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4.1.3 Explicit versus implicit focus on the informal economy

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Alessio Lupi24 October 2018

 

Implicit focus on the Informal Economy

Many policies and measures that affect the informal economy are not primarily designed to focus on the informal economy per se. Their effects are often implicit and can be understood as positive or negative externalities of the policy measures rather than their primary focus.

Such policies can be focused on a variety of goals, among which a major role is played by the poverty alleviation. This is mainly due to two reasons: (a) the significant relationship between the extent of informality and poverty at the national level, and (b) the fact that combating poverty has been at the centre of global international development frameworks since more than two decades. Given that the phenomenon of poverty has strong links to the informal economy and to the developing world, those working on poverty reduction are permanently confronted with the issues of informal economy and face the challenges posed by informality.

Poverty reduction was among the main targets of Millennium Development Goals, Post-2015 Agenda, and the current Sustainable Development Goals. As these frameworks were approved by the Bretton Woods institutions and embraced by major international donors, many international institutions, national governments and private sector subjects, the cause of poverty alleviation is at the centre of Official Development Assistance (ODA).

Poverty reduction has been addressed mainly at the operational level within the lending programs of the international financial institutions (IFI’s), such as the IMF’s Poverty Reduction Growth Facilities (PRGF’s) and the World Bank’s Poverty Reduction Strategy Programs (PRSP’s). Despite the strong links between poverty and informality, the latter has not been explicitly recognized or dealt with in the PRGF and PRSP frameworks (see Box 2).

Therefore, one can conclude that on a global scale the informal economy is implicitly affected by the policies aimed at poverty reduction to a much higher extent than by the policies focused primarily on the informal economy per se.

In Box 3 below we list the main goals and targets of the most influential recent global development frameworks: Millennium Development Goals, Agenda Post-2015, Sustainable Development Goals (2030 Agenda for Sustainable Development), and Strategy Europe 2020. One obvious fact is that poverty reduction occupies a central place in the recent global development frameworks. The prominent position of poverty reduction means that informal economy, which is significantly linked to poverty, is also targeted through implicit channels.

Box 2-Poverty reduction in the IFI’s operational frameworks

In September 1999, the IMF established the Poverty Reduction and Growth Facility (PRGF) to make the objectives of poverty reduction and growth more central to lendingoperations in its poorest member countries. Reviewsofthe PRGF by IMF staff in 2002 and by the Independent Evaluation Office (IEO) of the IMF in 2004 confirmed that the design of the programs supported by PRGF lending has become more accommodating to higher public expenditure, in particular pro-poor spending.

Poverty-reduction strategies are required by the InternationalMonetaryFund (IMF) and World Bank before a country can be considered for debtrelief within the HeavilyIndebted Poor Countries (HIPC) initiative. PRSPs are also required before low-income countries can receive aid from most major donors and lenders. The IMF specifies that the PRSP should be formulated according to five core principles (country-driven, result-oriented and focused on outcomes that will benefit the poor; comprehensive in recognizing the multidimensional nature of poverty; partnership-oriented, and based on a long-term perspective for poverty reduction).

As can be seen from the Box 3, the global development networks are abundant with goals that are related to the informal economy and to the situation of economic units and workers therein. All the global development frameworks include recurrent goals that have very strong linkages to the informal economy and informality issues. Notably, the goals aimed at:

  1. Poverty reduction, Employment and Decent Work, Reduction of inequality,
  2. Education, Training and Skills,
  3. Inclusive Institutions, Participation and Partnerships.

To date, these implicit channels are responsible for relevant cumulative effects on the informal economy through implicit coverage although not explicitly focused on the informal economy per se.

 

Box 3 - Main goals of recent

Millennium Development Goals (2000-2015)

  1. To eradicate extreme poverty and hunger
  2. To achieve universal primary education
  3. To promote gender equality and empower women
  4. To reduce child mortality
  5. To improve maternal health
  6. To combat HIV/AIDS, malaria, and other diseases
  7. To ensure environmental sustainability
  8. To develop a global partnership for development

Post-2015 Agenda (2015+)

  • Leave no one behind. After 2015 we should move from reducing to ending extreme poverty, in all its forms.
  • Put sustainable development at the core. We have to integrate the social, economic and environmental dimensions of sustainability.
  • Transform Economies for Jobs and Inclusive Growth.
  • Build peace and effective, open and accountable institutions for all. Freedom from conflict and violence is the most fundamental human entitlement
  • Forge a new global partnership. A new spirit of solidarity, cooperation, and mutual accountability must underpin the post-2015 agenda

EU Strategy Europe 2020

  • Employment: 75% of the 20-64 year-olds to be employed
  • R&D / innovation: 3% of the EU's GDP (public and private combined) to be invested in R&D/innovation
  • Climate change / energy: greenhouse gas emissions 20% (or even 30%, if the conditions are right) lower than 1990;20% of energy from renewables;20% increase in energy efficiency
  • Education: Reducing school drop-out rates below 10%;at least 40% of 30-34–year-olds completing third level education
  • Poverty / social exclusion: at least 20 million fewer people in or at risk of poverty and social exclusion

Sustainable Development Goals (2030 Agenda for Sustainable Development)

  • End poverty in all its forms everywhere
  • End hunger, achieve food security and improved nutrition, and promote sustainable agriculture

§ Ensure healthy lives and promote wellbeing for all at all ages

§ Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

  • Achieve gender equality and empower all women and girls
  • Ensure availability and sustainable management of water and sanitation for all
  • Ensure access to affordable, reliable, sustainable and modern energy for all
  • Promote sustained, inclusive and sustainable economic growth, full and productive employment, and decent work for all
  • Build resilient infrastructure, promote inclusive and sustainable industrialisation, and foster innovation
  • Reduce inequality within and among countries
  • Make cities and human settlements inclusive, safe, resilient and sustainable
  • Ensure sustainable consumption and production patterns
  • Take urgent action to combat climate change and its impacts
  • Conserve and sustainably use the oceans, seas and marine resources for sustainable development
  • Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification and halt and reverse land degradation, and halt biodiversity loss
  • Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels
  • Strengthen the means of implementation and revitalise the global partnership for sustainable development

 

Quantitative versus qualitative goals

It is important to note that poverty is a complex phenomenon that can be measured and expressed in absolute and relative way, using objective or subjective indicators. However, many institutions and donors understand poverty alleviation as a quantitative goal measured against one simple quantitative threshold (e.g. 1.90 USD per day per person).[1] This narrow focus can lead to approaches that are aimed at achieving poverty reduction targets without taking into consideration other important concerns, such as qualitative aspects of interventions, including the degree of informality of environment, empowerment of beneficiaries, or sustainability.

For example, the influential PRSP framework in general paid little attention to issues such as informality, employment, working conditions, or provision of labour and social rights. Although social protection played a prominent role among poverty reduction measures under PRSPs, the focus was almost exclusively on the social assistance schemes that provided (income-tested) targeted benefits and/or social services for the poorest segments of population. Such schemes are typically funded through general taxes and disbursed within the state budget or regional budget expenditures. To the extent that social assistance is funded through taxes, informal economy units are largely excluded from the game, as one of the major characteristics of the informal economy is its lack of coverage by the official tax system. Measures funded through social contributions are less popular in the banks’ led programmes, such as PRSPs. This is mainly due to the fact that such schemes are often run by extra-budgetary funds that fall outside the general tax system and are often supervised by social partners or collective organs. IFI’s operating mainly through banks and finance Ministries tend to prefer (targeted) social assistance schemes run by the state budgets and funded through general taxes. In Section 3.1 below we discuss in detail the use of tax-based social protection schemes, as well as alternative systems based on social contributions or self-help groups and their relevance to the informal economy.

The above-mentioned example illustrates the effect of value-based approaches by donors in the implementation of projects focused on social assistance that is supposed to reach out to the beneficiaries in the informal economy. It is often the case that national or international donors support the models that prevail at home or that are consistent with their own national agendas. However, such models can be ill-suited for the developing countries, notably those with larger share of the informal economy. For example, the European social model based on social insurance contributions is known to function well during the times of economic boom and to face serious deficits during the times of recession. This is due to the fact that the intake into the scheme depends on the contributions by the employed, while the outlays are related to the pool of unemployed or economically inactive. During recessions the employment falls and unemployment increases, which puts pressures on the social assistance schemes funded through contributions, up to the point of bankruptcy. In such a case the schemes have to be subsidized externally (typically through tax-based funds), if the level of protection is to be maintained. Otherwise the schemes provide too low level of protection for a too narrow base of recipients. Eventually, they collapse to a system of lump-sum minimum benefits, i.e. the outcome that is delivered by tax-based targeted social assistance systems. Box 4 below illustrates that this happened in the transitional economies of the former Soviet Union.

Box 4 -Failure of value-based approaches – the case of European social insurance model in the former Soviet bloc

In the early 1990s, most likely due to the legacies of socialism, the transitional economies of the former Soviet Union installed the European models of unemployment and social protection based on social contributions, run by extra-budgetary funds, often supervised on a tripartite basis. However, in the wake of the major transitional recessions and the rise of informal economy, these imported European models became essentially bankrupt, which resulted in severe restrictions of eligibility conditions, decreasing amount of benefits, and eventually in the cancellation of such schemes altogether (e.g. in Georgia). The richer CIS countries, such as Russia and Kazakhstan, were able to switch the source of funding early enough (towards the end of 1990’s) to the state or local budgets, thus upholding the level of protection. Looking back at the dynamics of the economic transition, it would have been preferable to start with basic targeted income-tested schemes funded by taxes or by mixed sources that would have been more resilient in the transitional recessions. Only at a later stage the schemes could have been instrumented by social contributions-based funding. None of the transitional countries was able to address the issue of exploding informality, likely due to their fascination by the EU models and lack of expertise or interest to the experience of developing economies. The two most influential regional donors – EU and IFI’s (notably the World Bank) at the time did not provide major focus and expertise on the informal economy issues. The transitional economies thus learned their own lessons and struggled with the large informalisation of their economies with a varying degree of success.

 

2 Explicit focus on the Informal Economy nad the ILO approach

Although informal economy is increasingly recognised and tackled by the international community through various projects and programmes, only a few international organisations and donors have developed official standpoint on the topic. As discussed above, such stance is usually underpinned by the “value orientation”of the particular donor. In what follows we briefly describe the position of several major actors in the field who developed and implemented activities explicitly focused on the informal economy. It has to be noted that among these, ILO is the only major international organisation that developed several official documents describing its position towards the informal economy and providing a normative advice. For other organizations that do not have such a comprehensive position towards the IE, the formulation of conclusions and recommendations on the informal economy is usually provided by consultants whose views do not necessarily represent the institutional point of view. The lack of official standpoint on the informal economy is partially due to the lack of unambiguous research results that could inform and inspire the official positions.

 

3. Systematic normative approach to the Informal Economy by the ILO

ILO has been preoccupied with the informal economy issues since the early 1970s. This orientation was in line with the organisation’s focus on the strategic priorities of labour standards, social protection, employment, and social dialogue. All the four are immanently linked to the issues of informality. Notably the ILO’s role as the global standard-setter in the social field required attention be paid to the informality as a serious governance issue. Social standards, like any other standards, have to be enforced. Therefore, informality was a legitimate and serious concern, as informality would undermine the implementation and enforcement of the standards defined by the ILO Conventions. Another feature that predetermined the ILO’s role in the field was its tripartite character and preoccupation with labour and social affairs.[2]Tripartism is inherent in all ILO’s activities as the representatives of workers, employers and governments are the main ILO’s constituents. Therefore, the organisation developed expertise over the years in dealing with a broad range of national organisations, including NGOs and organisations that have to fight for their recognition by the national authorities. These skills also equipped the ILO to deal with the subjects in the informal economy and to have a potential outreach to the informal economy units.

Finally, another comparative advantage in dealing with the issues of informality is the ILO’s legal expertise in the field of international social standards accompanied by relatively good enforcement mechanism. The latter consist of the regular reporting obligations by all the tripartite constituents, the Committee of Experts on the Application of Conventions and Recommendations (CEACR), the Commission of Inquiry, and eventually the power to cast global UN embargo on a country that does not comply with the fundamental standards[3]. These qualities predetermined the ILO’s role as a global fore-runner in the field of informal economy, notably the informality at work. Therefore, already in early 1970s, long before other major international organisations, ILO was explicitly dealing with the informal economy issues (e. g. ILO 1972 employment mission, as described in more detail also in Charmes, RNSF ARS Progetti, 2016).

During the 1980s and notably 1990s, the organisation strengthened its focus on fundamental rights (defined by the eight “core” Conventions by the ILO). These were concentrated mainly in the field of protection from discrimination, eradication of forced labour and child labour, and securing freedom of association - once again phenomena largely represented in the informal economy.

The Decent Work agenda introduced by Juan Somavia (later the ILO Director General) stemmed from his work on globalizing social progress in 1990s (People’s Security). As of 2000s, the Decent Work represents the organisation’s leading agenda. In brief, the notion of “decency” is linked to the preoccupation with qualitative aspects of work (rather than just number of jobs created), while the notion of “work” expressed the value orientation towards active “working out of poverty” - rather than just passively receiving social benefits. This orientation captures the basic juxtaposition between the ILO and the World Bank interventions on the poverty reduction front. In particular, in the PRSP documents of late 1990s, the World Bank tended to follow quantitative targets for employment (if any) and did not dwell on activation into employment and other qualitative issues related to the process of working out of poverty. The focus on activation into employment is strong also in the EU employment strategies since the 2000s (activation is understood as a necessity if growth has to be achieved with shrinking and ageing populations). Therefore, the EU employment interventions have been in line with the ILO values and strategies over the past two decades, both in the EU Member States, and in its foreign interventions.

Over the past decade, the Decent Work has made its way into a number of international documents and development frameworks. It continues to position the ILO as the rights-based organisation focused on both qualitative and quantitative aspects of social development (e.g. the More and Better Jobs initiative).

As described in Charmes, RNSF, ARS Progetti (2016), a seminal work on defining and measuring the informal economy was supported by the ILO and the International Conference of Labour Statisticians (ICLS). While ICLS helped to define the basic terminology capturing various aspects of informality at work (informal sector, informal economy, informal employment, employment in the informal sector, etc. - see Volume 2 for more details), the Report on Decent Work and the Informal Economy submitted by the ILO to the 90th ILC session in 2002 contained background analysis and orientation that resulted in the adoption of the ILC Conclusion on the informal economy (2002). Operationalisation of the ILO’s work on informal economy should be underpinned by the ILC Conclusions (Report to the Committee on the Informal Economy, 19th Session June 2002), and the corresponding Resolution that calls for re-adjusting the resources of the current biennium to take on board work outlined in the Conclusions (both documents can be consulted under ref. GB.285/7/2, 285th Session, Geneva, November 2002). The Conclusion and the underlying work by the ILO inspired and reinforced the focus on informal economy for a number of governments (see the overview of national policies in further section of this Volume) and international organisations.

In order to guide the implementation of the Conclusion in practice, ILO Informal Economy Task Force identified the following key issues for addressing the informal economy on topical and procedural grounds:

  • Governance and macroeconomic issues;
  • Productivity and access to markets;
  • Representation and voice;
  • Addressing vulnerabilities.

The continued work on the informal economy resulted in the adoption of ILO Recommendation No. 204 concerning the Transition from the Informal to the Formal Economy (adopted by the ILC at its 104th Session in Geneva, on 12 June 2015). The Recommendation represents a historical labour standard that is based on the assumption that “most people enter the informal economy not by choice but due to a lack of opportunities in the formal economy and an absence of any other means of livelihood.” The Recommendation represents the first international labour standard specifically aimed at tackling the informal economy and providing strategies and practical guidance on policies and measures that can facilitate the transition from the informal to the formal economy. In line with the ILO value orientation and rights-based approach, the Recommendation stresses issues such as rights, protection, inclusion, and decent work. However, there is also recognition of the complex multifaceted character of the informal economy and the related challenges, including the potential adverse effects of enforced formalization.

“Over the years we’ve seen a growing consensus between governments, workers and employers that the right thing to do is to move people from an informal to a formal employment situation. We know it is not easy, we know that these processes are complicated and take time, but the great value of this Recommendation is that we now have an international framework of guidance to help member States bring this about,”

ILO Director-General Guy Ryder.

The Recommendation also stressed the need for complex integrated strategies, as expressed also by the guiding principles for transition to the formal economy stipulated in its Article II (see Box 5).

Box 5 - Guiding principles for the transition from informal to formal economy stipulated by Article II of ILO Recommendation 204

“... In designing coherent and integrated strategies to facilitate the transition to the formal economy, Members should take into account the following:

    1. the diversity of characteristics, circumstances and needs of workers and economic units in the informal economy, and the necessity to address such diversity with tailored approaches;

b. the specific national circumstances, legislation, policies, practices and priorities for the transition to the formal economy;

    1. the fact that different and multiple strategies can be applied to facilitate the transition to the formal economy;
    2. the need for coherence and coordination across a broad range of policy areas in facilitating the transition to the formal economy;
    3. the effective promotion and protection of the human rights of all those operating in the informal economy;
    4. the fulfilment of decent work for all through respect for the fundamental principles and rights at work, in law and practice;
    5. the up-to-date international labour standards that provide guidance in specific policy areas (see Annex);
    6. the promotion of gender equality and non-discrimination;
    7. the need to pay special attention to those who are especially vulnerable to the most serious decent work deficits in the informal economy, including but not limited to women, young people, migrants, older people, indigenous and tribal peoples, persons living with HIV or affected by HIV or AIDS, persons with disabilities, domestic workers and subsistence farmers;
    8. the preservation and expansion, during the transition to the formal economy, of the entrepreneurial potential, creativity, dynamism, skills and innovative capacities of workers and economic units in the informal economy;
    9. the need for a balanced approach combining incentives with compliance measures; and
    10. the need to prevent and sanction deliberate avoidance of, or exit from, the formal economy for the purpose of evading taxation and the application of social and labour laws and regulations.”

The ILO thus represents an organisation that follows the rights-based approach to the informal economy and inspires the interventions by many other donors and international organizations, including the EU. This is mainly because in addition to widespread poverty, informal economy is characterized by other deficits, such as social exclusion, lack of access to services, rights, representation, and voice for the people dependent on the informal economy. Policies and measures that tackle these issues often address qualitative or structural aspects of livelihoods. They focus on the issues of decency, dignity, rights, quality of life, working conditions, etc.

 

 

[1]. Developed countries in their national goals tend to capture also qualitative aspects of poverty. For example, the definition of poverty according to the EU Strategy 2020 (measured by the EU SILC, Statistics on Income and Living Conditions) combines three indicators – relative income threshold, set of criteria capturing material deprivation, and indicator of work intensity in households.

[2]. ILO was created in 1919 (long before the United Nations) in the framework of Versailles Agreements at the end of World War I, as a global tripartite organisation, with the aim to prevent social unrest and tensions that could eventually trigger another global conflict. ILO was later embraced by the United Nations and became its specialized agency.

[3]. In more than 90 years of ILO’s history, this power was used only once - in the case of Myanmar.

 

 

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