The informal economy in developing countries: measurement issues and - - PowerPoint PPT Presentation

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Mireille Razafindrakoto & François Roubaud (DIAL, IRD – Université Paris-Dauphine, France) HSRC Seminar Series Cape Town, 10 April 2019

The informal economy in developing countries: measurement issues and economic challenge

 Rationale

Why is it important to know more about the informal economy?

 Concepts, Measures & Data

The need to follow international concepts in order to make comparable and reliable measures

 Some findings (drawn from our works on the LM & IE)

Informal sector into perspective: many similarities between developing countries

 Policy recommendations

The informal economy cannot be ignored anymore

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Employment is the main source of income of (poor) people, labour is their main asset

• Better understand the labour market (Characteristics of jobs, insertion into the

labour market according to individual characteristics, working conditions, etc.)

Focus on the informal sector and informal employment

• Position and role of the informal sector/employment in the economy?

Numerous research questions in debate :

• Working in the informal economy : choice (exit) or constraint (exclusion) ?
• Subsistance or dynamic economy ?
• Integrated or marginal sector into the economy ?
• Informality corresponds to a transition between the traditional to the modern

economy or is it here to stay?

• Share and determinants of informal employment?

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• NSOs (+ Research Institutes): institutionalization, sustainability
• 5 Pillars to bridge knowledge gaps
• Research in statistics (methodological issues)
• Research in economics (and social sciences)
• Policies
• Democratic debate (information)
• Training
• Tools
• Quantitative (surveys, modeling): major
• Qualitative (individual, collaboration): minor

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Many different definitions used by researchers (popular economy, underground economy, unregistered, unobserved, informal, illegal economy, in the open sun, moonlighting, etc.) -> Generalized confusion Heterogeneity of the informal economy and variety of factors for being informal  Three main approaches:

• Dualist: subsistence economy; insufficient demand for employment of the modern

sector; should disappear with development (ILO, 1972).

• Structuralist: subordinate economy; sub-contracting by multinationals; cost

reduction with globalization (Castells et al., 1989).

• Legalist (liberal): micro-entrepreneurs trying to escape public regulations and

choosing to work in the informal sector (De Soto, 1986).

Share of formal manufacturing jobs in the eleven African cities

West Africa Central Africa Indian ocean

Coto- nou Ouaga- dougou Abid-jan Bama-ko Niamey Dakar Lome

Total

Yaou

• nde Douala

Kin- shasa Antananarivo

Formal industrial employment in total employment (%) 2.2 4.8 6.1 3.7 3.6 6.2 2.7 4.9 7.6 11.0 4.5 18.4 Informal sector employment in total industrial employment (%) 87.7 74.5 68.7 81.7 86.3 77.9 86.9 77.6 59.6 50.9 69.7 46.3 Wage informal sector employment in total wage employment (%) 31.2 32.1 42.7 35.1 29.0 43.9 37.0 39.5 25.2 24.2 25.6 22.4 Sources: De Vreyer and Roubaud (2013).

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Informal sector = Non manufacturing jobs Formal manufacturing employment is peanuts (5% in West Africa). Informal sector jobs represent a huge share of manufacturing employment (between 50% and 90%) Informal sector = Non wage jobs = vulnerable jobs (ILO) Informal sector wage earners represents an important part

• f

total wage employment (between 25% and 50%)

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International recommendations (statistics): ILO 1993, 2003 & 2013 ; OECD 2002 ; UNSD, SNA 1993 & 2008)

Three components of non-observed economy (OECD, 2003)

Informal economy : partially/totally by-passing public regulations; its activities are not necessarily carried out with the deliberate intention of avoiding payment of taxes or social security contributions. Underground economy: intentionally by-passing public regulations (under- declaration) by registered (big) firms Illegal economy: illegal production (goods or services: drugs, etc.)

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Three different components of the “non registered economy”

Source: Based on Roubaud (1994)

1. 2. 3. Informal sector Underground economy Illegal economy Example Own-employment Black-market Drugs Size of entreprises Micro Large ? Attitude towards the State (by-passing) Unvoluntarily (by-passing) Voluntarily (by-passing) Voluntarily Measurement Direct surveys Indirect approach (demand of money, fiscal audits) Indirect approach (technical coefficient) National accounts integration New household sub- sector Branch/sector estimations Products re- estimation

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Definition of the informal economy (ILO, 1993 & 2003) Informal sector: all private unincorporated enterprises that produce at least some of their goods and services for sale or barter, are not registered (no business licence) and are engaged in non-agricultural activities (or without written accounts, etc.) Informal employment: employment with no protection (social insurance; written contract, wage slip, etc.) Informal economy = informal sector + informal employment

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Two alternative sampling strategies for measuring activity in the informal sector

Note: If the sampling frames (censuses of population or establishments) are unavailable or not up to date, the two methods may be applied from primary units selected from an area-sampling frame. First Census of Surveys of informal Strategy Establishments (sampling frame) establishments Survey of households Second Population Sampling On activity of individuals Filter Survey of informal Strategy census frame survey production units (Physical reference unit : the dwelling) Stage 1 Stage 2

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Building the implicit population of individuals, jobs and Informal Firms from Phase 1 (LFS) A.- Selecting only independent workers (employers, own account workers)

Individuals Corresponding job Production Units I1 J11 : mono-active HUEM11 . . . . . . Ij Jj1 : mono-active, first job HUEMj1 . . . Ik Jk2 : mono-active, second job HUEMk2 . . . Il Jl1 : pluri-active, first job HUEMl1 . Jl2 : pluri-active, second job HUEMl2 . . . II JI(1,2) HUEMI(1,2) NI NJ (>=NI ) NHUEM = NJ

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Building the implicit population of individuals, jobs and Informal Firms from Phase 1 (LFS) B.- Selecting all kind of workers (employers, own account workers, employees, contributing family workers, etc.)

Individuals Corresponding job Production Units I1 J11 : mono-active, independent worker HUEM11 . . . . . . Ij Jj1 : mono-active, first job, dependent worker . . . . Ik Jk1 : pluri-active, first job, independent worker HUEMk1 . Jk2 : pluri-active, second job, independent worker HUEMk1 . . . Il Jl2 : pluri-active, second job, dependent worker HUEMl1 . . . . . . II . . NI NJ (>=NI ) NHUEM <= NJ

The challenge of measuring the informal economy  ad hoc survey Mixed (household/enterprise) surveys (1-2 surveys; ILO, 2013; in South Africa: SESE Survey, 2001-2017, StatSA) Extension: 1-2-3 surveys (already conducted in more than 30 developing countries): 3 nested surveys  Monitoring (1) labour markets, (2) the informal sector (informal firms) and (3) private consumption/expenditure (poverty)

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Phase 1

. Socio-demographic characteristics . Employment

Augmented Labour Force Survey + Filter Survey (representative Support Survey)

Phase 2

. Informal Sector

Informal Production Units Survey Sub-sample

Phase 3

. Expenditure

. Living conditions

Household survey Sub-sample

+ Variable thematic modules

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Statistics

• Benchmark for the household surveys system

Economy

• Labour market : the main drive belt between the macroeconomic

conditions and the household living conditions (micro)

• Jobs: primary source of income for the households (in particular the Poor)
• Work : factor of integration vs segmentation & discrimination

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Source: ILO & OECD, 2018.

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South Africa in perspective: informal sector jobs vs unemployment

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• Concentration of poverty
• Links production & consumption (micro level), improve National Accounts

Aggregates

• Households' strategy / private initiative incentive
• Policies: Micro-finance programmes, capacity building, etc.

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Characteristics of the informal sector firms: The « Gold » number (South Africa: 1.5; SESE 2013)

Vietnam Cameroon Madagascar WAEMU Hanoi HCMC Douala Yaoundé Antananarivo 7 cities Job type and weekly hours Self-employment (%) 72.7 70.7 69.5 72.1 69.5 73.6 Rate of wage-earners (%) 15.3 16.9 10.9 16.8 16.4 13.6 Weekly working hours (average) 49.3 52.1 44.4 48.8 41.0 46.1 Characteristics of IHBs Average size of IHBs 1.4 1.5 1.5 1.6 1.5 1,5 IHB without premises 39.9 37.2 52.4 47.9 32.9 47.3 Income Average monthly income 133 121 100 135 46 128 Median monthly income 84 77 55 92 17 36

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Sources: phase 2 of 1-2-3 Surveys: PARSTAT (2001-2003), EESI (2005), Madagascar (2001) and Informal Sector Survey (ISS), Hanoi (2007), Ho Chi Minh (2008), GSO-ISS / IRD-DIAL; authors’ calculations.

Vietnam Cameroon Madagascar WAEMU Hanoi HCMC Douala Yaoundé Antananarivo 7 cities Destination of production Formal sector 5.8 3.0 6.4 3.2 9.7 7.5 Informal sector 19.5 20.7 25.0 20.3 18.6 16.5 Households 74.7 76.3 68.6 76.5 72.4 75.3 Exports

• 1.3

0.8 Origin of intermediate consumption Formal sector 24.5 14.9 24.0 35.9 46.6 10.3 Informal sector 73.8 82.8 75.8 63.6 49.8 82.7 Other (public, etc.) 1.7 2.3 0.2 0.5 1.7 6.9

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• Traditional indicators for monetary poverty
• In-depth monitoring of households living standards
• Informal sector demand: which households consumes which product in

which sector?

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Main reason for choosing formal/informal sectors by households type (quartiles) (% of Expenditures)

MAIN REASON OF CHOICE % of total expenditure Price Proximity Welcome Credit Quality Not found elsewhere Other TOTAL 1.- First quartile Informal Formal 22,0 24,1 64,8 22,6 3,1 0,7 0,8 0,0 6,3 11,6 2,9 35,8 0,1 5,2 100 100 2.- Second quartile Informal Formal 18,9 27,3 65,4 24,4 4,7 2,7 0,9 0,0 8,1 15,0 2,0 27,1 0,0 3,5 100 100 3.- Third quartile Informal Formal 21,8 24,2 60,9 25,2 4,4 2,2 0,4 0,5 9,5 11,6 3,0 30,2 0,0 6,1 100 100 4.- Fourth quartile Informal Formal 24,0 12,7 50,3 20,6 3,8 1,9 0,8 0,0 18,5 38,4 2,5 26,0 0,1 0,4 100 100

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 A decreasing coverage overtime

Coverage by the Household Business Census in Hanoi and HCMC (2007) & AHBS2009

% of HBs surveyed in the HB Census (2007) & AHBS (2009) Hanoi Ho Chi Minh City 2007 2009 2007 2009 Manufacturing 54.7 33.9 66.7 37.7 Trade 65.8 35.4 63.9 30.2 Services 49.8 24.7 50.4 24.7 Total IHB 56.7 31.3 58.3 38.2 Total FHB 90.2 34.7 86.3 44.8 Total HB 63.2 31.8 65.4 39.4 Source: HB&IS Survey, Hanoi and HCMC, 2007 & 2009, GSO-ISS/IRD-DIAL; authors’ calculations.

 A massive underestimation of Informal Firms Number

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 A massive underestimation of Informal Firms Number

Comparison between the HB&IS Survey and the AHBS, Hanoi and HCMC

Hanoi Ho Chi Minh City HB&ISS 2007 AHBS 2007 Coverage by AHBS HB&ISS 2007 AHBS 2007 Coverage by AHBS

• No. of HBs IHB

321,914 69,820 21.7% 749,359 205,193 27.4% FHB 77,685 47,214 60.8% 255,707 136,859 53.5% Total HB 399,599 117,034 29.3% 1,005,065 342,052 34.0%

• No. of Jobs Total HB

638,538 211,166 33.1% 1,790,559 726,159 40.6% Sources: Non-Farm Individual Business Establishments Survey 2007; Household Business and Informal Sector Survey (HB&IS Survey), Hanoi (2007), HCMC (2008), GSO-ISS/IRD-DIAL; Authors’ calculations. Note: The Non-Farm Individual Business Establishment Survey targets individual businesses, as suggested by its name.

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 Estimators of Totals: a massive underestimation (extrapolation bias) Comparison between the LFS2007 and the AHBS2007, Vietnam

Vietnam LFS2007 AHBS2007 Coverage by AHBS Total HB 10,226,500 3,748,000 36.6%

• No. of Jobs Total HB

16,148,000 6,594,000 40.8% Sources: Non-Farm Individual Business Establishments Survey 2007, LFS2007, 2007, GSO; authors’ calculations. Note: The Non-Farm Individual Business Establishment Survey targets individual businesses, as suggested by its name.

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Figure 1: Income distribution in the informal sector

Source: HB&IS survey, Hanoi (2007), GSO-ISS / IRD-DIAL.

 Estimators of Means: an overestimation (selection bias)

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Recent books on the labour market and the informal economy

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In between…

1994-1995 2004 2018

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Recent publications on the labour market and the informal economy

PAR ART T 1

SE SECT CTOR OR AL ALLOCA OCATI TION ON BETWE BETWEEN EN FORMAL ORMAL AND AND INF INFORMAL ORMAL EM EMPL PLOYME YMENT NT

• 1. Labor Informality and Poverty in Latin America. The Case of

Argentina, Brazil, Chile and Peru

Roxana Maurizio

• 2. Working in the Informal Sector: A Free Choice or an Obligation?

An Analysis of Job Satisfaction in Vietnam Mireille Razafindrakoto, François Roubaud & Jean-Michel Wachsberger

• 3. Being an informal self-employed from one generation to the next:

A Constrained Choice or better Income Prospects? Evidence from

Seven West-African Countries

Laure Pasquier-Doumer

• 4. Integration of Formal and Informal Sectors in Craft Villages of the

Red River Delta (Vietnam) Sylvie Fanchette & Nguyen Xuan Hoan

• 5. Social Insurance and Informal Economy in Vietnam: The Challenge
• f a Universal Coverage

Paulette Castel

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PAR ART T 2 2 ECONO CONOMIC, INS INSTIT ITUT UTION IONAL L AND AND SOCIA OCIAL L CONS CONSTRAIN RAINTS

• 6. Efficiency of Informal Production Units and its Determinants:

Applying the Quantile Regression Method in the Case of Antananarivo

Faly Rakotomanana

• 7. Estimating the Returns to Education in Cameroun Informal Sector

Pierre Nguetse Tegoum

• 8. Does Corruption Matter for Informal Sector Economic Performance?

Microdata Evidence from Sub-Saharan Africa Emmanuelle Lavallée & François Roubaud

• 9. Does forced Solidarity Hamper Entrepreneurial Activity? Evidence

from Seven West-African Countries

Michael Grimm, Flore Gubert, Ousman Koriko, Jann Lay & Christophe Jalil Nordman

• 10. The Political Economy of Micro Entrepreneurship: Why Does

Microcredit Fail to Promote Self-Employment in Rural South-India?

Isabelle Guérin

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PAR ART T 3 3 MICR MICRO O MA MACR CRO O DYN YNAMI AMICS CS AND AND PO POVERT VERTY Y

• 11. Micro analysis of formal-informal nexus in Madagascar: job

transitions and earnings dynamics Christophe Jalil Nordman, Faly Rakotomanana & François Roubaud

• 12. Do limits exist to informality growth in South America?

A preliminary exploration Francisco Verdera

• 13. Long term dynamic of the labour market in Thailand: transitions

between the formal and informal sectors Xavier Oudin

• 14. Dynamics of informal microenterprises and poverty in Peru:

A panel approach Javier Herrera & Nancy Hidalgo

• 15. Informality, crisis and public policies in Vietnam

Jean-Pierre Cling, Mireille Razafindrakoto & François Roubaud

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Methodological Inovations

 Panel surveys  ad hoc protocol for impact evaluation (Gubert et Roubaud, 2003 &

2011). Extentions

 Farm Informal Sector  Formal Household Businesses  Micro-entreprises

Integration of the Informal Sector into the National Accounts

Preliminary comment : up to date, no one can say for any country

Did informal sector production increase or decrease over time? (Which deflator? Cf. SESE)

Macro

 Informal Sector and economic dyanmics : pro or contra-cyclical? (jobs,

production, productivity)

 Monitoring &, evaluation (policies, programmes, projects)

Micro

 Job transitions on the LM

• Are informal sector workers trapped in informality?
• Are informal sector jobs a step to better jobs?

 Earning dynamics (and formal/informal gap)

• Is there a monetary penalty to informal sector jobs?
• Are some IS jobs better paid? If yes, which?
• Does the formal / informal earning gap vary along the earnings distribution

Declination: IS heterogeneity

37 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1995 1996 1997 1998 1999 2000 2001 2002 2004 2006 2010 2012

Secteur informel Secteur privé formel Entreprises franches Secteur public

Growth Growt

• wth

Cris isis Cris isis

2002 2004 Agricultural 86.2 2.6 11.2 100 Formal employment (Non-Farm) 6.3 75.4 18.4 100 Informal employment (Non-Farm) 17.6 11.6 70.8 100 Total 61.1 14.8 24.1 100 Agriculture (Non-Farm) Formal (Non-Farm) Informal Total 2002 2006 Agricultural 82.8 3.9 13.3 100 Formal employment (Non-Farm) 6.7 74.4 19.0 100 Informal employment (Non-Farm) 20.8 12.1 67.1 100 Total 59.6 15.6 24.8 100 2004 2006 Agricultural 88.3 2.6 9.1 100 Formal employment (Non-Farm) 7.8 76.3 16.0 100 Informal employment (Non-Farm) 18.4 11.2 70.3 100 Total 59.6 15.6 24.8 100

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5,883 obs. 2001 2000 Not Working FS Wage Workers IS Wage Workers Self- employed Total Not Working 72.2 9.6 4.6 13.6 100 Formal Sector Wage Worker 8.6 79.0 5.4 7.0 100 Informal Sector Wage Worker 15.1 26.0 30.2 28.7 100 Self-employed Worker 16.6 10.0 7.7 65.7 100 Total 32.9 32.1 7.6 27.4 100 2004 2002 Not Working FS Wage Workers IS Wage Workers Self- employed Total Not Working 64.4 14.3 3.6 17.7 100 Formal Sector Wage Worker 9.4 73.9 6.5 10.2 100 Informal Sector Wage Worker 16.9 24.6 30.0 28.5 100 Self-employed Worker 16.0 11.4 7.5 65.1 100 Total 30.9 29.8 7.8 31.5 100

in % Hanoi Ho Chi Minh City Economic activity ty Stop activity No info Stop activity No info Manufacturing 13.1 5.7 26.1 12.6 Trade 12.5 4.4 18.8 9.8 Services 17.1 9.2 20.0 11.5 Total IHB 14.7 6.8 21.0 11.2 Total FHB 12.4 8.4 13.9 9.5 Total 14.2 14.2 7.1 7.1 19.2 19.2 10.7 10.7

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Source: HB&IS survey, Hanoi and HCMC, 2007 & 2009, GSO-ISS / IRD-DIAL; authors' calculations.

High mortality rate. 14% in Hanoi and 19% in HCMC. + not found (if they stopped activity  21% in Hanoi & 30% in HCMC) The bigger the HBs are, the less vulnerable they are.

• r HBs which manage to survive can increase their size.

Mortalit ity rate , 2007 07-2009 2009

Formalisation rate Informalisation rate Economic activity (2007) Hanoi HCMC Hanoi HCMC Industry 4.5 9.5 25.4 9.0 Trade 10.9 12.9 26.1 10.6 Services 7.7 8.5 47.3 26.1 Total HBs 8.3 10.2 31.1 15.3

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At the micro level: High mortality rate (14% in HN, 19% in HCMC)… ... And important transitions between formal/informal sectors corresponding to an informalization process Source: HB& IS Survey 2007, 2009

Evolution of failure, creation and survival rates of IPUs 2002-2010 (%)

Average 2002/ 2010 2003/ 2002 2004/ 2003 2005/ 2004 2006/ 2005 2008/ 2007 2009/ 2008 2010/ 2009 Mortality rate

35.4% 31.0% 34.8% 39.5% 37.9% 35.9% 36.1% 35.2%

Creation rate

38.0% 40.8% 37.9% 40.7% 40.4% 36.9% 37.3% 36.8%

Survival rate

64.6% 69.0% 65.2% 60.5% 62.1% 64.1% 63.9% 64.8% Source: ENAHO 2002-2010, INEI ; authors’ calculations. Note: The data is missing for 2007/2006 because of a new survey design implying a total renovation of the panel.



The 1-2-3 survey can serve as a base to elaborate ad hoc protocoles of impact evaluation: – Whatever the method: RCT, quasi-experimental (double- difference, before/after, cross section matching, etc.) – Identification of control group (always); of treated group (possible)…

 Advantages :

– Economies of scale and comparative advantage – Institutionalisation, Public Good (NSO) – Costs

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Main conclusions:

• Predominant weight of informality (informal sector/employment)
• Similarities between developing countries
• Low skills and precarious jobs
• Poor working conditions and low incomes
• Small production units
• Lack of integration into the formal economy, etc.

 Does the informal sector mainly absorb surplus labour ?  Should we promote or eradicate the informal economy?  Informality is here to stay

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Three general objectives: 1- Favour formalisation of the informal sector 2- Support to informal sector (in particular women headed) 3- Promote universal social protection Tradeoffs: assistance to the informal sector will reduce its formalisation

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 Recognition, monitoring of the informal economy 1 - Adoption of official definitions (ILO recommendations): policies, voice 2 - Measure and regular monitoring (surveys, integration into national accounts) 3 - Evaluation of the impact of policies  Transparency and simplification of bureaucracy 4 - Simple rules for registration (the same for all informal enterprises) 5- Uniform tax rate for all informal enterprises (low tax rate)  Targeted policies 6 - Financial institutions and micro-finance towards the informal sector 7 - Targeted training programmes (vocational training, business literacy…) 8 - Promotion of professional networks for the informal sector 9 - Extension of social protection scheme (universal coverage) 10 – Reduction of Informal employment in the Formal sector by associating stakeholders in the fixation of compulsaory contribution

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SOME ILLUSTRATIVE RESULTS

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Sources: Phase 1 of 1-2-3 Surveys: EESI (2005), Madagascar (2001), PARSTAT (2001-2003) and HB&IS Survey, Hanoi (2007) & Ho Chi Minh City (2008), GSO-ISS/IRD-DIAL; Authors’ calculations.



Note: this table considers only main jobs.



Time related underemployment is the % of the labour force working less than 35 hours a week and wanting more hours.

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Vietnam Cameroon Madagascar WAEMU Hanoi HCMC Douala Yaoundé Antananarivo 7 cities Employment by institutional sector (excl. agriculture) Public sector 32.9 20.4 6.9 17.8 11.3 8.9 Formal private sector 31.5 44.6 21.1 13.6 38.2 16.1 Informal sector 34.5 34.1 72.0 68.6 50.5 75.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 Unemployment rate 3.0 3.5 12.6 14.8 4.5 11.8 Time related under-employment 1.6 1.1 14.9 11.0 14.6 14.3

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The informal sector is not only an urban phenomenon (second employer after agriculture in rural areas; diversification strategy) The informal sector is here to stay (whatever the growth prospects)

Democratic Republic of Congo Kinshasa Urban Rural National All Public Administration 1.7 3.7 1.5 1.8 Formal Private Sector 9.2 5.1 1.5 2.0 Informal Sector 89.2 91.2 97.0 96.2 Total 100 100 100 100

Cameroon

Douala Yaounde Urban Rural National All Public Administration 0.6 2.6 1.7 0.6 0.9 Formal Private Sector 24.7 27.7 23.8 5.4 10.5 Informal Sector 74.7 69.7 74.4 94.0 88.6 Total 100 100 100 100 100

Source: 1-2-3 Surveys. Phase 1 (labour force survey). Kinshasa (2004). national (2005) and EESI 2005.

Any employment policy for youth = employment policy for youth in the IS

Distribution of Employed Young Workers (15-24 years old) by Institutional Sector in Congo (Dem. Rep.) and Cameroon, 2005 (%)

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The major part of formal sector job is informal employment

Non farm employment by type of job and sector

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Informal job in informal sector Informal job in formal sector Formal job in formal sector Formal job in informal sector

Source: Herrera et al. (2011), DIAL/WIEGO. 1-2-3 Surveys. Phase 1 (labour force survey).

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Example of Vietnam: Informal employment: a predominant share of employment (80% of the total); a massive share of employment in private enterprises; a significant share of employment even in the public sector) Source: LFS 2007, 2009, 2010; authors’ calculations

Number Structure Institutional sector (1,000) (%) Public sector FDI enterprise Domestic enterprise Formal HB Informal sector Agriculture 2007 37 705 81.9 12.3 17.2 52.9 48.0 100 99.0 2009 38 288 80.5 12.6 12.9 48.0 51.6 100 98.6 2010 39 539 79.1 9.2 11.4 38.0 52.5 100 98.5

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Vietnam Cameroon

Madagascar

WAEMU Hanoi HCMC Douala Yaoundé

Antananarivo

7 cities

Perspective of formalisation

Ready to register 16.3 19.4 24.5 20.9 42.1 34.7 Ready to pay taxes 25.7 25.1 20.0 26.0 59.7 46.0

Perspectives for the future of the IHB

Believes that the enterprise has a future

42.2 30.9 64.0 70.6 60.4 83.1

Wish to see children take

• ver the enterprise

19.5 17.2 39.8 43.5 37.1 65.2



Sources: Phase 1 of 1-2-3 Surveys: EESI (2005), Madagascar (2001), PARSTAT (2001-2003) and HB&IS Survey, Hanoi (2007) & Ho Chi Minh City (2008), GSO-ISS/IRD-DIAL; authors’ calculations.

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West Africa: 82% job creations in the informal sector, for 48% of job aspirations. The public sector, which created virtually no jobs in the two years preceding the survey (less than 4% of new jobs), still the target of 27% of young people's aspirations (in line with job satisfaction).

Youth's job aspirations

Cotonou Ouagadougou Abidjan Bamako

Jobs wanted Jobs created Jobs wanted Jobs created Jobs wanted Jobs created Jobs wanted Jobs created

Public sector 34 5 38 9 26 2 39 4 Formal private sector 18 13 20 15 26 16 16 10 Informal sector 48 82 42 76 48 82 45 86 Total 100 100 100 100 100 100 100 100

Niamey Dakar Lome Total

Jobs wanted Jobs created Jobs wanted Jobs created Jobs wanted Jobs created Jobs wanted Jobs created

Public sector 33 12 16 4 20 3 27 4 Formal private sector 20 15 33 17 24 10 25 14 Informal sector 47 73 51 79 56 87 48 82 Total 100 100 100 100 100 100 100 100

Yaounde Douala Kinshasa Antananarivo

Jobs wanted Jobs created Jobs wanted Jobs created Jobs wanted Jobs created Jobs wanted Jobs created

Public sector 19 13 29 4 23 8 30 5 Formal private sector 23 29 31 32 43 14 48 44 Informal sector 56 58 40 64 34 78 22 51 Total 100 100 100 100 100 100 100 100

Sources: De Vreyer and Roubaud (2012). 1-2-3 Surveys; authors’ calculations.

The new generations are heading for serious disappointment, which, if not corrected, could generate major social unrest

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Dete Determi minant nants

• f
• f

Regist gistration tion

Cling J.-P., Razafindrakoto M., Roubaud F. (2012), “To be or not to be registered? Explanatory factors behind formalizing non-farm household businesses in Vietnam”, Journal of the Asia Pacific Economy, 17(4): 632- 652.

 The law concerning registration of household businesses is fuzzy:

• Law not transparent and variable thresholds
• Most household businesses believe they do not have to register;

 Analysis based on representative surveys conducted in Hanoi and

HCMC with household businesses (both formal and informal).

 Most of the informal businesses operate « illegally » (70% to 95 %

according to our estimates).

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Hypothesis: Income threshold applies to: H1- all kinds of HBs H2- HBs at home or with professional premises H3- only HBs with professional premises Hanoi % of IHBs that should be registered Manufacturing 95.9 90.0 7.3 Trade 93.1 60.3 21.8 Services 96.0 65.7 13.0 Total IHB 94.9 68.1 15.2 Ho Chi Minh City % of IHBs that should be registered Manufacturing 95.4 93.8 6.0 Trade 93.4 64.0 16.0 Services 98.6 65.6 11.1 Total IHB 95.4 71.3 11.6

 This is not deliberate: 72 % of IHBs in Hanoi and 79%

in HCMC consider it is not compulsory to register.

 Two main categories of household businesses:

• entrepreneurs who set up in business out of choice are

more inclined to become formal;

• those who set up in business for want of a wage-

earning job are caught in an « informality trap ».

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Reaso asons ns why y not regi gistere tered d

Too complica- ted Too expensive Registra- tion in progress Not com- pulsory Don’t know if have to register Don’t want to cooperate with State Other

TOTAL Manufacturing 1.0 0.8 0.5 66.5 25.5 2.1 3.6 100 Trade 2.8 0.6 2.0 69.3 18.2 2.7 4.4 100 Services 1.0 0.6 0.2 76.5 14.1 2.0 5.7 100 Total IHB 1.7 0.6 0.9 72.0 17.7 2.3 4.8 100 Manufacturing 1.3 0.3 0.6 83.0 4.9 0.0 9.8 100 Trade 0.9 2.0 1.7 75.1 9.3 0.0 11.1 100 Services 0.4 1.7 1.2 80.1 7.1 0.2 9.4 100 Total IHB 0.8 1.5 1.2 79.1 7.3 0.1 10.0 100

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Main advanta ntage of registeri tering ng busine ness

Access to loan Access to market place Sale to large firms Adver- tising Face less corruption Other No Advantage Total

Hanoi Manufacturing 8.9 13.2 4.8 2.4 29.5 2.2 39.0 100 Trade 5.0 10.2 4.3 0.6 32 .1 1.8 46.0 100 Services 4.9 8.7 1.5 1.1 33.2 5.0 45.6 100 Total IHB 5.7 10.0 3.2 1.2 32.1 3.3 44.5 100 Total FHB 3.3 14.9 6.7 1.9 69.7 0.5 2.8 100 Total HB 5.2 11.0 3.9 1.3 39.4 2.8 36.4 100 HCMC Manufacturing 3.1 13.2 5.5 1.2 29.4 10.1 37.4 100 Trade 4.3 11.8 2.9 0.3 23.2 5.1 52.5 100 Services 2.3 7.6 0.7 0.4 30.6 5.8 52.6 100 Total IHB 3.1 10.2 2.5 0.5 28.0 6.5 49.2 100 Total FHB 3.9 15.4 5.0 0.7 56.6 4.8 13.7 100 Total HB 3.3 11.5 3.1 0.6 35.2 6.1 40.2 100

64

(5) (6) (7)

Reason for setting up HB (ref.: no job as wage worker) Reason: to get higher income 0.1 0.1 (1.128) (0.983) Reason: to be independent 0.5*** 0.5*** (5.330) (5.408) Reason: family tradition or other 0.2* 0.2* (1.766) (1.817) Characteristics of HB head Female

• 0.1*

(-1.915) Education: lower secondary (ref.=primary) 0.3** (2.260) Education: upper secondary (ref.=primary) 0.6*** (5.478) Education: university (ref.=primary) 0.8*** (5.861) Migrant

• 0.4**

(-2.147)

65

• Education : The most well-educated are more inclined to register (better

informed, more able to handle the procedures and more ambitious

• Reasons why the HBs were set up :

* Businesses set up to be independent or to follow a family tradition display a greater probability of being formal. * Those set up for lack of an alternative (for want of a wage job) or to make extra income  do not see as a real ‘business’ but as an ‘auxiliary’ activity. The number of years in business apparently has no impact on registration (HBs are stuck in an ‘informality trap’). Migrants (more vulnerable & less confident) less likely to register their HBs. Micro firms’ dynamics (like formalization and economic performance) are highly dependent on the reason for setting up the business: the more it is a real choice (and the less a constraint), the more the HB is economically efficient

 The « legalist » approach partially refuted in the case of

Vietnam (IHBs are unaware of the regulations)=IHBs fail to register because of ignorance.

 However, not registering can also be an advantage: they avoid

taxes and certain regulations (but they believe registering would reduce corruption).

 Policy implications: increase transparency and simplify

regulations for formalization (not perceived as being difficult); put in place formalization incentives.

66

Razafindrakoto M., Roubaud F., Wachsberger J.-M. (2014), “Working in the informal sector: a free choice or an obligation? An analysis of job satisfaction in Vietnam”, in Cling J.-P., Lagrée S., Razafindrakoto M. et Roubaud F. (eds.), op. cit., Chapter 2, Routledge: London and New York, pp.50-73. Razafindrakoto M., Roubaud F. (2013), “Job Satisfaction in Eight African Cities”, in De Vreyer P., Roubaud F. (eds.), Urban labor Markets in Sub-saharan Africa, Africa Forum Series, AFD/World Bank, Washington D.C: The World Bank, Chapter 3, pp.109-134.

JOB JOB SA SATISF TISFACTION CTION

68

Two competing views on the Informal Sector (IS):

• 1. Exclus

clusion ion (dualism) The IS is a constraint choice: bad jobs, labour market segmentation, queuing for formal sector jobs

• 2. Exit

it The IS is a voluntary choice: pecuniary or non pecuniary reasons

(autonomy, flexibility, interest, social & working relations, no advantage in formalization: low social allowance, etc.)

• Procedural utility : not only outcomes but how they are obtained

Sound nd empiri rical cal evidence ce: a mix of the two components, in different proportions depending on contextual factors (country, business cycle, type of jobs, etc.)

• The 2 views are methodologically difficult to disentangle

69

How these alternatives are addressed in the (quantitative) literature?

• 1.
• 1. Earni

rning ng gaps (formal vs. informal)

Beyond raw gap, informal jobs generate pecuniary penalty/premium Shortcomings: based on compensating differentials theory only valid with competitive labour market (no good test of segmentation; Magnac, 1991) .

• 2. Jobs dynami

mics cs

Macro level: dynamics of informal jobs with the business cycle Micro level: transition matrices, state dependence (informality trap) Shortcomings: do not say much on why people stay in the IS, or the determinants of the sectoral flows

All these works are based on indirect approaches & revealed preferences

• Our

r approach ch: : Job Satisf sfact actio ion n as a d direct ct measure ure of utility lity

In developing and emerging countries, 2 papers:

Latin America (Pages & Madrigal, 2008); Russia (Beuran, Kalugina, 2005)

70

A second strand of literature: job b satisf sfactio action/su /subje bjectiv ctive e well ell-being being

Mainly used in developed countries by various kinds of social scientists:

Psych cholo

• logist

gists: personal traits, mental balance, emotion, fulfilment, mental health Sociolog logist ists: social network, well-being at the work place (stress, working relations) Econo nomis mists ts: recent (largely overlooked, reluctant about using subjective data)

To test:

• Causes of JS: job’s outcomes; gender, age, unions, firm’s size, self-employment, etc. (

Blanchflower & Oswald, 2004; Frey & Benz, 2006)

• Consequences of JS: performance at work, labour mobility (Freeman, 1978; Oswald,

1997; Levy-Garboua, 1999; Clark, 2001)

• JS as an indicator of job quality (Clark, 2004), quality of life (Judge & Watanabe, 1993;

Warr, 1999; Easterlin, 2001 & 2003)

A A comple lex issue ue: JS depends on aspirations (time variant), psychological

traits, social interaction, peer comparisons; causality

State te of the e art

Research: JS/SWB is meaningful (Frey & Stutzer, 2002; Kahneman et al., 2003; Layard,

2005)

Statistics: To be included in all official statistical surveys (Stiglitz commission; 2009)

71

Workers in the IS the least satisfied (excl. agriculture)

Sources: Razafindrakoto, Roubaud & Wachsberger (2012); authors’s calculations based on LFS 2009. 72 47 47 49 38 29

10 20 30 40 50 60 70 80

Public sector FDI Domestic enterpr. Formal HB Informal sector Agriculture

JO JOB B SA SATISF TISFACT CTION ION

72

Public employees come first: structural or crisis effect? No significant differences between formal private sectors  Informal wage workers: the less satisfied (in line with the literature)

Level of job satisfaction by institutional sector

Source: LFS2009, GSO, authors’ calculations

70 70 49 49 45 45 47 47 30 30 19 19 31 31 0% 20% 40% 60% 80% 100%

Public Sector Foreign Enterprise Domestic Enterprise Formal HB Informal sector Agriculture Total

unsatisfied normal satisfied very satisfied Balance of satisfaction

73

Job Satisfaction (cont.)

74

 Public sector work status is considered to have the highest value  All other things being equal, wage-earner status generate less satisfaction (intrinsic value of the job = importance of autonomy)  The higher the income, the greater the individual’s tendency to express job satisfaction (with a convex effect).  Job protection matters : social security, type of contract, etc.  Workplace  intrinsic factor

• Itinerant/traveling HBs are considered as the worst (no

possibility to build social network, “judgment of the society”)

• working at home (flexibility)
• trade activity : “prestige” of owning its own business/shop

 Finally, the informal sector apears to generate less job satisfaction (in particular, compared with the public sector, foreign enterprise and formal household businesses)

Job Satisfaction

75

 Women, rural, the oldest individuals are more inclined to express job

• satisfaction.  the downward revision of these social categories’

aspirations, which leads them to be less demanding regarding their

• ccupational status.

 Social interaction: All things being equal, individuals in wealthier areas have a more negative perception of their job Prospects  More data: a need for a systematic measurement: introduce overall « Job Satisfaction » in all kind of surveys; more precise variables (different dimensions of job satisfaction; example: survey on informal sector)  More in-depth analysis: evolution of « Job Satisfaction » over-time (panel data), determinants of aspirations, interaction effect

Job Satisfaction

76

Same analysis for African countries The results validate the idea that job satisfaction is a suitable indicator of job quality, for three reasons.

• 1. Satisfaction provides a gauge of the match between jobs and individual
• aspirations. Given that a mismatch between expectations and outcomes

could create economic and social tensions, this match needs to be measured.

• 2. After controlling for the effect of aspirations, the correlations between

satisfaction and objective job characteristics indicate that individuals take these characteristics into consideration in evaluating their working conditions.

• 3. Labor market conditions (and the characteristics that capture those

conditions) vary across countries.  Different values can be placed on a given job or status depending on the circumstances in a country. reflect the intrinsic quality of a category of employment in the country studied.

Job Satisfaction

Emmanuelle Lavallée & François Roubaud (2018): Corruption in the Informal Sector: Evidence from West Africa, The Journal of Development Studies, DOI: 10.1080/00220388.2018.1438597

CORR CORRUPTION UPTION & & Inf Infor

• rmality

mality

78

Co Corr rruption tion in in th the Informa rmal l Se Sect ctor: r: questio estionnair nnaire e

79

Causes and impacts of bribery in the informal sector in West Africa.

• The magnitude of the bribes actually paid.

 contrary to popular belief, our data show that IFs in West African capital cities are not massively victims of corruption by public officials.  Only 4.2 per cent of IFs reported they had to pay bribes in the year before the survey.  This figure does not mean that corruption is an anecdotal phenomenon.  If we look solely at IFs that had contact with the State in the year before the survey, this proportion rises to 37 per cent, which makes bribery a significant means of settling disputes with public officials.

80

IPUs and public agents

Source: 1-2-3 surveys, phase 2, Informal sector, 2001-2003, National Statistics Institutes, AFRISTAT, DIAL. Own Computations

Coto tono nou Ouaga ga- dougou gou Abid idjan Bamak mako Niame mey Dakar kar Lomé Tota tal Had a problem em with th publi lic agent ents (%)

4,7 5 7 3,5 6,2 8,5 6,2 6,2

How w had it been en sett ttled? ed? Payment of a fine

43 52,8 42,9 32,2 27,7 37,3 42,9 40,3

Payment of a gift

8,6 11,6 44,7 39,6 29,9 35,7 46,9 37

Other

48,4 35,6 12,4 28,2 42,4 27 10,2 22,7

Tota tal amoun unt per r year Total Fines (in millions of CFAF)

61 62 921 68 25 137 27 1301

Avera erage ge of fines by IPU (in 1000 CFAF)

14 16 51 24 16 16 5 29

Total Gifts (in millions of CFAF)

5 29 614 164 22 156 236 1226

Avera erage ge of gifts by IPU (in 1000 CFAF)

6 40 32 51 16 17 39 31

81

82

Causes and impacts of bribery in the informal sector in West Africa.

• The determinants of the incidence of bribery

 Consider the heterogeneity of the informal sector to investigate the effect of corruption (using estimate of production function). Three categories

• top performers
• constrained gazelles, which share certain characteristics with top

performers such as education, sector choice and language skills, but are not successful;

• survivalists.

 experience of corruption increases business performance, but that this effect is driven by just one category of informal firm: constrained gazelles.

Selective references

Statistics

ILO (2013), Measuring Informality: A Statistical Manual on the Informal Sector and Informal Employment, Geneva: ILO. OECD/IMF/ILO/CIS STAT (2002), Measuring the Non-Observed Economy - A Handbook, OECD, Paris. Herrera J., Roubaud F., Suarez R. A. (Editores Científicos) (2004), El sector informal en Colombia y demás países de la Comunidad Andina, DANE, Bogota, Colombia, 217p.

Economic analysis

Books Cling J.-P., Lagrée S., Razafindrakoto M., Roubaud F. (eds) (2014), The Informal Economy in Developing Countries, Routledge: London/New York, 332p. De Vreyer P, Roubaud F. (eds) (2013), Urban labor Markets in Sub-Saharan Africa, Africa Forum Series, AFD/World Bank, Washington D.C: The World Bank, 408p. Roubaud F. (1994), La economía informal en México: de la esfera doméstica a la dinámica macroeconómica, Fondo de Cultura Económica, México, 484p. Papers Lavallée E., Roubaud F. (2018), “Corruption in the informal sector: evidence from West Africa”, The Journal of Development Studies [DOI: 10.1080/00220388.2018.1438597] Grabrucker K., Grimm M., Roubaud F., (2018), “The informal sector in sub-Saharan Africa: a comparative perspective”, in Fourie F. (ed), in The South-African Informal Sector: Creating Jobs, Reducing Poverty, Chapter 3, Johannesburg: HSRC Press. Demenet A., Razafindrakoto M., Roubaud F. (2016), “Do Informal Businesses Gain From Registration and How? Panel Data Evidence from Vietnam”, World Development 84:326-341. Cling J.-P., Razafindrakoto M., Roubaud F. (2014), “Segmentation and informality in Vietnam: A Survey of

• Literature. Country case study on labour segmentation”, Condition of Work and Employment Series, No

52, ILO: Geneva. website: www.dial.prd.fr