Informal sector needs a ‘New Deal’

COVID-19 has wreaked the global economy, shuttered businesses, disrupted supply chains, and caused millions of people to lose their jobs.

This unprecedented pandemic has been devastating for the informal sector that makes up about 60% of the world labour force where they earn a meagre US$2 or less.

In Malaysia, the informal sector accounts for 1.36 million employed persons and it accounts for about 9.4% of the total employment.

Majority of them are in the urban area, encompassing around 82% and growing at about 5% annually. Their presences are heavily concentrated in the services industry (62.1%), construction (20.0%) and manufacturing (17.2%)

Full or partial lockdowns to curb the spread of Covid-19 have crippling effects on businesses and workers especially in the informal sector.

They are mostly self-employed, engaged in occupations as varied as street vending, domestic work, transportation, and garbage collection. Some also work as off-the-books day labourers in factories, farms, and other formal businesses that do not extend full rights or protections to all of their employees.

Among the most vulnerable of the workers are the ones working in part-time and temporary jobs without social insurance, and in sectors of the economy that are neither taxed, nor regulated by any form of government.

For many of them, savings are either non-existent or extremely limited. They are experiencing dramatic collapses of income and loss of livelihoods.

And with many being self-employed and as daily wage earners, they live hand-to-mouth.

If they cannot work for extended periods of time, their family’s income is at risk. Unlike workers in the formal sector of the economy, who benefit from legal and social protections, informal workers earn their living without a safety net.

Their access to health benefits is often unstable. Protecting their earnings – whether by increasing unemployment benefits, reducing income taxes, or extending paid sick leave – and reaching them through transfers, is nearly impossible.

As such, the Covid-19 is expected to bring about a “new deal” for those under the informal segment.

The pandemic virus outbreak has exposed the challenges in protecting them as well as the vulnerable households.

However, the current extraordinary circumstances also provide an opportunity to address longstanding inequalities—in access to health and basic services, finance, and the digital economy—and to enhance social protection for informal workers.

Safety net

What the informal workers need now is a “New Deal” that provides immediate social protection against the pandemic’s economic fallout.

This is over and above the measures being put in place in the building blocks for a stronger safety net for the future. Hence, there is an urgent need to formulate effective policy responses that must reach this segment of the workforce and their families quickly to prevent them from falling (deeper) into poverty.

It is despite the economy facing budgetary and capacity limitations, especially given the size of the economic shock from Covid-19.

Addressing the growing informal sector requires comprehensive measures with the aim to improve the business environment, remove heavy legal and regulatory obstacles (especially for startups), and rationalising the tax system. Specific measures will depend on the circumstances but with the aim to bring informal workers into basic social safety nets while enhancing their productivity.

Policy recommendations need to recognise the importance of informal sector contribution to the economy.

While the government works with what they already have even before new and better systems can be developed, they need to devise mechanisms to extend the coverage of existing social protection programmes to informal workers. It is to enable them to survive the immediate impact of the pandemic.

Where existing registries or databases exist, quick assessments can be made on their relevance for the scale-up of social protection interventions.

Government also need to introduce reforms to stabilise the long-term impacts of the economic shock on informal workers and find innovative and sustainable ways to identify and reach those that need assistance.

There is a need to move away from targeted relief programmes. A major constraint here is the lack of information on informal workers – relying on information like identification document numbers, names, addresses, background verification via electricity bills, assets, household composition, and socio-economic details that are difficult to collect.

Tax relief

As such, there is a need to use data to inform the design of large-scale programmes. Setting up big official machinery to implement social protection and relief programmes is not easy.

Technology can be used to fill critical information gaps. However, the government should be realistic in their expectations, especially by increasingly depending on data and mobile phones to gather geo-tagged data.

Besides, there is a need to design the right kind of policy interventions. Tax relief and wage subsidies are usually only offered to formal enterprises and do not reach informal firms.

Bailouts for small informal enterprises or businesses is something that is hardly heard of.

Determining mechanisms to quickly deploy economic support to informal businesses and individuals, and establishing methods to target them effectively, is especially challenging when they are poorly documented in the economy.

In the absence of functioning markets and intact supply chains, an alternative is to consider food/in-kind transfers in the form of rations than in place of cash.

And there is a need to create fiscal space to provide relief. While the economic support packages are well-designed, however, they are not large enough to address the urgent challenges of informal workers.

It is largely due to the fiscal constrain. And so, options for creating additional fiscal space will vary – ranging from the restructuring of debt, to official assistance, to altering domestic fiscal policy.

As measure to stabilise the economy, a renewed focus on formalising the economy could in fact hurt the informal sector by increasing the tax burden on small business.

Solutions developed for Covid-19 response should be linked to broader social protection initiatives towards building a comprehensive system that is resilient to pandemics. Underlying all these efforts must be a commitment to introduce legislation to recognise informal workers as significant contributors to the economy.

Anthony Dass is chief economist/head research, AmBank Group & adjunct Professor, UNE, Australia. The views expressed here are the writer’s own.

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