NN39, October 2007
Best Practice in Education and Training: Hype or Hope?
Formalizing the Informal Economy: Best Practices?
By Robert Palmer, NORRAG, Edinburgh and Amman
KeywordsFormalizing informal economy, Best practice
Summary
This article argues that efforts to formalize the informal economy often involve the coming together of multiple forms of ?best practice?. It notes that the key to formalizing the informal economy will be to create incentives for those operating informally to see the value of becoming formal. One way to formalize the informal economy may be to informalize formal structures.
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What does formalizing the informal economy mean? Is it the best way forward (a best practice)? And, if so, for whom is it best practice? In what ways is it best practice? And how feasible is this best practice anyway?
There are many aspects of the informal economy that policy makers and development agencies are keen to formalize or, to put it another way, to move into ?the economic and social mainstream?. Main areas where formalization is promoted include: employment policies; basic education and vocational training; occupational safety and health; social protection; access to critical resources; dialogue and representation.
In effect, efforts to formalize the informal economy often involve the coming together of multiple forms of ?best practice?; best practice in microfinance, best practice in formalizing informal training (including best practice in skills recognition), best practice in reforming formal skills training for the informal economy, best practice in formalizing informal trade and community associations, best practice in formalizing informal social protection, in formalizing land rights and so on?
For example, since the mid-1990s there is a great deal of interest in formalizing informal apprenticeships in developing countries. There have been numerous projects and programmes that have, with mixed success, put in place public policies addressing formalization or facilitating the transition; linked formal training institutions and informal training systems; set up formal recognition and certification of skills acquired in informal apprenticeships; or worked with informal sector associations in formalizing informal training systems. There have been a number of useful lessons learned in the process (Palmer, 2007), though some lessons appear to have very short life-spans as institutional memories fade fast (see also Ellerman, this issue, ?Best Practice Development Fads 101?). With regard to formalizing recognition and certification of skills acquired in the informal economy, some countries (e.g. Ghana) are attempting to use the ?best-practice? of National Qualifications Frameworks (NQFs). However, incorporating skills acquired informally through apprenticeships into an NQF may prove to be too big a task for most developing countries (Palmer, 2007) (see also McGrath, this issue, ?Lessons from Qualifications Framework Experience?).
While there are many areas of the informal economy where formalization can be promoted, for many policy makers in developing countries, however, formalizing the informal economy ? in the short term at least - simply refers to formalizing informal ventures in order for them to pay taxes and get licenses (and pay the associated fees); a desirable outcome for the public purse perhaps, but hardly an incentive for the (informal) private pocket to formalize. While this might be ?best practice? for the government (e.g. they will increase their tax base), from the perspective of informal micro-enterprises it certainly is not!
The key to moving informal ventures into the economic and social mainstream will be to create incentives for those operating informally to see the value of becoming formal; in other words, to create an environment in which the benefits of formalizing outweigh the costs of remaining informal. Necessary incentives and other mechanisms making formalization more affordable and appealing to informal economy workers and economic units need to be created (de Medina, 2006). In doing this, informal ventures are more likely to voluntarily opt to formalize (Nelson and de Bruijn, 2005), and governments will have to expend less resources in enforcing formalization.
Such incentives for informal enterprises formalizing might include improvements in the accessibility of micro-finance, improvements in labour standards and legislation, social protection (de Medina, 2006) and worker benefits, secure property rights, stronger and more representative informal sector associations that can add the voice of informal workers to the policy process [1]. Policies and legal frameworks facilitating appropriate formalization need to be developed and, more crucially, implemented (de Medina, 2006). Opportunities for productivity and market enhancement need to be generated (ibid.). The costs of formalizing ? in both time and money ? should be kept to an absolute minimum and procedures should be greatly streamlined and simplified. For formalization of informal ventures to occur, such incentives need to be in place. In most developing countries, however, formal policies and legislation remains very much disabling for micro- and small enterprises (MSEs). In other words, the wider economic and social environment is failing to provide the incentives required for formalization.
There needs to be action at the macro, meso and micro levels to address this issue. At the macro-level, policies concerning labour standards and legislation, social protection and worker benefits, property rights and social dialogue need to be made more pro-poor and pro-MSE in general. At the meso and micro levels, public and private education and skills development, and financial and business development services (BDS) need to approach the delivery of their interventions in more innovative ways. One way of doing this is to informalise formal support structures aimed at MSEs; to make, in other words, formal support structures less formal. By learning from the existing informal providers, formal services might be better placed to reach informal MSEs more effectively. One potentially useful approach (a best practice?) is highlighted by the case of mobile bankers in Ghana. In some districts in Ghana, rural banks have set up ?mobile banking? ? a daily ?door-step? financial service modeled on the traditional door-to-door money collectors. Rural bank collectors go out every morning into the community and collect savings from clients, returning to the bank in the afternoon to deposit the money. The mobile banker also facilitates the process of micro-enterprises getting access to formal credit. Due to the daily personal contact they have with their clients, they are well placed to inform the bank on that client?s suitability for receiving a loan, thus breaking down the information asymmetry and some formal collateral requirements that hinder usual formal financial extension to micro-enterprises. However, these mobile bankers might be well placed to provide more than just financial services. If they were provided with further training themselves, each mobile banker could, in theory, become a mobile BDS unit; providing additional training services to their clients (including basic book keeping, business skills). Having mobile bankers/business advisors would greatly increase outreach to the entrepreneurs that need advice. Is this not a good example of how we can formalize the informal economy by informalizing formal structures?
Notes
[1] For informal wage employment other incentives might include getting a secure contract.
References
De Medina, R. (2006) Towards a more comprehensive model of change for the informal
economy: an ILO perspective, DFID labour standards and poverty reduction forum (Geneva, ILO).
Nelson, E. and de Bruijn, E. (2005) The voluntary formalisation of enterprises in a developing economy ? the case of Tanzania, Journal of International Development 17(4): 575-593.
Palmer, R. (2007) Skills for more productive and decent work in the informal economy, (draft) ILO: Geneva.
Further reading
Chen, M. (2005) The business environment and the informal economy: creating conditions for poverty reduction. Draft Paper for Committee of Donor Agencies for Small Enterprise Development Conference on ?Reforming the Business Environment?, November 2005, Cairo, Egypt.
Dalglish, Carol (2007) From the informal to the formal sector: micro-enterprises in a developing economy ? research in progress. In Proceedings AGSE Research Exchange, QUT, Brisbane. Accessed from http://eprints.qut.edu.au
Grunwald, E., Nell, M. and Shapiro, J. (2005) Projects / programmes aimed at economic improvement and poverty alleviation through non-formal training in Sub-Sahara Africa, GTZ: Eschborn. June 2004 version available online at http://www2.gtz.de/wbf/doc/Arbeitpapier-SSA-Case-Studies-2004-12.pdf
ILO (2002) Decent work and the informal economy, International Labour Conference 90th Session (Geneva, ILO).
Ishengoma, E. and Kappel, R. (2006) Economic growth and poverty: does formalisation of informal enterprises matter? GIGA-WP-20/2006, German Institute of Global and Area Studies: Hamburg. www.giga-hamburg.de/workingpapers
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