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Sunday, December 11, 2016

Informal Sector in Southeast Asia


Jack Huang

 

     Informal Sector, also known as informal economy, shadow economy or underground activities, etc. has been recognized as an essential issue, which impacts economic growth and the responding policies. According to the World Bank (2016)[1] research, the informal sector comprises at least 4 to 6% of total GDP in developed countries and more than 50% in those low developing countries (LDCs). Such as Laos, Viet Nam, Myanmar and Cambodia, it can be found that most of economic results are from informal activities and create major income for the locals. Besides, many informality-related issues in our society have gotten increasing attention, for example, the decent employment[2], human rights, fair competitiveness, poverty, lack of economic efficiency, etc. Many economists and policymakers believe that informal sector seems to play a negative role in economic growth and hamper our social development. Therefore, governments among vary countries tend to either reduce those underground activities or formalize them into regulatory framework.

 


     In general understanding, the informal sector contains both legal and illegal activities which are excluded in official taxation system and without monitoring mechanism. In addition, the cost of collecting data of informal activity is relatively high and inefficient (Joshi, Prichard and Heady, n.d.)[3] and as a result, the economic performance may be underestimated and difficult to due to the characteristics and forms of informality, such as  casual employment, kinship and personal relations rather than the solid contract with relatively comprehensive regulation and labour protection.

 

     Furthermore, many researches also show that the income distribution and poverty issues are highly related to informal activities. For example, the labour market informality in Southeast Asia explains the internal-regional income inequality (ADB, 2011)[4]. By comparing the income disparities between advanced regions and less advance ones, the survey indicates that high rate of poverty associated with the high informality in local labour market. Figure one gives a brief understanding on the relation between informality and real wages in Thailand, it can be observed that when the informal employment remains the highest proportion in Northeast, the earnings growth is relatively slow and therefore, the low-income householders have increased in past decades.

 

  Figure 1: Informality and Wages Growth by different Regions in Thailand

Source: National Statistics Office and Labour Studies and Planning Division, Department of Labour Protection and Welfare. 2010. Labour Force Survey 2010.


 

     According to International Labour Organization (ILO)[5], in developing countries, it can be found that nearly half to 75% of all sectors (exclude agricultural sectors) are recognized as informal economy and in some low developed regions or during the certain global economic downturn, the situation can be even worse. In terms of Southeast Asia, Vo and Ly‘s study (2014)[6] provides an overall view on the trend of regional informality. The figure two shows that while the Indonesia and Viet Nam have maintained relatively low level of informality in the given period, the Myanmar and Thailand have had higher percentage of GDP resulting from informal activities. It also needs to note that both the internal and external shocks may lead to fluctuations of informal employment. For example, the Asian Finance Crisis in 1997 caused Philippines peso to a huge devaluation; the unstable circumstance[7] during 2005 to 2012 in Myanmar might push more people engaging in informal sectors[8]. 

 

Figure 2: Informal Economy in Southeast Asia (% of GDP)


Source: Vo & Ly (2014).

 


      In Taiwan, the informal economy is estimated to reach almost one-third of total GDP. In terms of long-term trend, it can be found that from 1961 to 2003, the size of those gray-zone activities had decreased for decades, but reincreased from about 25% to 28% (of GDP) during 2008 to 2014[9]. In general, informality does not necessarily mean illegality but it is more about the economic activities operating in relatively small scale, self-employment or unregistered business. If we exclude the agricultural sector, most of informal sectors locate in urban areas and those underground activities cause not only the less revenue of taxation, but also the lack of workforce protection, unfair competition of labour market and even the attractiveness of speculation or crime. Therefore, the proper formalization of informal economy has become important agenda for policymakers around Southeast Asian countries, including Taiwan.

 

      Besides the traditional perspectives on informal sector, in recent years, the idea of ‘sharing economy’ has become another topic to global market. When new technology combining with new business model, such as Uber or Airbnb[10], the old definition on informality may need to be revised. The Uber, for example, registers itself as an information service company and doesn’t follow the local transportation regulations, neither pay tax to government. Whether it should be considered as informal sector? Or how to formalize these startups and minimize the effects to traditional industries? It needs more researches and practical experiences to support policy-making.    

 

     In sum, informal sector can be regarded as a prominent factor of the development landscape, and the increasing concern on informality-related issues[11] has also brought to light in recent years. Indeed, because of the insufficient literatures on informal economy (especially for Taiwan), it requires more efforts and accurate data in dealing with informality. Since the informal sectors are quite heterogeneous and their influences are varied to different stakeholders in a society, government may need to develop different strategies for each certain case. Instead of implementing regulation solely, the more flexible and diverse policies should be taken in consideration.

(Jack Huang is a Consultant of United Nations ESCAP)






[1] World Bank. (2016). Concept of Informal Sector. [online] Available at: http://lnweb90.worldbank.org/eca/eca.nsf/1f3aa35cab9dea4f85256a77004e4ef4/2e4ede543787a0c085256a940073f4e4 [Accessed 8 May 2016].


[2] See ILO Report (2002). Decent Work and the Informal Economy.


[3] Joshi, A., Prichard, W. and Heady, C. (n.d.). Taxing the Informal Economy: Challenges, Possibilities and Remaining Questions. SSRN Electronic Journal.


[4] ADB Working Paper (2011). Poverty, Income Inequality and Microfinance in Thailand.


[5] Ilo.org. (2016). Informal economy. [online] Available at: http://www.ilo.org/global/topics/employment-promotion/informal-economy/lang--en/index.htm [Accessed 4 Jun. 2016].


[6] See Vo, D. and Ly, T. (2014). Measuring the Shadow Economy in the ASEAN Nations: The MIMIC Approach. International Journal of Economics and Finance, 6(10). Note that the method they used is mainly based on Schneider’s research (2010).


[7] For example, the civil conflicts between minor ethnic groups and government in 2004, public unrest in 2007 and bomb attack in 2008. See: BBC News. (2016). Myanmar profile - Timeline - BBC News. [online] Available at: http://www.bbc.com/news/world-asia-pacific-12992883 [Accessed 28 Jun. 2016].


[8] It also needs to keep in mind that the statistics may not tell the whole story and the different measuring methods, e.g. MIMIC approach (Schneider, 2010) or monetary demand approach (Schneider, 2012), may lead to different results. Furthermore, due to each country has its own specific political and economic environment, the ups and downs of informality may determined by many factors.


[9] See: News.ltn.com.tw. (2016). 台灣地下經濟占GDP28 - 財經 - 自由時報電子報. [online] Available at: http://news.ltn.com.tw/news/business/paper/792265 [Accessed 28 Jun. 2016].


[10] Uber is an internet-based transportation service around the world, it provides immediate match for both drivers and passengers. Airbnb is an online platform that allows people to rent out their own properties for short-term lodging.   


[11] For example, the social externality, social marginality, human rights, productivity and competitiveness of business, innovation and income-generating for the poors.

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