World Bank seeks policies to integrate informal sector into mainstream

by Elijah Felice Rosales (The Philippine Star), 13 May 2021

MANILA, Philippines — The World Bank has urged governments in East Asia and the Pacific to widen social protections and reduce regulatory burdens plaguing the informal sector, paving the way for its integration into the economic mainstream.

A World Bank study titled “The Long Shadow of Informality: Challenges and Policies,” showed that about seven in every 10 workers in developing countries belong to the informal sector, contributing close to a third of gross domestic product (GDP).

The World Bank said informality may weaken the ability of emerging markets to acquire the fiscal resources needed to improve their economies during the pandemic.

In particular, informal output in East Asia and the Pacific declined from 35 percent of GDP in the 1990s, but it stood at an average of 27 percent from 2010 to 2018. Informal employment, on the other hand, expanded to half of the total labor force in the region.

In the Philippines, informal output scaled around 40 percent of the economy from 1990 to 1999. Based on the World Bank report, it declined to less than 40 percent from 2010 to 2018.

“Informality is particularly high in lower-income economies, which are also characterized by the more stringent labor regulations and lack of enforcement,” the report said.

The World Bank proposed that governments in the region simplify their registration procedures, tax assessment and payment schemes to encourage informal firms, along with their workers, to graduate to the formal sector.

Further, the US-based multilateral said governments should amplify their investments on social protection programs to expand their coverage and include new beneficiaries, especially workers who came from the informal sector.

“The tax base can be widened, the progressivity in taxation increased and financing of the social insurance schemes can be expanded. The pandemic provides an important opportunity for the policy makers to take measures to strengthen social protection systems, including the ability to adapt to future shocks,” the report said.

Likewise, the World Bank called on authorities to enhance the delivery of basic services as part of efforts to reform the urban areas. It also said an environment conducive for doing business is needed to raise labor productivity in the formal sector.

Mari Pangestu, managing director for development policy and partnerships at World Bank, said women and youth who lack skills make up for most of the informal sector, and they are exposed to vulnerabilities, including the absence of safety nets, when they lose their jobs.