avoid
detection.
The decision to remain in the informal
economy is a rational one, because the
cost advantage of avoiding taxes and
regulations allows unofficial firms to
undercut official firms in prices.
Informal firms are thus hurting growth
because their small scale makes them
unproductive and because they take
away market share from more
productive, formal competitors.
Government policy should aim to
eradicate informal firms by reducing tax
evasion and increasing government
regulation enforcement.
The dual view
Informal and formal firms are operating
in different markets and have different
customers so they do not compete
against each other.
Since informal firms provide livelihoods
to millions of people, government
policies should not raise the costs of
doing business for them.
Instead, the role of government policies
should be to promote the creation of
official firms and let the informal ones
die as the economy develops.
Additional arguments for the new
identity
Since there is such a productivity gap
between formal and informal firms and
considering that there is no evidence
that informal firms become formal as
they grow, stimulation of formal firms is
necessary for economic growth.
The evidence points out that a best
move would be to support the creation
of formal firms run by educated
managers and utilizing modern
practices to stimulate economic
development.
IE-Crisis
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Figures published by the Organization for Economic
Cooperation and Development (OECD) show that
the world has more people working informally than
formally.
Campaigners emphasize that informal workers are
not necessarily illegal workers. The OECD says that
a record 1.8 billion workers are employed in
underground activities, compared with 1.2 billion in
the formal sector.
During a recession, “dismissed workers frequently
have to move to the first available job, even if it is of
a lower quality than the one they have lost”. It says
that this will have a profoundly negative effect on
the United Nations’ Millennium Development Goal
to halve the number of people who live on less than
$1 (69p) a day.
IE-Migration
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Between 4 million and 8 million people reside illegally
in Europe. Ilegal migration is a top priority in
European politics for the past few years.
Illegal migrants come mainly to the Mediterranean
countries from Africa, Eastern Europe, and the Middle
East. Most of them also choose to stay permanently.
Low fertility rates and aging populations coupled with
a higher level of education have led to labor
shortages in low-paying sectors.
Italian sociologist Emilio Reyneri's : the IE in
Southern Europe has a pull-effect on migration. The
IE has deep social and historical roots and has not
been caused by immigration. The opportunities for
informal work, strengthened by the fact that there are
labor shortages in sectors where natives no longer
want to work, has made these countries attractive for
migrants.
The end
Thanks for the
attention!
Any questions?
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Над 14% е сивата икономика в Германия, според анализаторите на ”Дойче банк”
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Сивата икономика в европейските страни им е помогнала да оцелеят по време на рецесията,
съобщава Financial Times, цитиран от Economynews. Британският вестник се позовава на
изследване на "Дойче банк".
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Експертите на банката са уверени, че икономиките с предимно съмнителни структури, с голям
обем недекларирани средства, използващи утвърдени схеми за избягване на данъци са
преживели по-малко негативи в сравнение с “честните“ си конкуренти.
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Анализаторите уточняват, че този извод важи предимно за страните, в които този тип икономика е
много разпространена. Като пример експертите посочват Гърция, чиято икономика, независимо от
финансовата криза, се сви с 1% в сравнение с 4-те процента спад в страните в ЕС.
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Страни като Австрия, Франция и Холандия, които са пример за другата крайност на “изцяло пълна
честност“ също се справят относително успешно от кризата.
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Оказва се, че най-много са пострадали от икономическата криза тези, които не са в нито една от
крайностите, а именно германците. Анализаторите определят, че показателят на сивата
икономика е сравнително висок 14,3318% за Германия. В същото време страната е била
изправена пред реализацията на един от най- рисковите сценарии за изход от кризата.
Re-conceptualization of IE
•Органичната връзка между формалния и
неформалния сектор;
•От неформалния капан към нов еквалибриум
/информализацията като глобален тренд/;
•Вложенията се отплащат: НЕ като естествен
стабилизатор: а/ в период на развитие /случаят
с Индия/; б/ в период на криза;
•Извод за синдикатите: да се учат на
партньорство с неформалните работници и
техните мрежи;