THE informal economy touches every sector, from agriculture and construction to education and professional services, to a varying degree. A dominant trait is its reliance on unreported cash-only transactions.
Around the world, the informal economy has negative impacts on governments, businesses, and individuals. It limits governments’ abilities to provide services, damages business competition, fosters unfair labour practices, and leaves workers vulnerable in an unregulated environment with a limited safety net.
The informal economy is one of the most pervasive challenges in modern society, yet one of the hardest to measure or understand. Many governments around the world recognise the challenges posed by the informal economy, and are increasingly embracing digital payments as a way to reduce informal transactions.
Estimation suggests more than 61% of the world’s employed population make their living in the informal economy. Africa accounts for about 86% of employment in this segment of the economy while the Asia and the Pacific region contributes around 68%. Meanwhile, the Arab States constitute about 69% and with the Americas around 40% and 25% from Europe and Central Asia.
Focusing on Malaysia, majority of the workers are in the informal sector, accounting for around 69%, followed by employees (20%), unpaid family workers (8%) and employers (3%).
Almost two thirds of those employed in the informal segment are concentrated in the services industry (63%), namely in the area like wholesale and retail trade as well as repair of motor vehicles and motorcycles, and followed by 16% in accommodation, food and beverage and 8.3% in human health and social work activities.
Informality remains persistent globally
Given the significant size of the informality globally, it is imperative to address it since it is being associated with development. The broad perception is that informality falls when the level of development picks up as a result of improved productivity and lower poverty. However, this is not the case.
Globally, the level of informality has been exceptionally persistent. It seems to be going against the basic norms of the principles of economic development. There are still hundreds of millions of workers in the informal employment with poor social protection, rights at work and decent working conditions. As a result, their productivity is low. Besides, their access to finance is also weak.
Given the high incidence of informality, it has become a major challenge for the realisation of a decent work for all, and maintain a sustainable and inclusive development. A possible reason for the still high informality could be due to the policies instituted. It should specify more basic objectives such as efficiency and equity.
Also, it is important to disaggregate informality into policy-relevant categories than to lump them under a single umbrella. Policies should be transparent with strong governance to avoid misappropriations leading to corruption and marginalisation.
The other issues commonly cited for high level of informality is the level of education. Broad perception is that higher level of education tends to lower the level of people working in the informal sector.
The notion is that those who have completed secondary and tertiary education are less likely to be in the informal employment compared to workers who have either no education or completed primary education. As much as this notion holds true, it is important to recognise that the education curriculum plays a critical role.
By failing to develop the basic soft skills at the lower levels of education, it impedes the self-esteem of many, thus pushing them into informality.
Though technical subject and discipline-related skills (hard skills) are important for employment, it is important to recognise that soft skills which refers to behavioural competencies, interpersonal skills, people-centred learning skills or personal attributes that enhance an individual’s interactions, job performance and career prospect are equally essential.
Those in informality tend to lack soft skills although they may potentially master the hard skills.
Digital technology reduce informality?
Formalisation of informal businesses entails changing the characteristics of businesses from informal to formal. It deals with bringing informal enterprises under regulatory framework and providing them with access to resources that were hitherto denied them.
Direct intervention has been a popular method of formalising informal businesses. It entails simplifying registration procedures and other regulatory frame work such that informal businesses could be accommodated.
Government through its agencies should provide interventions directly to informal business operators in the area of licensing, capacity building, credit programme, insurance schemes, legal support, market information, security, representation and management of businesses.
But this approach has only helped a small fraction of informal businesses to formalise. This is because it did not remove the important barriers bedevilling informal businesses such as lack of trust, corruption and access to information.
Another approach to formalisation is indirect intervention. Here, interventions are provided to informal businesses indirectly using business associations and cooperatives. Interventions that can aid formalisation and improve access to formal opportunities are provided using self regulated mechanisms.
Indirect intervention has achieved more success in developing economies than direct intervention and strengthening semi-formal associations like business associations and cooperatives have emerged as a policy thrust of many governments.
In recent times, digital technology has led to the emergence of business models and innovations that can be used by both informal and formal sector operators. In fact, digital innovations are sector blind; it has more inclusive impacts, benefitting people who were excluded from the formal sector in unprecedented way.
Convergence of digital technology and informal sector has resulted in a form of hybrid innovations, enabling informal entrepreneurs to optimise informal practices. Its provision of inclusive programme has led to the development of social entrepreneurship and opportunities in reaching customers, access to information, support services and ease for formalising operations.
Digital technologies not only provides gender equality but also reduces barriers to information which prevent formalisation. It makes products globally accessible by default, eliminating needs for physical resources and reducing cost. It eliminates infrastructural barriers, simplifies business operations, encourages real time response and synchronises business operations in most efficient ways.
Businesses both in the formal and informal sector see digital innovation as a source of competitive advantage for improving performance and breaking down barriers posed by distance, resources, time and lack of awareness.
Meanwhile, it is expected to facilitate the formalisation of informal businesses in an unusual way. Uptake of digital innovation has conditioned a large number of informal businesses to access formal opportunities, breaking the barriers between formal and informal businesses. It has been pinpointed as a single most important variable that can bridge the formal sector-informal sector gap.
There is a strong relationship between the size of informal sector and broadband subscription. Nearly all entrepreneurs who use digital technologies consciously or unconsciously see themselves in the formal sector.
Indeed, uptake of digital technologies has the capacity to increase efficiency, open access to opportunities and provide access to people and businesses in the informal sector but whether such benefit has reached specific group in the informal sector whose business thrives in secrecy and who are traditionally bared from modernity is yet undetermined.
So, it is important to recognise that digital technology is persistently transforming all work sectors, linking people in the informal sector to formal opportunities and bridging all divides. However, its effect on formalisation of informal enterprises and businesses that were denied a place in the formal economy remains little understood.
While most informal businesses that use digital technologies get formalised easily, it remains a challenge to tap on those businesses that continues to practise using the traditional manner. The reason being digital technology is an expansive term for gadgets, networks and procedures used to generate, store, manipulate and transmit information and data.
It includes unified communication and telecommunication innovations such as computer mobile phones, Internet, softwares, audio-visual systems and host of other digital enabled devices that assist people in one way or the other.
They include services such as mobile phone, Internet services, use of websites, social media, mobile money, ATM, online business platforms, online payment platforms, e-commerce arrangements that facilitate exchange, communication and relationships between and among people.
Besides, digital technology is challenging in the manner in which businesses are done traditionally. It has created an unstable environment enabling many informal businesses who maximised the innovations to see themselves in the formal sector. It has led to emergence of new players, optimal harmonisation of economic opportunities and a platform for matching demand with supply easily.
Shifting to digital holds great promise
While informality remains a sizable challenge, shifting transactions from cash to digital payments holds great promise for individuals, businesses and governments. Digitising payments can bring an array of benefits, including greater inclusion and stronger economic growth.
Testing the reach and depth of the revolution brought about by the digital technology can be achieved when one looks at its impact on people who are traditionally confined to the informal sector, businesses that do not have a place in the formal sector and people who reject other cultures.
It has become imperative to study how has digital technology transform businesses that are shrouded in secrecy and considered illegitimate.
A number of policy strategies that have the potential to impact the size of the informal economy includes encouraging government adoption of digital payments, incentivising digital payments usage by offering value-added tax rebates, subsidising funds that support the development and expansion of acceptance infrastructure and accelerating the use and acceptance of contactless payments.
Anthony Dass is chief economist/head at AmBank Research.