Informal economy

Informal street vendors in Lima, Peru

The informal economy or irregular economy is the economic activity that is invisible to the State for reasons of tax evasion or administrative controls (for example, undeclared domestic work, spontaneous street selling or underestimation of the registered price in a real estate sale). It employs more than 60% of the world's active population. On the other hand, the formal economy "is the one that is within the regulatory parameters of the State", that is, it complies with fiscal, labor and environmental regulations, pays taxes, has duly obtained the necessary activity licences, has been registered in the corresponding registers and pays the social security of its workers, whom it has also registered.

The informal or irregular economy is part of the underground economy, along with illegal economic activities (for example, false or falsified billing, drug trafficking, arms trafficking, prostitution, money laundering, organized crime and terrorism).

The submerged economy, to the extent that it is transformed into National Income and ends up being integrated into aggregate demand, is included in the Gross Domestic Product (GDP) statistical data, as a consequence of adjusting the methods used to estimate it.

Although the informal economy has often been associated with developing countries and emerging economies, all economic systems, without exception, participate in it.

The economic damage caused by the informal economy to the treasury is not limited to uncollected taxes, but extends to the improper payment of subsidies, subsidies (for example, the unemployment benefit that is given to a person who appears as unemployed, but actually has a full-time informal job) or pensions.

Likewise, the informal economy constitutes one of the most harmful cases of unfair competition among economic agents.

The underground economy in Spain represented, in 2008, more than 23% of GDP, which would be equivalent to 240 billion euros.

Informality in Latin America

According to the ILO, between 2019 and 2020, 158 million people worked informally in Latin America.

Post	Country	Labour informality (2020)	Source
1	Bolivia	84.9%
2	Guatemala	79%
3	El Salvador	69.1%
4	Paraguay	68.9%
5	Peru	68.4%
6	Ecuador	63.5%
7	Colombia	62.1%
8	Mexico	57.4%
9	Dominican Republic	54.3%
10	Panama	52.8%
11	Argentina	49.4%
12	Brazil	47.1%
13	Costa Rica	36.6%
14	Chile	25.3%
15	Uruguay	23.9%

Causes

Cotidianity of the informal market in the streets of Bolivia.

According to the International Labor Organization (ILO), "The root cause of informality is the inability to create enough jobs in the formal economy."

On the other hand, the ILO does point out the following as obstacles:

• political corruption
• poor infrastructure
• lack of trust and security to the government
• lack of market access
• lack of funding for self-employed
• the weakness of labour administrations and, in particular, labour inspection
• excessive regulation and bureaucracy

The causes of informality are multiple and, for the most part, they are not related to legality. Therefore, it would be ineffective to proceed to formalization solely through a legislative reform.

In another document, Main causes of the informal economy and some solutions, the ILO divides the causes into:

• via expulsion: you cannot or do not want to pay the biggest expenses of formality.
• via exclusion: perception that the services received do not compensate the payments made.

Many young people in developing countries have low-quality jobs, with little potential for career development and little opportunity to contribute to their economies. This is particularly problematic given the continuing significant gap in labor productivity that exists between developing and developed regions. Technical and vocational education and training (TVET) is a means of providing greater opportunities for marginalized youth, improving their employability outcomes.

A review of 26 studies conducted in Latin America, the Caribbean, Europe, Asia, and sub-Saharan Africa, using participants ages 15-24, concluded that TVET interventions, overall, have a small but positive effect, on employability and youth employment. Also, no specific intervention model was found to be better than others. These results, however, preclude drawing any firm conclusions, due to limitations both in the studies and in the review itself. Therefore, it is necessary that more TVET interventions are evaluated, and their results disseminated efficiently.

Consequences

• Increased criminality
• Low wages
• Low productivity
• Housing and buildings vulnerable to natural disasters
• Low State income, thus without resources to provide services such as education or health
• Lack of medical and pension care for workers
• Increased number of workers ' diseases, whether by unhealthy working conditions, stress or poverty
• Risk of dismissal of the informal worker without compensation and without the right to unemployment benefit
• Less training of workers, because providing training to their employees benefits the company in the long term, while informal companies have a short-term horizon
• Difficulty of the informal company to access private finance or public aid
• Unfair competition for workers and entrepreneurs in the formal economy, who see their income depleted, sometimes to such an extent that they have no choice but to move to informality

Fight against the informal economy

This section is an extract of Formalization.[chuckles]edit]

Informal settlement in Venezuela

Economic language is known as formalization (laboral or business) the transition of a worker or an enterprise from informal to formal economy. The policies that aim to achieve or accelerate this transition are called "formation policies". The formalization of a company requires registration and compliance with its tax and labour obligations. The formalization of a worker requires, in turn, that it be registered (normally in a different registry; according to countries and sectors, this registration may be made by the worker himself, or by his employer) and that the social security system is listed.

It is also known as formalization (urban) the transformation of informal settlements (barrios de chabolas, favelas, ranchitos) into integrated spaces within the urban fabric, with electricity supply, water, sewerage, asphalted accesses, including properties in the city's catastro and its inhabitants in the census.

For these processes, the term "regularization" is also used (regularization of workers, regularization of settlements). However, "regularization" is often used to designate the process by which irregular immigrants become full-fledged citizens of the country to which they have arrived.

It is considered that overcoming informality (and thus achieving formalization) is the major development challenge for the world as well as an essential issue for social cohesion and the achievement of peace. Informality reduces the income of the State and of workers, and is among the factors originating in the poverty trap. In terms of workers, the third part of the goal of sustainable development is " Promoting sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all ". As far as settlements are concerned, it is directly related to target 11: “To ensure that cities and human settlements are inclusive, safe, resilient and sustainable”.

The Decent Work Programme of the International Labour Organization (ILO) aims to achieve “the transition from the informal economy to the formal economy”. It is organized by countries.

Statistics

The informal economy under any system of government is diverse and includes occasional small-scale members (often street vendors and garbage recyclers) as well as larger, more regular businesses (including transit systems like the one in Lima, Peru). Informal economies include garment workers who work from home, as well as informally employed staff in formal enterprises. Employees working in the informal sector can be classified as salaried workers, non-salaried workers, or a combination of both.

Statistics on the informal economy are unreliable by the very nature of their subject matter, but they can provide a tentative picture of their relevance. For example, informal employment accounts for 58.7% of non-agricultural employment in the Middle East - North Africa -, 64.6% in Latin America, 79.4% in Asia and 80.4% in Sub-Saharan Africa. If agricultural employment is included, the percentages rise beyond 90% in some countries such as India and many countries in sub-Saharan Africa. Estimates for developed countries are around 15%. In recent surveys, the informal economy in many regions has declined over the past 20 years up to 2014. In Africa, the share of the informal economy has declined to an estimate of around 40% of the economy.

In developing countries, most informal work, around 70%, is self-employed. The informal economy is a greater source of employment for men (63.0% of the active population) than for women (58.1%). Of the 2 billion informal employees in the world, in 2018, just over 740 million are women.

The problem of development in Latin America is strongly linked to the levels of informal employment. Understanding the nature of informality is crucial to promoting development, given its implications for factors such as productivity or the accumulation of skills. For this reason, a project has been developed that explores the role of the pecuniary costs of applying for a business registration, the perceptions regarding the potential benefits of formality, the sanctions for operating without the existing legal instruments, and the information on the existing legal institutions to be formalized.

An experimental study that included a sample of 1,046 Bolivian micro-entrepreneurs who were not registered with FUNDAEMPRESA in 2012, concluded that providing information on the potential benefits of becoming formalized, the tax regime, sanctions, and institutions to turn to, has a positive impact on tenure. of formalization instruments. Likewise, a 50% discount on the cost of acquiring the registration does not significantly increase the obtaining of the instrument. Finally, taxes depending on the size of the companies could distort some decisions of those establishments whose levels of capital or sales, for example, are around the thresholds defined by the policies.