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Thursday, 24 November 2011

How do we bring the informal sector in the fold?

"To improve access to economic opportunities and achieve more inclusive growth, policy makers will need to reduce the costs and burdens of entering the formal economy. Changing labor regulations can make it less expensive for employers to hire workers formally. More straightforward rules for establishing and operating a business will encourage entrepreneurs to start businesses on a formal basis. Enforcing the rules fairly and consistently means that firms share not only the responsibilities but also the benefits of operating formally. Simpler tax regulations and stronger administration will complement these reforms. At the same time, workers in the informal sector will need help in acquiring the skills demanded by the formal sector". 
IMF's Masood Ahmed on how to bring the informal sector in the fold. The policy suggestions seem fairly sensible and quite obvious. The clear problem for many governments, including our own, is that to tackle informality requires sacrificing today (e.g. through lowering taxes, reducing fees) for larger benefits tomorrow. Governments who are long term minded therefore always do better at tackling informality. The citizens may not always give them that long. 


  1. Since when would anyone go to the IMF for economic advice?

    Besides, the problem isn't really taxing the informal sector, the problem is taxing the nation's resources. Taxing the informal sector is attractive to politicians, because it is safe, short of creating open rebellion.

    There would be no informal sector issues, when government revenues came from the mines, were redistributed to local government so they wouldn't be solely dependent on charges and local taxes (and the CDF).

    The reason there is a high level of informality is because of all the regulation on small business, regulations that are scrapped for transnational corporations.

  2. Yes, indeed the contribution of the informal economy in most developing countries, notably in Africa, is overlooked or underestimated. There are a number of reasons as to why enterprises remain in the informal sector — unattractive business environment, red tape, high tax rate and a non-transparent tax regime, etc, etc. Reducing taxes, firing costs, etc, can play a role to reduce informality in an economy. However, it should be emphasized that these should be accompanied by other equally important considerations such as the provision of efficient business development services, better access to finance, and capacity building to the enterprises in the formal sector. This provides a signal to the informal sector operators that being in the formal sector is not as costly as they imagine it to be (reasonable tax rates, easy registration and start-up, etc.), but it also comes with additional advantages — such as better access to finance and business services, etc. that are not available for informal enterprises).

    However, in addition to such incentives, policymakers should also have a clear strategy and action plans for formalization that may be costly in the short term, but will a significant long term positive effects (through improved tax collection, better enterprise linkages, improved firm level productivity and improved national outputs…).


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