Large Informal Sector Research Articles

Collaborative governance of an integrated system for collecting contributions for social health insurance, pension, and taxes from the informal sector: a synthesis of stakeholder perspectives

BackgroundMany low-and middle-income countries have adopted social health insurance schemes. However, the collection of contributions from the large informal sector of these economies poses a significant challenge. Employing an integrated system of contribution collection from all relevant institutions may be cost-effective. We used the integrative framework for collaborative governance, to explore and explain factors that may shape the governance of an integrated system for collecting contributions for social health insurance, pension, and taxes from the informal sector in Zambia.MethodsWe undertook a qualitative case study involving 25 key informants drawn from government ministries and institutions, cooperating partners, non-governmental organizations, and association representatives in the informal sector. Data were analyzed thematically using Emerson’s integrative framework for collaborative governance.ResultsThe main drivers of collaboration included a need for comprehensive policies and legislation to oversee the integrated system for contribution collection, prevent redundancy, reduce costs, and enhance organizational effectiveness. However, challenges such as leadership issues and coordination complexities were noted. Factors affecting principled engagement within the collaborative regime consisted of communication gaps, organizational structure disparities, and the adoption of appropriate strategies to engage the informal sector. Additionally, factors influencing shared motivation involved concerns about power dynamics, self-interests, trust issues, corruption, and a lack of common understanding of the informal sector.ConclusionThis study sheds light on a multitude of factors that may shape collaborative governance of an integrated system for contribution collection for social health insurance, pension, and taxes from the informal sector, providing valuable insights for policymakers and implementers alike. Expanding social health insurance coverage to the large but often excluded informal sector will require leveraging factors identified in this study to enhance collaboration with pension and tax subsystems.

Effect of Economic Policies on Income Inequality: A Comparative Study of Switzerland and Bolivia

Purpose: The aim of the study was to examine the effect of economic policies on income inequality: a comparative study of Switzerland and Bolivia. Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries. Findings: Switzerland, with its advanced economy, implements progressive tax policies, robust social welfare programs, and equitable education systems, contributing to relatively low income inequality. In contrast, Bolivia, a developing nation, faces challenges in reducing income inequality due to less effective economic policies, limited social safety nets, and a larger informal sector. The study underscores that while Switzerland's policies effectively mitigate income disparities, Bolivia's efforts are hindered by structural economic issues and policy limitations. Unique Contribution to Theory, Practice and Policy: The Kuznets curve theory, the human capital theory & the social stratification theory may be used to anchor future studies of climate change on risk management practices in agriculture in Switzerland. From a practical perspective, the study provides actionable insights for improving the design and implementation of economic policies. The study offers several policy recommendations for both developed and developing economies. Policymakers in Switzerland should consider revising tax policies to address the increased burden on higher-income individuals and improve the overall equity of the system.

Fighting Inequality Through a Progressive Tax System for a Just Future in Tanzania

The problem of inequality is one of the economic problems that developing countries still face including Tanzania. This research therefore focuses on presenting the status and trends of inequality and the progressive tax system to pay for a just future in Tanzania. Research was anchored on the Ability-to-Pay Principle. The study was typically a desk research whereby it dwelled on analyzing and synthesizing large amounts of complex secondary data/information and literature concerning the issue of inequality in Tanzania. The target population for this study consists of secondary data sources, which included Peer-reviewed journal articles on taxation and inequality Government reports and taxation data from the Tanzania Revenue Authority (TRA). A purposive sampling methodology was employed to choose relevant studies and reports. This approach ascertained that only sources directly related to the research goals were included. The sample consisted of 20 sources, selected based on criteria such as: Year of publication. Content analysis was adopted in analyzing data to discover themes, patterns and trends related to progressive tax systems, income inequality reduction, and wealth distribution. Key variables such as tax policies, inequality measures (Gini coefficient), and wealth distribution patterns were extracted and analyzed to determine the effectiveness of progressive taxation in Tanzania. Findings revealed that while progressive taxes can be a remedy, the presence of large informal sectors, as in Tanzania, hinder their reach. Thus, while Tanzania’s progressive tax structure holds potential, more reforms are in need to boost implementation alongside widening the tax base. Further, the study concluded that there is little wealth-related taxation in Tanzania. Also, assets such as land ownership or financial assets are hardly/not taxed. The study recommended that given the situation, there is a great need to improve the tax collection with a focus on the existing tax base in Tanzania.

A framework for investigating new firm entry: The (limited) overlap between informal-formal and necessity-opportunity entrepreneurship

We analyse entrepreneurial entry along the dimensions of informal-formal and necessity-opportunity entrepreneurship, distinguishing between them yet considering them jointly. While the dominant view in the literature conflates necessity with informal entry, and opportunity with formal entry, we hypothesise that informal entrepreneurship may be attractive to higher-income individuals as a testing ground for entrepreneurial ideas. We also explain why higher-income individuals may undertake necessity entrepreneurship. We utilise individual Global Entrepreneurship Monitor (GEM) data from Chile (2019–2021), which identifies informal-formal and necessity-opportunity entrepreneurial entry modes, to test hypotheses on the role of individuals´ income in the four types of entrepreneurial entry. We also consider changes in entrepreneurial entry during a crisis and a non-crisis periods. Our results confirm that the patterns in the data are consistent with hypotheses derived from our proposed theoretical framework. Executive summaryEmerging markets economies have very large informal sectors, and their entrepreneurial entry is often motivated by economic necessity rather than by business opportunity. But neither informal nor necessity entrepreneurship are usually expected to generate the positive benefits for growth and development predicted for formal and opportunity entrepreneurship. We argue that the dominant stream in the literature actually conflates informal and necessity entrepreneurship, both of which have been associated with low human and financial capital and productivity. We propose that the appropriate typology is more complex than this because there are examples of successful and dynamic informal firms. This leads us to identify four categories of entrepreneurial entry: informal-necessity (Type 1), formal-opportunity (Type 2), informal-opportunity (Type 3), and formal-necessity (Type 4). While necessity entrepreneurship has typically been associated with low-income individuals, we propose that formal-necessity entrepreneurship may be an entry path for both low- and high-income individuals, though for different reasons. Informal opportunity entry may likewise be an option for people with low-income as well as high-income.We therefore seek to disentangle the analysis of opportunity-necessity and of formal-informal entry and to demonstrate that the two less explored entry modes - informal-opportunity, and formal-necessity - are of considerable theoretical and practical significance in emerging economies. We test our framework in the emerging market economy setting of Chile, one of the more prosperous and open economies in Latin America. We use Global Entrepreneurship Monitor (GEM) data which uniquely for Chile allow us to distinguish between individuals along both the formal-informal and the necessity-opportunity dimensions. On this basis, we distinguish empirically between these four categories of entrepreneurial entry and explain how higher-income individuals may use informal-opportunity entrepreneurial entry as a “seed bed” to test their new business ideas. At the same time, we show that necessity entrepreneurship may be attractive to both lower- and higher-income individuals.We also show that the interplay between individuals´ income groups and four entrepreneurial entry modes is stable over “normal times” versus “crisis periods”. We observe that in response to a crisis, individuals with lower-incomes are likely to engage more in informal-necessity entrepreneurship while opportunity-informal entry by higher-income individuals will decline. These changes represent a more complex adjustment pattern than has been identified for developed economies, where entrepreneurial activity has been found to be countercyclical. Thus, in emerging markets, informal-necessity entrepreneurship plays a stabilizing role for those individuals with a more marginal position in the labor market during the crisis. In contrast, for those individuals who have access to higher household income, all forms of entrepreneurship become a less attractive option. We interpret this as indicating that these individuals have the option to wait for higher return opportunities to re-emerge. This is one of the first papers to explore the impact of the COVID-19 pandemic on entrepreneurship in an emerging market economy.

Designing turnover taxes in countries with large informal sectors

AbstractTurnover (sales) is frequently used in developing countries as a presumptive income tax base to economize on the costs of tax administration and taxpayer compliance. We construct a simple model where a size threshold separates firms paying turnover tax from those paying regular income tax and where firms have the option of producing in the untaxed, informal sector. The optimal turnover tax rate trades off two policy concerns: reducing informality and avoiding strategic reductions in sales by firms seeking to remain below the threshold for the regular income tax. We provide analytical results and calibrate the model to compute the optimal policy using realistic parameter values. Introducing an optimally designed turnover tax induces about 12 percentage points of previously informal enterprises to register for the presumptive regime in the calibrated model.

Public expenditure multipliers and informality

This paper investigates the role of informality in affecting the magnitude of the public expenditure multiplier in a panel of 142 countries, using the local projections method. We find a strong negative relationship between the degree of informality and the size of the multiplier. This result holds irrespective of the level of economic development and institutional quality and is robust to additional country characteristics such as trade and financial openness and exchange rate regime. In a two-sector New-Keynesian model, we rationalize this result by showing that fiscal shocks raise the relative price of official goods, thereby shifting demand towards the informal sector. This reallocation effect increases with the level of informality, because a larger informal sector is associated with a stronger appreciation of relative prices in response to fiscal shocks, and thus reduces the multiplier.

The effects of informal competition on firms’ innovation in Greece

PurposeSeveral empirical studies indicate that the existence of a large informal sector is a major obstacle to firms’ choices of innovation strategies. This paper aims to address this issue and investigates the effect of the informal sector on the innovation of formal firms in Greece.Design/methodology/approachUsing the World Bank’s Enterprise Survey data, the impact of informal competition on formal firms’ innovation in Greece is investigated by testing whether formal firms use innovation as a tool to protect and sustain their competitive advantage vis-à-vis informal firms and whether overall and informal competition has an inverted-U relationship with the innovation of formal firms. The effects of bribing and other variables drawn from the empirical literature are also controlled for.FindingsThe findings fill a gap in the literature regarding the effects of the informal sector on formal economic activity in Greece, by indicating that the informal sector puts pressure on formal firms to innovate, in order to differentiate their product or service and enhance their productivity and by offering learnings to help policymakers to promote innovation in Greece.Originality/valueThe originality of this study is that it investigates the impact of informal competition on formal firms’ innovation in Greece, a developed economy with a large informal sector. It does so by focusing on the effects that formal firms’ informal practices have on their competitors’ innovation activities, and the role of informal competition in creating and sustaining a competitive advantage in Greece.

Fiscal policy with an informal sector

On the eve of its sovereign debt crisis in 2010, Greece initiated a large fiscal consolidation program. By 2015, official GDP had fallen to 26% below its 2009 level. We feed the actual fiscal package in the DSGE model of the Bank of Greece, augmented to include an informal sector, to assess the contribution of the fiscal package as well as of its individual tax and spending components. The model explains the bulk of the cumulative reduction in economic activity, and attributes roughly half of the decline to government spending measures and the other half to tax increases. The interaction of a large fiscal adjustment with a large and elastic informal sector proved lethal. Our model predicts that had growth in shadow activities been contained, the vicious circle between fiscal adjustment, tax revenue and macroeconomic activity could have been significantly mitigated, resulting in a considerably milder downturn.

Designing a Presumptive Income Tax Based on Turnover in Countries with Large Informal Sectors

Designing a Presumptive Income Tax Based on Turnover in Countries with Large Informal Sectors

Fiscal policy options for reducing informality in an economy with fiscal rules

We use a dynamic general equilibrium model to examine the effect of various fiscal policies in an economy with a large informal sector. More specifically, we simulate (i) a reduction of the tax rate on personal income and social security contributions and (ii) an increase in the efforts of the tax administration to uncover shadow activities in a model, calibrated to the Bulgarian economy. While both policies encourage total economic activity and discourage shadow practices, they worsen the inequalities in the economy. Due to the application of fiscal rules in the model, the tax cut leads to a permanent increase in public debt and lower public investment, while the strengthened control over tax collection has a negative impact on employment, but, nonetheless, does not deepen inequalities as much as the tax cut.

Employment Mobility in East Java During the COVID-19 Pandemic

The study examines the mobility of workers between the formal and informal sectors in East Java, Indonesia. The potential mobilities of workers are examined, not only from the formal to informal sector and from informal to formal sector, but also the movement of new entrants (who do not have a job in the past) to the formal-informal sector jobs. Using the 2021 National Labor Force Survey (SAKERNAS), the study contributes to the literature by examining the mobilities in the case of developing countries during an economic downturn during the COVID-19 pandemic. The study is essential in supporting the policies in the region with the existence of a large informal sector in the labor market. Using probit regression, the study found that workers who have previously worked in the formal sector are more likely to enter (re-enter) formal sector employment when the economy starts recovering in 2021. In contrast, workers previously employed in the informal sector have a lower probability of moving to the formal sector. The study continues examining the implications of the different income levels of formal and informal sector workers. The results using Heckman's bias correction selection show that new entrants (workers who have no job previously or freshly graduated) earn more earnings than workers who have previously been employed in the formal-informal sector. One possible reason is the role of digitalization and working-from-home activities that might support, particularly young educated people, to work productively during the pandemic.

Mandatory health insurance for the informal sector in Tanzania-has it worked anywhere!

Many countries in sub-Saharan Africa are struggling to expand voluntary health insurance schemes to raise finances toward achieving universal health coverage. With more than three-quarters of the population without any insurance, the government of Tanzania has unsuccessfully tried to pass a Bill proposing a mandatory, nationwide scheme to cover the large and diverse informal sector. The Bill proposed an annual premium of ∼150 USD for a household of six or 65 USD per person. Studies in Tanzania and Kenya have shown that the majority of people in the informal sector are unwilling and unable to pay premiums as low as 4 USD, mostly due to poverty. Mandatory health insurance for the informal sector is not common in this region, mostly because it is difficult to enforce. Successful insurance schemes have included significant subsidies from tax revenues. Tanzania should not seek to raise funds for health through an unenforceable insurance scheme but rather should consider a largely tax-funded scheme for the informal sector. Contributions through low-cost voluntary schemes can enhance social contracts, reduce out-of-pocket expenditure, and promote efficient utilization. In addition, progressive health taxes should be imposed on harmful products (tobacco, alcohol, sugary drinks, etc.) to raise more funds while addressing the increasing burden of non-communicable diseases. Furthermore, efficiency in the use of scarce health resources should be promoted through realistic prioritization of public services, the use of Health Technology Assessment, and strategic purchasing.

Aging, inadequacy, and fiscal constraint: The case of Thailand

AbstractWe use an overlapping generations model to study the challenge in developing countries with a large informal sector and aging population. We use Thailand as a case study and incorporate its labor market structure and its public pension system into the calibrated model. Unlike developed countries, workers in developing countries commonly transit from the formal sector to the informal sector, which can be in the early stage of their working life. This labor market feature crucially limits the coverage of the contributory social security (SS) system. We find that 66% of Thai elderly (aged 60 or over) are ineligible for SS annuity benefits because of an insufficient number of years paying into the SS fund. In addition, we use our model to evaluate two schemes to raise the existing universal basic pension income to the poverty line, namely, uniform benefits and pension‐tested benefits. We find that pension‐testing effectively improves the targeting efficiency, and nontrivially lowers the cost of the basic pension income program.

Left behind in Covid times: the impact of the pandemic on job loss and job finding rates of vulnerable groups in Serbia

Purpose This paper aims to analyse COVID-19’s effects on job loss and job finding rate in Serbia, focusing on groups with already low employment before the pandemic, such as youth, women, low-educated and rural areas. Design/methodology/approach The authors exploit the panel structure of the Labour Force Survey (LFS) data for Serbia to analyse if the impact of the pandemic on transition probabilities was different for vulnerable groups and their counterparts during the first year of the pandemic. Findings The results indicate that stagnation in overall employment growth in Serbia during the first year of the COVID-19 crisis resulted from decreases in new hiring rather than increases in job losses. However, trends differed for vulnerable groups. Young workers faced the highest increase in job losses, partly due to their higher shares in informal wage employment. In contrast, decreases in job finding rates were particularly high among low-educated and in rural areas. Practical implications After the first year of the COVID-19 pandemic, employment opportunities of vulnerable groups further deteriorated, and already existing labour market inequalities were exacerbated. These effects are partially due to policies implemented to mitigate the crisis, which focused on preserving permanent employment while leaving vulnerable workers and groups unprotected. Originality/value The authors investigate the annual effects of the first year of the pandemic in a country with a large informal sector and explore the role of vulnerable groups’ job characteristics in transition changes.

Remittance Modality: Unpacking Canadian Money Transfer Mechanism Choices

Numerous international development targets aim to encourage and formalize remittances, because they can support development efforts while controlling and monitoring illicit capital flows. Despite continued efforts to promote formal remittance channels, informal remittances flourish among specific population groups. This study uses data from the Canadian Study on International Money Transfers to analyze the determinants of remittance modality or channel choice. Previous empirical work tends to classify remittances as either formal or informal. In contrast, this article considers a variety of channels. It shows that the dichotomization of formal versus informal remittances masks crucial differences across remittance channels. Due to Canada's unique geographical positionality, cash transfers operate distinctly from informal methods despite often being treated as a homogenous group in other studies. Interestingly, remitters are also more likely to use formal money transfer operators (most of which offer cash pickup options to recipients) than informal channels to send funds to countries with larger informal sectors. Within the context of Canadian remittance outflows, this invalidates the frequent assumption that more informal destination country economies push remitters to opt for informal transfer methods.

Do different types of vocational education and training programmes influence earnings? Recent evidence from India

PurposeIndian government initiated several skill development policies and different types of vocational education and training (VET). Yet the participation in skill education is low because of poor labour market outcomes. This paper aims to calculate returns to skill education to understand the type of training that will have better labour market outcomes.Design/methodology/approachIn this paper nationally representative data from the periodic labour force survey (PLFS), collected by the national sample survey office for 2017–2018, are used to estimate the returns to formal and non-formal VET obtained (after different levels of general education) with the help of Heckman's two-stage method.FindingsNearly 8% of the working-age population has received some form of VET (mostly non-formal), generating poor returns. For the overall population, formal on-job training (OJT) and full-time VET influence wage positively and significantly. Full-time VET obtained after secondary and below levels of education generates positive returns, whereas part-time VET is profitable only to those without formal education. At the graduate level, technical education obtained along with VET is associated with better wages.Originality/valueIn India where a considerable proportion of the workforce is employed in the informal sector, different types of skill training like full-time, part-time and OJT influence labour market outcomes. This finding has policy implication for countries with large informal sector and calls for further research in such countries.

Economic development, corruption, and income inequality: The role of the informal sector

This article investigates how the relationship between economic development and income inequality is conditioned by corruption and the informal sector. While corruption has traditionally been believed to worsen inequality through resource concentration, this study suggests that it can also lead to the opposite through the informal sector. In countries with a high level of corruption or a large informal sector, individuals can bypass regulations and barriers by offering bribes or participating in the informal economy; this allows the benefits of economic development to be widely distributed, thereby reducing inequality. The reverse is true when corruption is low or the informal sector is small. However, at low levels of economic development, an increase in informal economy or corruption alone would not lead to a more egalitarian distribution without an economic expansion. The arguments are supported with a time-series cross-sectional analysis of 127 countries from 1964 to 2007. This study contributes to the literature by clarifying the relationship between corruption and the informal sector and how they affect inequality jointly with economic development.

Impact of women’s economic empowerment on the rise of female entrepreneurship and human capital in Botswana

The authors investigated the importance of women’s economic empowerment and its impact on the rise of female entrepreneurship and human capital in Botswana. The research included a case study analysis with four in-depth expert interviews. Data triangulation ensured the study's validity, and the case was examined through pattern matching. The results demonstrate that female entrepreneurs face challenges such as access to resources and education, socio-cultural norms, a lack of social protection, and a large and unprotected informal sector. The government and institutions shall promote women's enablement through a direct labor market intervention, support for the informal sector, a gender-sensitive constitutional, legal, and institutional framework, the enforcement and oversight of gender-responsive laws and policies, and access to resources and education. Furthermore, women require digital inclusion, entrepreneur networks, social protection, and reformed socio-cultural norms. If female entrepreneurs are empowered adequately, they will contribute to nations' human capital, economic growth, and development.

The impact of women's economic empowerment on the rise of female entrepreneurship and human capital in South Africa

The authors investigated the importance of women's economic empowerment and its impact on the rise of female entrepreneurship and human capital in South Africa. The research included a case study analysis with four in-depth expert interviews. Data triangulation ensured the study's validity, and the case was examined through pattern matching. The results demonstrate that female entrepreneurs face challenges such as access to resources and education, socio-cultural norms, a lack of social protection and a large and unprotected informal sector. The government and institutions shall promote women's enablement through a direct labour market intervention, support for the informal sector, a gender-sensitive constitutional, legal and institutional framework, the enforcement and oversight of gender-responsive laws and policies and access to resources and education. Furthermore, women require digital inclusion, entrepreneur networks, social protection and reformed socio-cultural norms. If female entrepreneurs are empowered adequately, they would contribute to nations' human capital, economic growth and development.

Consumption Smoothing in a Transition Economy with a Large Informal Sector: Evidence from Russia

본 논문은 러시아의 가구 패널데이터(2002-2015)를 사용하여 노동시장의 소득충격이 가계의 소비지출에 미치는 영향과 비공식 위기대응전략의 소비평탄화 효과에 대해 연구한다. 실증분석 결과 임금지불유예, 갑작스런 임금삭감, 강제적인 무급휴가 등의 노동시장의 충격이 가계의 소비지출에 유의미한 역할을 하지는 않은 것으로 분석되었으며, 이와 같은 실증분석 결과는 체제이행 시기를 주로 분석대상으로 삼았던 선행연구 결과와 차별되는 점으로서 체제이행 시기와 경제회복 시기를 겪으면서 러시아의 경제체제가 근본적으로 변화하였음을 시사한다. 복수의 직업을 갖고 노동을 하는 것, 친인척 혹은 이웃 간의 사적이전, 그리고 가내생산으로 인한 농작물 및 가축 재배 등은 소비평탄화 효과에 유의미한 효과를 주지 않는 것으로 나타났다. 이와 같은 실증분석 결과는 관련 정책 수립 시 소득충격에 특별히 취약한 계층의 특성 등이 고려되어야 함을 의미한다.