INFORMAL sector prospers in developing countries, particularly where the rule of law is extremely weak. As a large informal sector drains the formal economy, the key question is how to formalise it. The informal segment of the industry and business mainly consists of small units producing goods or services. Its activities are marked by low levels of capital, skill and technology, with loose access to organised markets. Their working conditions are depressing, their incomes too small and jobs they offer unstable.

The sector remains outside the purview of the official policy-making and its incomes are included as guesstimates in national accounts. In developed countries, this sector is described as unreported employment; is hidden from the state for tax, social security or labour law purposes but is legal in all other aspects.

Two conferences on informal sector’s role in the economy held early this month — one in Karachi highlighting entrepreneurs’ perspective and the other in Cape Town, South Africa, looking at organisational issues — were of the view that an enabling environment needs to be created by the state and business bodies jointly to absorb this fast expanding sector into the mainstream.

The Karachi moot was informed that the country’s informal sector has grown faster than the formal economy during the last three decades and accounts for at least one-third of the country’s gross domestic product. Other estimates put the size between 30 to 50 per cent or roughly $51 billion in total economic activity. In developing countries, according to Wikipedia, some 60 per cent of the labour force earns its living in the informal sector.

The discussion forum was organised by the Centre for International Private Enterprises (CIPE) and the Karachi Chamber of Commerce and Industry. The moot was attended by 40 persons from trade, industry, financial sector, the State Bank, and informal businesses.

It recommended that CIPE and Pakistani chambers should join hands in identifying the clusters where the informal enterprises are based and encourage them to become part of the formal sector.

There was consensus that the informal sector should not and cannot be equated with ‘black economy’ which is mostly illegal and crime-related. Since most of the informal enterprises are now seen pursuing legitimate economic activities they should be classified as ‘extra-legal,’ and not ‘illegal.’

The solution lies in neither encouraging nor suppressing informal economic activity but rather in facilitating the transition of informal businesses to the formal sector by removing barriers.

Once having entered, the formal sector itself creates new opportunities for the small businesses to realise their potential. But the government remains indifferent towards the needs of most vulnerable workers. There are about 8.52 million home-based, or informal, workers in Pakistan, representing 70 per cent of the women workforce, based on the 2009 Pakistan Economic Survey.

The key reasons for the growing informal sector are barriers such as lengthy registration processes, red-tape, licencing requirements, lack of access to private property rights and a complicated taxation policy. These barriers have been erected by the system itself and are supported by greedy elements within the state apparatus.

In such a business environment, businesses that may wish to enter the formal economy would dither. What is needed is a policy that rewards, not punishes, informal sector enterprises and individuals for disclosing themselves. In fact, nobody prefers to remain in informal sector for long and be deprived of benefits such as access to formal bank credit.

Following are some f the recommendations agreed at the CIPE-KCCI panel discussion:

* The State Bank has introduced the Credit Guarantee Scheme for commercial banks to cover the default risk of borrowing entrepreneurs — including those in the informal sector — for up to 60 per cent of first loss. There is a need to raise awareness among the commercial banks and enterprises to utilise this scheme.

* The State Bank prudential regulations governing collateral requirements have been relaxed to accept any documented property including their inventories, moveable property, and receivables and more entrepreneurs should take advantage of this new lending opportunity.

* Informal enterprises operating in the manufacturing sector should be encouraged and facilitated to use the testing, standardisation, and quality assurance services offered by the government to improve their product and market development capacity.

There are several methods to determine the size of the informal economy. A 2010 study carried out by a senior economist of the State Bank of Pakistan showed that the informal economy was about 30 per cent of the total economy but it declined considerably in 2000s.

The results of the autoregressive distributed lag (ARDL) model showed that Pakistan’s undocumented economy increased from less than 30 per cent in 1960s to 33 per cent in 1990s and then declined to 23 per cent on average in 2000s. The electricity consumption approach shows that informal economy increased from about five per cent of the total size of the economy in 1970s to 29 per cent in 1990s and then declined to 27 per cent in 2000s.

The Cape Town conference held on December 2-3 and organised by the Solidarity Centre of AFL-CIO, the most powerful trade union of the United States, brought together informal workers, union leaders and researchers from around the world to explore ideas and strategies for helping informal sector workers improve their lives and livelihoods.

The conference was informed that the process of globalisation has put all of the labour market structures at risk and that nobody was safe. The hard fact is that globalisation is driving workers from a high-wage economy into a low-wage informal economy. In their efforts to make both ends meet, workers in the informal economy such as domestic workers, street and market vendors often cannot organise and fight for better working conditions.

But despite the odds against them, there have been some key victories. For instance, domestic workers in Hong Kong; female beer promoters in Sri Lanka, newspaper deliverers in Pakistan and self-employed workers in Brazil have organised themselves. Market venders in Zimbabwe have set up a Chamber of Informal Economy Associations.