AS a development practitioner, I have the good fortune of meeting some phenomenal individuals. Recently, I met Baji Suriya (name changed to protect confidentiality) and was struck by her fortitude and resilience. Baji Suriya lives in a small mohalla in the city of Bhera and has a 17-year-old girl and a 14-year-old boy, both with disabilities. Her husband plies a rickshaw, purchased through a microfinance loan, while Baji Suriya supplements the family income with her small tailoring business. Generally, it is assumed that such businesses do not contribute much to the GDP of a country, and that supporting such enterprises through financial services is, at best, a philanthropic measure and, at worst, usury.
It may actually be a good idea to actually look at the economic value of the two businesses highlighted above. In a recent study that was undertaken to gauge the financial impact of common home-based businesses run and managed by low-income households, especially by women, the research showed that a typical rickshaw can generate up to Rs24,000 in net monthly income. The same research estimated that a stitching business run by a woman out of her home will also generate approximately Rs24,000 monthly. The range of net income could be as low as Rs4,713 to as high as Rs46,340 per month.
In Baji Suriya’s case, her monthly net earnings were around Rs6,000, since having to take care of two children with disabilities was very time consuming. However, the extra money that she earned from her business was invested in monthly savings in the form of a committee, which allowed the family to build up a nest egg in case of a rainy day.
The relationship between the formal and informal economy is complex.
The question to ask is how all of this transposes at the macro-economic level. One line of argument considers the informal sector negatively as it is seen to be outside the ambit of the law, has low productivity and growth potential, and, at the same time, causes losses to the revenue of the state. From another perspective, it is seen as a means to alleviate poverty, lead to greater wealth distribution, is considered a hotbed of entrepreneurship, and, in some ways, is able to redress gender inequities as it employs a greater number of women.
The reality may, in fact, lie somewhere between both these points of view.
Estimates to measure the size of the informal economy in Pakistan can be seen in two ways: one study places the informal sector as 36 per cent of the GDP, while the Labour Force Survey estimates that 40pc of Pakistan’s total labour force relies on the informal sector. When compared with other countries in the region, as a percentage of the GDP, Pakistan’s informal sector is much bigger — both as an employer and as a generator of economic opportunities.
Traditionally, it was also assumed that the informal sector is counter-cyclical, ie during periods of economic downturn, the informal sector would grow to absorb the unemployed as jobs in the formal sector were lost while, in good times, the size of the informal sector would shrink as demand for formal jobs increase.
However, this particular correlation has not held up in the face of empirical evidence, as the relationship between the formal and informal economy is more complex — a point, in fact, that needs to be better understood by today’s policymakers. At one level, the existence of the informal sector has a lot to do with the state of human resources in a country — research has shown that there is a positive correlation between the education, the skill levels and the age of the population. This particular aspect could definitely have an impact on the size of the informal sector in Pakistan.
However, even the above analysis does not adequately explain the existence and growth of Pakistan’s informal sector. There are deeper structural issues that have created the space for the growth of the informal economy.
One of the most compelling arguments is related to the level of public sector corruption, where most businesses have to pay bribes or face rent-seeking, as a result of which many businesses prefer to be ‘out’ of the formal sector. Similarly, this is further compounded by the lack of ‘ease of doing business’ in Pakistan, where many start-ups struggle with basic legal and business registration and other set-up aspects.
There can be no running away from the fact that, in order to improve the overall productivity and the growth of businesses in Pakistan, the government has to tackle both of these points, while also understanding that the informal sector will continue to provide jobs to millions of self-employed men and women in the country. In the long run, the growth of the microfinance sector, combined with access to skills development and education, can also go a long way towards enhancing the productivity of micro-entrepreneurs. There is no doubt that, for people like Suriya Baji and her husband, access to affordable financial services is an important safety net.
The writer is founder and managing director of Kashf Foundation.
Published in Dawn, January 4th, 2019