Thursday October 28, 2021

Informality on rent

October 15, 2021

LAHORE: Pakistan desperately needs a well-designed, transparent, and stable set of political and economic institutions that foster democracy and market-based activity and provide a level playing field to all citizens.

Small entrepreneurs do not participate in market-based economic systems because institutional structures or the "rules of the game" are ill-designed and decision-making is undemocratic. This erects barriers to participation as the cost of doing business becomes prohibitively expensive.

Informal economy is promoted by design. Poor remain poor as long as they operate informally; this exclusion from formality has been forced on them by the system.

It is stated that the informal economy in Pakistan is larger than the documented economy. Experts wonder why there are still so many poor in Pakistan.

It is because the distribution of wealth in the informal economy is as skewed as it is in the formal economy.

When we talk about the size of the informal economy, we include both rich and poor. We fail to realise that the rich exclude themselves from mainstream economy by design, while the poor are forced out by the flawed system. Exclusion from participation forces many entrepreneurs to engage in low-income, low-growth informal business activities.

Around 90 percent of the grey economy is in the hands of 5-10 percent people, with the poor holding less than 10 percent share in the informal economy.

The smugglers, speculators and hoarders earn as much individually as any successful formal manufacturing concern. The high-rise buildings and commercial plazas are owned by people who do not pay any tax.

They are visible to everyone except the regulators who look the other way against a rent. Expensive luxury cars that ply on our roads are owned by persons who do not pay taxes, but no one dares to confront them.

Roadside vendors have to oblige the police and municipal staff to operate. The amount of bribe that these poor entrepreneurs pay is much higher than the taxes they are required to pay if they become formal.

Majority of poor entrepreneurs produce legitimate products without proper permits or legal status because they lack the resources to comply with burdensome and excessive rules and regulations necessary to become part of the formal economy. Hence, they operate outside of it by paying the ‘tax’ informally to the public officials.

It is the duty of the people elected through the participatory process to remove impediments preventing routine, daily participation in national and local decision-making which foster unresponsive policies, such as exorbitantly high costs of doing business.

These obstacles politically and economically disenfranchise citizens, jeopardise the consolidation of political and economic reform, and threaten exclusion from global markets.

The present regime, like its predecessor is in firefighting mode. It has no time to make efforts to bring the poor into the mainstream economy.

Entrepreneurs with modest means would become formal if the requirements to obtain business permits and licenses are simplified and inexpensive.

Unfortunately, our bureaucracy does not cooperate and facilitate small entrepreneurs to become formal. Bureaucratic red tape reaches its height if someone tries to become formal without greasing the palms of the concerned officials.

Bureaucrats enjoy discretionary powers that give them a license to make small entrepreneurs sweat by raising objections that get ignored as soon as their palms are greased. However, poor entrepreneurs, who cannot afford to oblige such bureaucrats at each step of registering in the tax net, stay away from it.

Discretionary powers of the bureaucracy need to be removed, and instead government institutions should be strengthened through excessive reforms.

Public institutions should facilitate businesses by enhancing administrative and enforcement capacity. Laws and regulations should be so simple and elaborate that they are administered and enforced efficiently, effectively and inexpensively.

Small informal sector businessmen need relevant business-related information and training about various business procedures to become formal.

They should be facilitated by the state to obtain a license or permit. They should also be guided on how to start a business, how to form commercial entities such as joint ventures and incorporated companies, and how to run a business.

Poor informal entrepreneurs are in millions but their total wealth only makes up 5-10 percent of the informal economy. The bulk of the money is in the hands of a few highly influential individuals who enjoy luxurious lifestyles.

If the state regulators bring these high wealth individuals in the tax net, the size of the informal economy would reduce to 10 percent, which is normal even in developed economies.