Hyderabad:A strikingly large percentage of workers and firms operate outside the line of sight of governments in emerging market and developing economies (EMDEs)—a challenge that is likely to hold back the recovery in these economies unless governments adopt a comprehensive set of policies to address the drawbacks of the informal sector, a new World Bank Group study has found.
The study, The Long Shadow of Informality: Challenges and Policies, is the first comprehensive Bank analysis examining the extent of informality and its implications for an economic recovery that supports green, resilient and inclusive development in the Along-term. It finds that the informal sector accounts for more than 70 per cent of total employment—and nearly one-third of GDP—in EMDEs. That scale diminishes these countries’ ability to mobilize the fiscal resources needed to bolster the economy in a crisis, to conduct effective macroeconomic policies, and build human capital for long-term development.
In economies with widespread informality, government resources to combat deep recessions and to support subsequent recovery are more limited than in other economies. Government revenues in EMDEs with above-average informality totalled about 20 per cent of GDP—five to 12 percentage points below the level in other EMDEs. Government expenditures also were lower by as much as 10 percentage points of GDP. Similarly, central banks’ ability to support economies is constrained by the underdeveloped financial systems associated with widespread informality.
“Informal workers are predominantly women and young people who lack skills. Amid the COVID-19 crisis, they are often left behind, with little recourse to social safety nets when they lose their jobs or suffer severe income losses,”saidMari Pangestu, World Bank Managing Director for Development Policy and Partnerships. “This analysis will help to fill knowledge gaps in an understudied area and get policymakers back on track to tackle informality, which will be critical going forward as we work to achieve green, resilient and inclusive development.”
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High informality undermines policy efforts to slow down the spread of COVID-19 and boost economic growth. Limited access to social safety nets has meant that many participants in the informal sector have neither been able to afford to stay at home nor adhere to social-distancing requirements. In EMDEs, informal enterprises account for 72 per cent of firms in the services sector.