Informality is not a choice, rather a compulsion for most people to earn their living in the absence of any other opportunity that make their entry into informal economy. Informal economy is an outcome of unemployment, underemployment, poverty, gender inequality, ineffective or poor implementation of socio-economic policies and programmes; inadequate legal and institutional frameworks; lack of good governance; and precarious work, which involves large number of people in almost all developing countries. Economic growth caused by glabalisation of economies is not necessarily favorable to the transition to formality. Majority of the people in this are illiterate and lack required skills and training opportunities. This is most prevalent in developing economies which is a matter of interest for almost 50% of the global workforce and 91% of the Small and Medium Enterprises (SMEs) and even greater proportion of micro enterprises in many Asian and African countries. It is important to note that informality also exists in the developed world and is estimated at 18.4 per cent of GDP in 2013 in the European Union (EU-27) and 8.6 per cent on average in Australia, Canada, Japan, New Zealand and the United States.
The informal economy is so vast and heterogeneous that it is a very difficult task to determining its size. The concept of “informal sector” was first introduced by International Labour Organization (ILO) in 1972. Subsequently, International Labour Organisation (ILO) adopted the first resolution at 1993 International Conference of Labour Statisticians (ICLS) that covers issues relating to the definition of the informal sector as well as the design, content and conduct of informal sector surveys.
Despite important contribution of Informal Sector Enterprises (ISEs) in producing goods and services for use by a large number of people, they face many problems which vary across national, rural and urban contexts. In addition, they are important from the angle of public finance and national income. These attributes, perhaps, partly explain the increased international concern/attention on improving the overall performance of the informal sector. Hence, inclusive growth without improving the conditions of the enterprises and workers engaged in the informal economy is impossible.
Capital and credit are inaccessible to most of the ISEs with the absence of secure property rights. Micro and Small Enterprises (MSEs) in the informal sector find themselves at a disadvantageous position as compared to the large companies in building trust and long-term relationship with the banks and clients because of their capacity in fulfilling contracts on time. They have difficulty accessing the legal and judicial system to enforce contracts, and have limited or no access to public infrastructure and public markets. Informality may also inhibit investment in bigger businesses and impede trade because informal firms often lack the necessary size to exploit economies of scale fully.
MSEs in the informal economy lack the capacity to generate sufficient profits to reward innovation and risk taking, which are two essential ingredients for long-term economic success. Studies show that high rates of informality drive countries towards the lower, more vulnerable end of global production chains and attract capital flows related to the existence of a large low-wage labour pool.
This is an important issue that affects the economy and, hence, this needs to be dealt seriously. Government policies are more labour oriented and has little focus on ISEs. Recognizing the seriousness of the issue of informality, ILO at its 104th labour conference adopted the first ever international labour standard to tackle informal economy with a tripartite approach of increasing workers’ welfare and reducing decent work deficits; reducing unfair competition between enterprises; and protecting and expanding public revenues to build national social protection systems.
ISSME is very much concerned about the development of ISEs as they have vast contribution to a nation’s economy which often get unnoticed. They have enough potential to grow big and contribute more to the economy. Inspired with such viewpoint, ISSME is engaged in following activities:
- Bringing out report on actual size, status and contribution of ISEs in an economy, especially in developing ones;
- Empowering ISEs not only to fulfil local demands but to take active part in global value chain through training and skill development;
- Lobbying for pro-ISEs policies that regulates and fuels their growth; and
- Teaming up with international and UN agencies to effectively address the issue on a global level.