Reading Time: 4 minutes The informal sector of the Pakistani economy, largely invisible on the official plane, is responsible for 35% of the country’s GDP. According to the Labour Force Survey 2020-2021, 70% of non-agricultural employment is based in the informal sector, and 76.2% of it is in rural regions. The female population working in this sector is 65.5% while the male population is 73.4%.
The informal economy, often misconceived as illegal, includes activities that are untaxed and unmonitored/unregistered with the relevant authorities. The workers of this sector do not have the fair remuneration, labor and societal rights, benefits, and safety enjoyed by workers of the formal sector. The results/products of the informal sector are completely legal and are largely responsible for the economic infrastructure of most underdeveloped and developing countries.
Around 60% of the world’s working adult population (2 billion people) is engaged in the informal sector. While the sector is more active in developing countries, advanced countries are not without it. It is estimated that the sector represents around 15% of the GDP in advanced countries and 35% in underdeveloped and developing countries.
At the 7th IMF Statistical Forum: Measuring the Informal Economy, Kristalina Georgieva, Managing Director at IMF, remarked, “The ILO estimates that in developing economies, 92 percent of women workers are informally employed. This is the opposite of what we see in advanced and emerging market economies, where it is a greater source of employment for men.” She further added, “For women, the challenge is compounded by the fact that, in addition to being paid less than men in formal employment, they are also paid less than men in informal employment. If we are missing out on measuring the size of the informal economy, are we also underestimating the contribution of women to economic growth?”
Why is the informal sector of the economy bigger in emerging and developing countries than in advanced countries? According to the International Labor Organization, the causes attributable to informal economy revolve mainly around laws, policies, regulations, and economic conditions of a country. Meanwhile, other lower impacting factors are the overall education level and quality, discrimination, poverty level, inaccessibility to economic sources, and different business services and markets. Another pertinent factor was pointed out by Georgieva, “The reality is that far too many governments face difficulties in measuring informality. Because of poor official statistics, policymakers depend on unofficial estimates.”
Since the workers of the informal sectors are not registered with the government, they do not pay taxes. As Georgieva said, “Informality results in lower tax revenues that hinders the government’s ability to spend on social programs and investment. This means the individuals that are most in need of social programs and public infrastructure may not receive them.”
In the case of Pakistan, many people, especially women, tend to gravitate towards informality when starting their businesses. The reason is the needless complexity, corruption, bureaucracy, and discrimination within the different government institutions and agencies. To launch and run even a small business, a local has to go through a maze of departments, wait far too long in between processes, obtain a dozen licenses by chasing after officials, bribe government employees throughout the process, and face discrimination along the way.
The consequences of informality are harmful to both the workers and governments. It leads to low potential tax revenue collection, slack policies and regulations, poor development, corruption, and more. Professor Zafar Mahmood of School of Social Sciences and Humanities, National University of Sciences and Technology, rightly said, “It is vital to capitalise on the potential of the informal sector for sustained stimulation of economic growth.”
For the workers, it means low wages, no social protection schemes, no unions, exploitation, gender discrimination, poor health and education outcomes, an increase in child labor, and poor social standing. As Georgieva commented, “The informal economy can provide income or a social safety net. But it is a complicated issue. Poverty levels among people in informal employment are, on average, twice as high as that of people in formal employment. Why? Because of low productivity, low incomes, and limited access to government benefits.”
Due to patriarchy permeating at every level in the country, the domestic workforce is largely made up of females from a low economic background. The nauseating notion of a woman’s honor being tied to her body is the reason why women are mostly only allowed to work in a domestic setting which impacts their social standing compared to men. According to IMF, 72% of women working in the domestic workforce lost their jobs due to the COVID-19 pandemic.
The informal sector of the Pakistani economy, largely invisible on the official plane, is responsible for 35% of the country’s GDP. According to the Labour Force Survey 2020-2021, 70% of non-agricultural employment is based in the informal sector, and 76.2% of it is in rural regions. The female population working in this sector is 65.5% while the male population is 73.4%.
Industry-wise, out of the total population of the workers in the sector, 30.6% are in the wholesale and retail trade, 19.6% in construction, 20.2% in manufacturing, 17.5% in community, social & personal services, and 11.7% in transport. Females workers are found more in the manufacturing and community, social & personal services industries, and males are more present in the wholesale and retail trade sector.
The most prominent pathway that the government of Pakistan seems to be taking for the formalization of the economy is to expand the tax base. In 2018, the provinces of Punjab, Sindh, and Khyber Pakhtunkhwa developed labor policies: Punjab Labour Policy 2018, Sindh Labour Policy 2018, and Khyber Pakhtunkhwa Labour Policy 2018. For the informal sector, the common theme followed by all the policies was to bring the sector into the formal framework, gather accurate information about the workers through research, extend social protection and insurance schemes, registration of the workers, and work toward the welfare of the workers of the informal economy of the country.
The biggest obstacle for the government of Pakistan in formalizing the informal sector is the lack of focus and specific steps formulated to target the sector only. Moreover, the government needs to introduce better policies for ease of doing business. New businesses can be encouraged to register by making tax collecting agencies transparent and supportive. The tax collected should be spent on the welfare of the taxpayers which would incentivize tax paying and registration of businesses. Lastly, implementing an intelligent system for tax filing will be beneficial.
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