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The informal sector

One keeps on seeing references to the informal sector scattered in the social science literature. It might be worthwhile to focus on the issues of the informal sector to bring them to the attention of policy-makers. This article refers to some literature (ADB 2008, Pakistan Bureau of Statistics 2019, Wilson 2010) to illustrate the discussion.
Generally, the informal sector has been labeled as ‘marginal’ in comparison with the formal capitalist modern system due to its reliance on low human capital and its existence in the underdeveloped economic sphere. Initially the assumption was the informal and the formal economic systems operate in the independent realms (despite the fact the some informal workers could also work part of their time in the formal sector); however, since the early 1980s, the neo-Marxist analysis has emphasized that the informal sector actually complements and gives ‘subsidy’ to the formal economic system. According to Wilson (by citing some other literature), the informal sector has subsidized the formal sector in at least in two ways (if not more), “First, it often supplied (cheap) inputs to core capitalist firms. Second, it provided goods and services to the working class at low prices, thus lowering pressures for higher wages”.
Informalization takes place in a number of ways: the formal firms hire seasonal or contract-based labour to complete certain orders and then lays them off; the formal firms subcontract to the informal firms who in return sub-contract the home-based workers; or the formal firms themselves subcontract work to the home-based workers. In other words, the formal sector either hires ‘short-term ‘labour itself; or subcontracts to SMEs to hire ‘temporary’ labour to whom no benefits and social insurance is provided in contravention of the formal labour laws.
The informal sector has expanded in Pakistan in the last two decades and not contracted despite the country being in and out of the IMF agreements that probably only pushed more poor into the informal sector. ADB (2008) refers to a study by Gennar(2004) to state that the informal sector’s contribution to the GDP was 21.2% on the basis of 2000 statistics. According the World Bank (2013), the informal enterprises contribution in the ‘national output’ ranges from 35-40%. SMEDA website states that small and medium enterprises’ share is roughly 40% in the annual GDP. Hence, it is corroborated through a number of sources that the contribution of the informal sector to GDP has increased substantially (almost doubled) in the last two decades or so. It could either mean that the informal sector has expanded, or it could also mean that the formal sector has contracted; in whatever way it has been achieved, the informal sector cannot be ignored.
The Pakistan Bureau of Statistics (PBS) excludes all enterprises that are in the agricultural (presumably both non-capitalist and capitalist) or non-market production activities from its informal sector definition. PBS defines the informal sectors ‘in terms of household enterprise and size of employment’, including ‘informal own-account enterprises’, including those that hire less than 10 employees in operated and owned enterprises. However, ADB (2008) states that more than 99% enterprises with less than 50 employees operate in the informal sector in Pakistan. The majority of small enterprises often lack the resources and skills to upscale to even the ‘medium sized’ level of enterprises. Hence, the bulk of the informal sector comprises of small enterprises. The informal sector is dominant in retail and wholesale trade, construction, transport, communication, as well as in social/community/personal services, and the SME sector hires ‘80% of the non-agricultural labour force’.
The infrastructural, institutional, and economic issues beset the informal sector; and lack of focus on the informal sector is a major ‘disconnect’ in the economic policy formulation. In terms of infrastructure, there is poor access to storage, transport, utilities, and physical premises etc. In terms of institutional issues, there is lack of capacity building both in terms of labour skills and management expertise, as well as, limited access to enterprise and other property rights registration, and project finance. Therefore, there is much more reliance of the SMEs on ‘informal institutional arrangements’ as the cumbersome government procedures indirectly pushes them towards informality. There is also limited access to information and market processes such as the capacity to comply with the international standards that could widen the SMEs’ sales market.
In terms of the economic issues, there are issues such as the high transaction cost of doing business and getting registered, limited access to technological upgradation, lack of ability to buy inputs in bulk due to restrictive working capital, lack of investment, and often the unfavourable terms of finance offered by the institutions. All of these contribute to the problems the informal sector faces and it often prevents it from transiting towards formalization.
The ADB (2008) states that there is need to work on strengthening the informal sector and focus on SMEs and climate change to improve the job creation and economic growth. If both these seemingly separate sectors are improved, they are going to have the major impact on economic growth and development. Climate change is linked with opportunities and challenges in the agriculture sector performance, spread of renewable energy, and upgradation of the public transport system, amongst others.
On the other hand, the informal sector is a major source of employment after agriculture and it has not been properly studied, focused, and prioritized in the governmental policy making. There is need for a ‘strategy’ or ‘vision’ for the informal sector; given its huge role and linkages with the formal private sector growth; and its ability of absorb low-skilled and low-educated labour force, particularly the youth. There is also need to work further on the development of SMEs clusters that help them to climb the technological processes ladder.



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