Does informality belie logic?

LAHORE: Informal economies like Pakistan have an unusually large number of low productive firms that operate alongside fewer large firms. If the small, unproductive firms close down and the larger, more productive firms hire their workers, total output and well-being would rise.

Logically this should be the case as more productive firms would deliver better quality at lower price. They will lure informal sector workers by offering higher wages. But this is not happening in our country. Informal enterprises survive trapping resources in low productive actions.

Small firms complain government regulations make compliance too onerous for them. Formal firms say tax evasion creates an unfair advantage for unregistered firms. In an effort to address the problem, successive Pakistani governments have been redesigning their registration systems, and exploring the potentially perverse incentive problems associated with social-welfare programmes.

But the problem is not as simple as our planners think. Efficient production requires prudent distribution of labour among technicians (skills), marketing staff, finance managers, human resource management, regulations, contracts, distribution, customer services and above all logistics.

To attain this efficiency, human resources must be integrated into cooperative arrangements in the same company or within clusters of related enterprises. To reach the productive firm or cluster, people must travel from their homes to the productive site. The issue starts here.

In our cities they do so with difficulty. The commute times for low-income formal-sector workers often exceed three hours. Moreover, average cost of transportation is equivalent to roughly two hours of work at the minimum wage.

This means that the eight hour shift and three hours commuting time take 11 hours per working day. So, the worker gets paid for eight hours out of which two hours of this salary is spent on commuting.

Practically he gets a wage equivalent to six hours for 11 hours duty. It is an implicit tax of 45 percent on low wage workers. Besides, the worker tolerated three hour travel fatigue with realisation that he might not reach home in time in case of emergency. It is because of these considerations that the workers prefer to work near their residence at a lower salary.

The slums, where these workers reside in cities have few jobs available according to their skills. They perform as low-skilled workers operating at low productivity. This is the reason that we see them sell food preparations, operate internet cafes, retail shops, construction, repairs, and many other activities that can be carried out at home and sold through either a window facing the street or a hand driven cart.

Our policymakers do think of providing one window facilitations for investors, but ignore the human resource logistic aspect. Housing societies are approved without incorporating the provisions of ensuring decent transport.

They do not bother if the location of society has small plots far away from industrial and business zones.

The policy makers must realise that informality cannot be addressed by reducing the cost of registering a business or bringing small firms into the tax net. There is a dire need to redesign urban space by making room for dedicated bus lanes and subways to reduce commute times.