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January 28, 2021

Textbook solution


January 28, 2021

LAHORE: The informal sector is mostly flourishing because people are disconnected from modern production networks. Informality cannot simply be eliminated by reducing the cost of registering a business or bringing them into the tax net.

There is a need to bring formal jobs nearer to where most of the poor population lives. We will have to redesign our urban spaces for that.

It includes building subways and dedicated bus lanes. It needs an integrated approach to housing, social services, and production areas. Instead of appeasing the vested interests, the government would have to start doing what is in national interest.

Informality serves the economic interests of those who cannot travel long distances to get a minimum wage job (which is inefficient). Informal workers earn only half the minimum wage while living close to their homes.

If they work at a greater distance from their workplace, the net income they take home would be equivalent to what an informal worker earns near home. In most of our industrial cities, daily commute times for low-income formal-sector workers often exceed three hours.

This means they have got the minimum wage after 11 hours of ordeal, including 8 hours working on the floor and three hours commuting. On top of that the cost of transportation is equivalent to two hours of their wage. This means that after 11 hours of work, they get a net pay of only six hours.

In other words, the minimum wage formal workers are subjected to an implicit tax of 45 percent (20 percent transportation cost plus three hours non-paid commuting time). By earning 5 percent higher than informal workers, the formal workers face the fatigue and inconvenience of travel besides being far away from home even in case of any family emergency.

If we take these factors into account, it would become easier to appreciate why workers prefer to work near their homes rather than working in highly productive factories.

The result is that the size distribution of firms in developing countries has a long tail. Compared to developed countries, an unusually large number of small, unproductive firms coexist with a small number of large, productive firms.

Informal firms no doubt are highly inefficient. Logically, the small low productivity firms should close down, and their workers should be absorbed by formal productive firms.

This should happen automatically through the invisible hand of competition, because the more productive firms should be able to deliver a better product at a lower price, while luring workers with higher wages. But this is not happening in Pakistan just because the formal workers take home almost the same net amount that an informal worker gets while working close to home.

Our experts have continued to ignore this economic impact that keeps workers glued to informal work. They complain that government regulations make compliance too onerous for small firms.

Others think tax evasion gives advantage to the informal operators. Even if these firms pay taxes, their salary bill would always be half of what formal firms pay and that gives them an edge. The trick is to make the formal work economically more attractive for the informal workers.

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 else. It requires manual and intellectual skills that must be used in tandem. Just think of the different specialised skills that must come together to make a single film.

To bring these skills together, people have to be integrated into cooperative arrangements in the same firm or within clusters of related firms. But, in order to get together to work, people have to travel from their homes to production sites. How do they do that?

One example in this regard is the development work done during the previous regime’s tenure on the infrastructure of Lahore. The 27km Metro Bus connected one remote part of the city to its industrial suburb.

The one-way travel time was reduced from two hours to just 45 minutes. The fare was subsidised to Rs20 (saving workers almost Rs100 in daily fare).

Most comfortable and air-conditioned buses were deployed. The Metro hauls 150,000 to 200,000 workers daily to work and back home.

Now the formal workers take home almost 85 percent than what an informal worker earns near home. The project worked wonders for industrialisation in the city.

A vast industrial land at Roohi Nallah was lying almost vacant for the past four decades. Only a few big industries established their projects.

The area was considered unsafe for travel after sunset. The big firms moved with security vans while travelling at night. Most avoided travelling.

After the Metro Bus project started operating, the area industrialised quickly. The colonisation of the industrial estate eliminated the thugs. Industrial space is no longer available in the area.

Most of the critics called it a waste of national resources because the Rs9 billion subsidy for poor commuters was considered too high. No well to do citizen uses this service as over 90 percent of the commuters are workers.

They neglect the transformation, brought on by this project, both in the form of industrialisation and increase in workers income. Orange Line train project was meant to connect the other remote area of Lahore with another industrial sector.

It was almost complete when this government assumed power. It took more than two years to roll out the train service. It is expected that the next industrial and commercial development would take place on this route in another three to four years.