The informal economy was commonly considered to have been a key obstacle to the development and growth of emerging markets even before the pandemic. However, COVID-19 and the resulting disruptions in the supply chain and nations’ economies globally have had an impact on this sector in ways that are likely to generate further negative outcomes for future catalysts and trends.
More nations and their citizens have been hit hard as a result of shortages in the global supply chain that have negatively impacted production capabilities. Disruption to the supply chain has forced employers worldwide to scale down their operations, which for many resulted in unemployment.
For example, at the start of the pandemic, retail companies in countries such as the United States and United Kingdom completely shut down their shops and cancelled orders, leading to factory closures that left garment workers jobless and vulnerable to more dangerous jobs. As a result, it became extremely difficult for many working within the informal economy to make a living and take care of their families at the same time; generating a heightened level of desperation.
What is the Informal Economy?
Informal economies have been around throughout history and consist of activities with a market value that is typically considered “off the books,” and thus not taxed by governments. More than 60% of the world’s adult labour workforce now makes up the informal economy. According to the International Monetary Fund (IMF), that is over 2 billion workers out of 7.8 billion in the world’s population who are working informally and not reporting their income to their governments.
The IMF also states that this population group typically consists of people that are aged 15 and higher, who work in the informal sector either part-time or full-time. They can range from providing basic everyday simple services, products, and small ventures to illicit and criminal activities too. If you look at the informal economy by country, you will see it remains mainly outside of the nation’s formal economy.
This is typically where individuals or firms apply to avoid having to report their own taxes, social contributions, or even complying with standards and licensing requirements that would have originally deterred or limited their entrance into the formalised sector.
However, there are consequences to entering this regulation-less realm and the concept of using forced labour is one of them. Informal economies have a great deal of inequality in skills, treatment, labour, and wages, which is why the formal-informal wage gap sectors are highly disproportionate since one pays fair and competitive rates while the other does not. These types of conditions can create the foundation for an environment that breeds human rights abuses and elements of modern-day slavery.
One example is the climate crisis in northern Ghana, where a drought is forcing rural workers to migrate to the major cities, making them more vulnerable to trafficking, sexual exploitation, and debt bondage. Those that engage in it are not protected by the formal system and the compliance culture that characterises it. It instead causes them to run the risk of using forced labour rather than an employee with options and worker rights.
Developing Effective Policies to Combat Forced Labour
Addressing the informality trends will be a good first step toward alleviating the inequalities found in this sector, which means economic development and poverty reduction should be key priorities in nations that have this problem on a massive scale.
The pandemic and ensuing mass disruption of the world economy has reinforced the urgent need to address these two key priorities in which governments can implement economic and social programs that serve as a lifeline for the large informal communities that are impacted. Furthermore, the pandemic has streamlined the existing vulnerabilities of the current system that previously hadn’t been addressed effectively.
The informal economy is a result of certain country characteristics in terms of how their institutions operate and are effective. In fact, the International Monetary Fund (IMF) says that a third of low and middle-income countries’ economic activities make up the informal sector. Also, they mention that 15% is made up of advanced economies and the informal sector too.
There may not be a one size fits all solution. However, the following still applies, according to the IMF:
- Improving access to and quality of education to lessen the impact of informal economies to prevent dangerous scenarios and inhumane treatment that is common in these environments.
- Creating tax systems that incentivise individuals and firms to not continue operating within the informal economy.
- Developing policies aimed at promoting financial inclusion that promotes ongoing access to formal bank-based financial services to help decrease informal tendencies.
- Increase incentives to lower formalisation costs with a wide range of structural policies like labour market regulation simplification that ensures flexibility, improved level of competition rather than a monopoly, and the elimination of excessive regulations and bureaucratic requirements.
Solving the Informal Economy Problem
The informal economy is a sign of economic weakness and a lack of human rights in sectors of society. Most people operating within the informal economy will never have access or opportunity to enter the formal economy due to poverty, lack of necessary training and skills, race, and gender. These barriers prevent them from entering the formal sector and their only alternative is to enter the informal economy, which makes them more vulnerable to being taken advantaged of.
For example, migrants who may have obtained higher degrees as doctors, lawyers, engineers, etc in their home countries may not easily find the equivalent work if they are in a host country that makes it difficult for them to assimilate within the formal economy. If their qualifications don’t count or aren’t recognised, then they’ll be more tempted to operate in the informal economy doing low-level labour that is below their professional capabilities, such as being a hotel cleaner, taxi driver, factory worker, etc.
However, the lack of human rights and forced labour conditions that have become more commonly associated with the informal sector indicates that more serious work is needed to fix the ills of this realm and society.
Policies must be considered to deal with the realities and various examples of informal economy and labour conditions, too. Solutions that can make a positive and lasting difference can be things like improving access and quality to education, improved tax incentives, financial inclusion in the formal banking system, and increased incentives to lower formalisation costs that reduce bureaucracy and regulatory red tape. Lastly, policies must be tied to customising the solutions rather than offering cookie-cutter approaches.
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