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].
[3] Joshi, A., Prichard, W. and Heady, C.
(n.d.). Taxing the Informal Economy: Challenges, Possibilities and Remaining
Questions. SSRN Electronic Journal.
[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GDP達28% - 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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