‘Infromality a bane for formal sector’

LAHORE: Experts say it is prudent to replace informal small low productive firms that are not only outside the tax net but also noncompliant with labour laws compared to large productive units; there would no job loss, and output and well-being would increase.
They claimed that the reason for a large informal sector in the country was the existence of a high number of small firms with low productivity. Small firms are inefficient, they reasoned. Under normal economic principles, the low productive firms should be no match for the highly productive large firms. However, here it is the opposite to the surprise of economists.
An entrepreneur Nabeel Hashmi recounted the advantages enjoyed by smaller firms over large entities while addressing a workshop. He said the first advantage informal producers enjoy is that they can operate in residential areas as they are not registered with any government agency. The second advantage is that the labour laws are not applicable on them. “These firms hire workers at half the minimum wage. They do not pay overtime to their employees. They do not make social security contributions or register with Employees Old Age Benefit contributions,” he said. On top of that, he added these firms do not pay any tax; be it the income tax, sales tax or excise duty. He said the rate of sales tax alone is 15 percent. “This puts the formal tax complaint at disadvantage against informal firms.”
Hashmi said a blow moulding machine installed in a small home could produce products of comparable quality if the mould and dye is good. Similarly, he added a power loom operated by a family from home weaves out the same quality of fabric as produced by a large weaving mill. These informal manufacturers out bid the price quoted in market by the formal manufacturers. “What the informal sector loses in efficiency and productivity is over compensated in the taxes and wages its saves,” he said, adding that the workers are denied all benefits. This uneven competition slows or stops the growth of the formal sector. Resultantly, the formal sector is constrained to operate at below its installed capacity, losing the advantage of economies of scale. It also creates hindrance in exports, he added. Traders’ leader Anser Zahoor Butt said the cumbersome government regulations make compliance too onerous for small firms. He conceded that tax evasion creates an unfair advantage for informal firms. But he as far as the government services on enterprise contribution or labour welfare go, those do not suit a family of six operating a machine on convenience of each family member. Moreover, he lamented programmes that target the informal sector and distort the playing field. In this regard, he cited the deduction of GST on electricity bills. He said factors inhibiting formalisation should be analysed and removed. He said it requires many years of training and abstract economic thinking to miss the obvious.
Market analyst Benish Toor said that the salient characteristic of modern production is that it mobilises a lot of knowhow – too much to fit in the head of any single person. She said efficient production requires a division of labour among those who know about technology, marketing, finance, logistics, human-resource management, contracts, regulations, distribution, customer service, and much more. Moreover, she added it requires manual and intellectual skills that must be used in tandem. Just think of the different specialised skills (many of them recognised by the Oscars) that must come together to make a single film.
She said the small firms must be persuaded to come under an integrated cooperative system where persons with different skills could be accommodated. This unification, she added could be in the form of cluster of related firms. She said this gives rise to another problem, as instead of operating from their homes the workers would have to travel to the production sites. She said daily commute times for low-income formal-sector workers averages three hours, and the average direct cost of transportation is equivalent to roughly two hours of work at the minimum wage. An eight-hour shift becomes an 11-hour shift for which net pay is only six hours. This, she added is the main reason for informality.