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
• 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 groups, into a factor, adding to the
overall economic growth.
Present importance
• 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 informal one.
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 ex-USSR, this is a range of 50% to 80% of all employed.
IE in 21 OECD countries
Factors for the IE growth:
-Global /including findncial and economic
crisis/;
- Intraregional /common past, present
links/;
- National /traditions,; regulations/;
-Neo liberal reforms deregulation
paradigm/;
Third part
DEFINITIONS
General definitions
• Mixed criteria-many definitions:
• IE is a ‘market-based production of goods and services,
whether legal or illegal, that escapes detection in the
official estimates of GDP’.
• 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
In this presentation the following more narrow definition of
the IE economy is used.
• “ 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,
• 2. to avoid payment of social security contributions,
• 3. to avoid having to meet certain legal labour market standards, such as
minimum wages,
• maximum working hours, safety standards, etc.,
• 4. to avoid complying with certain administrative procedures, such as
completing statistical questionnaires or other administrative forms.
PERC project typology
• 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
• 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
• 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.
3. 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
Structuring
Segmentation
And
Partial
End 80,s -
institutionaliz
ation
Beginning 90’s
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 house-holds, 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 of these measures, which were never applied
as economic tools are requalification of individuals, labor market brokerage, labor market
funneling of the labor force, stimulation of self-employment and other tools.
The next, third wave, which occurred during the first decade of the 21st century, is a period
of time, when most of the national economies of the Eastern and South-East Europe were
modified into a test-field to apply the principles and policies of the Washington Consensus
and its relevant tools for imposing shock therapies.
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 stateplanned 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 by external inter-state tensions and
collision /typical to all countries, included in the project/.
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 stateowned 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 command-administrative 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 neoliberal doctrine for building “free and perfect”
markets).
The second period lasted until the economic crisis of 2007-2010. However, the EME’s do
have neither automatic stabilizers, nor buffers, nor networks to protect the affected by the
crisis professional groups and businesses.
The Informal Economy Boom
• All countries without exceptions, in both subregions, are turning from industrialagricultural or mainly agricultural states into
economic areas with domination of services,
retailing and dispersed micro-production
factories, based on sub-contractual relations.
• This is demonstrated by the branch
distribution of informal activities in all nine
countries, subject to the ITUC/PERC project
Positive Effects
To the positive effects, one may add all of the following
examples:
- the process of finding jobs (which diminishes
unemployment rates); the process of accruing additional
incomes for individuals (which diminished poverty rates);
-the process of evolving the way services are provided to the
market (which was limited by the party-state system of
command administration);
-the process of producing demanded goods – mainly in the
processing industry, information innovations industries
(internet, and mobile technologies, which allow individuals
to work from their homes, or from a distance; the eeconomy, in general);
Negative effects
• 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.
• And many 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
• 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 some segments of the
informal employment.
Three Competing Views of the Informal
Economy and Economic Development
• By definition, informal businesses are hidden
from the eyes of the state and so most of what
we have relies on estimations and very microlevel studies.
A 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
• Figures published by the Organisation for Economic
Cooperation and Development (OECD) show that the world
has more people working informally than formally.
Campaigners emphasise 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.
• The organisation notes that, 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
• Between 4 million and 8 million people reside illegally in Europe, which
has made illegal migration 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. In Southern Europe, the IE provides work for the
paperless within these areas, something that politicians are unwilling to
admit to the public.
• Italian sociologist Emilio Reyneri's research , shows that 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”
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".
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.
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.
Страни като Австрия, Франция и Холандия, които са пример за другата крайност на “изцяло пълна честност“ също се справят относително
успешно от кризата.
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;