Unproductive informal units provide greater employment

LAHORE: Small informal manufacturing sector is providing more jobs than the organised sector, but need reorientation to achieve productivity gains.

According to economic principles, small is beautiful and smaller units ought to be efficient in terms of management and use of resources. In fact, in the organised sector, smaller units with right technologies are more efficient, but this cannot be said about small manufacturing units in the informal sector.

Small informal units do not have access to several kinds of resources, particularly in relation to credit and marketing facilities, and are not able to reap the economies of scale. If properly facilitated, the small informal manufacturing units may become the epicentres of pro-poor growth.

Unorganised manufacturing sector includes both household and non-household units. These units account for a majority of the total manufacturing jobs in the country. As they lack any government support, these units try to lower their costs by employing labour at much less than minimum wage that naturally is inefficient as well.

With improvement in technologies, the larger units making similar products have also reduced labour force, and through better quality are also eroding the markets of smaller manufacturers, particularly in urban centres.

The smaller units become commercially unviable due to lack of marketing techniques and lack of credit. This does not bode well as these units are the lifeline for the poor and ought to be strengthened by the state.

The ability of the smaller units to convert inputs into output when compared with larger best performing units is very low. Total factor productivity of unorganised manufacturing industrial units in our country is discouraging when compared with units in the organised sector.

It has been found that the unorganised sector units are not able to benefit in the process of rapid economic growth. This explains the dismal performance of smaller informal units during the accelerated growth between 2000 and 2005.

It is imperative that the state makes the informal sectors a part of the formal economy. This is important because when the standard of living improves with rising incomes, the demand of manufactured items produced by the organised sector increases at the expense of the unorganised sector.

Though better infrastructure is important, it does not have that much of a positive impact on informal manufacturers. That happens because it is the formal manufacturers which increase efficiencies on the strength of better infrastructure.

The informal sector merely exists just for survival. This is particularly true for units operated in residences where the only workforce is family.

The industrial planners have to chalk out policies to improve the quality of products made by the informal sector to enable their growth.

One such step is accessibility to infrastructure for the household units which often operate in remote areas and thus have less access to the bigger markets.

Other facilities such units need are credit and marketing assistance. Institutions can play an important role in ensuring that informal sector gets its due share in the market. The antitrust authorities can ensure that larger units do not take advantage of their market dominance to wipe out informal units.

There is also a difference in the technology of the urban and rural small informal units. Urban units have higher technical facilities than those operating from remote rural areas. 

One reason for better technical efficiencies of urban based units is that they acquire it through subcontracting of some parts or products from the organised sector. Obviously subcontracting is done more in urban centres.

Manufacturing units operated by family members in residences have even higher labour inefficiencies than the non-household units.

These units may be allotted small plots in the industrial areas and allowed to construct residences above the working floor, saving them travel expenses and ensuring more subcontracting.

The current law does not allow residences above an industrial unit in the industrial estate.  

For a long time, the demand to establish a cottage industrial estate has been there. Each province needs to allocate a large piece of land outside main cities and gradually shift all industries. Manufacturing in residential areas can then be completely stopped.