The government’s efforts at documenting the economy have not been a success owing to a strong resistance against the move. It calls for a policy re-think.

Mindlessly dragging the informal economy out of the shadows could upset the apple cart by exposing small businesses to challenges they are not prepared for and hence threatening the future of millions employed in the sector.

It could possibly deprive the country of an economic cushion to absorb crisis, further depress productivity at the micro level and perhaps bring down consumption, the key driver of growth.

Experts believe that there is a need to sift productive small scale businesses from the ones purposely operated for tax avoidance and those that are outright illegal, operating in the undocumented economy.

They also advise policymakers to be watchful of: (a) special interest manoeuvring which universalises its standpoint; (b) resist unfair external pressures that promote a one size fit all kind of policy prescriptions; (c) discard the taxman’s lens to deal with economic challenges.

The situation in the shadow economy is too complicated for a broad brush to be used to paint the situation. Broadly, experts say, it can be segmented in three distinct categories.

One: family businesses, too small in scale, lacking the capacity to formalise an undertaking. Two: medium size set ups kept intentionally under the radar for tax avoidance; and three: illegal businesses.

Mindlessly dragging the informal economy out of the shadows could upset the apple cart by exposing small businesses to challenges they are not prepared for

“The government needs to improve its understanding of the dynamics of the informal sector before attempting to press it for documentation. It needs to be aware that vested interests will try to club all components of the undocumented economy together to use good ones as a shield”, an economist in Islamabad cautioned.

Senior government functionaries conceded to an insufficient insight with little appreciation of its humongous size and contribution to the economy.

“The fact that the parallel economy lends resilience to the country’s economy, by absorbing the unemployed and offering part time employment to people who wish to work two jobs to supplement their regular income, needs to be acknowledged. At the current low investment rate it would be lame to expect a significant improvement in job creation capacity in the formal sector with millions entering the job market every year”, another expert commented.

The depth in informal economy, with all its downside risks (compromising standards, hurting competition, labour exploitation), is still valuable in a labour-abundant country growing at a slow pace. Beside regular full day work it offers job opportunities to youth and women who need flexible jobs because of their studies or family responsibilities.

Dr Nadeem Javed, Chief, Economist Planning Commission, pointed out both aspects of the issue talking to Dawn over phone from Islamabad. He thought the absence of modern management practices and documentation scuttled the growth of small businesses and compromises their performance in the export market.

He gave an example of surgical blade producers in Sialkot. “I was told that blades are exported to China at a unit price of $2. The Chinese then do value addition by installing laser light on the edge and sell it in the global market for $11-16. Producers said their backwardness and lack of access to capital kept them from upgrading their units”, he commented.

He was soft on the issue saying it would be wrong to assume that the informal sector is exclusive to poor countries. “It exists everywhere, even in the most developed nations though its composition and size may wary”.

Vice Chancellor Pakistan Institute of Development Economics, Dr Asad Zaman’s opinion was firmer and seems to be influenced by his ideological orientation. In response to Dawn’s request for comments he forwarded a long message. Some extracts are reproduced here:

“The problems of development are actually extremely easy to solve. Major obstacles to understanding are created by special interest groups who distort the narrative by projecting policies which favour them as being in the best interest of the nation as a whole”, he said.

He argued that solutions are available but the elitist interests come in the way of their application.

“The ‘informal economy’ exists because of the excessive burden of taxation being placed on the formal economy. There are many win-win solutions possible. For example, if we shift to the system of Zakat, and tax at only 2.5pc, everyone will be happy, the formal sector and the informal sector will be happy to formalise as long as they are not afraid that this is a trick of the government to lure them in”, the message reads.

“The main pre-requisite for doing this is a change in mindset. Currently our entire bureaucracy is trained in the ways of the imperialists and colonisers. They are the kings and lords, whose job is to extract revenue from the suffering population. The tax extraction mechanism is oppressive and external”, he thought.

“A bigger problem than formalising the informal sector is the prevention of transfer pricing which allows multinationals and international finance to take out huge sums of money from the local economy, acting much like the colonial tribute of earlier times. Again the problem is rationalisation of the tax structure, according to costs and benefits being provided to the economy by the activity”, he concluded.

Ehsan Malik, CEO The Pakistan Business Council, articulating the perception of the corporate sector recently, at a forum in Karachi, said: “….the key reason why these non-filers do not enter the tax base, or tax ‘net’…., is for fear of harassment.

“They see those in the formal sector, particularly large tax payers, subjected to multiple audits by the FBR. For the sake of fair-play why not entrust audits, if justified, to independent firms?

“The FBR’s discretionary power needs to be reviewed and its key performance indicators must move from total taxes collected to tax received from new filers, existing filers etc.”

Published in Dawn, Business & Finance weekly, November 7th, 2016