World Bank Report: One-third of economic activity takes place outside the government's sight

On May 11, 2021, the World Bank Group's latest research report, "The Far-Reaching Impact of Informality: Challenges and Policies," found that a large proportion of workers and firms in emerging market and developing economies work outside the government's sight, and that if governments do not adopt comprehensive policies to address the ills of the informal sector, this problem may hinder the recovery of these economies.

The study is the Bank's first comprehensive analysis of the extent of informality and its impact on the economic recovery that supports long-term green, resilient, and inclusive development. The study found that in emerging market and developing economies, the informal sector accounts for more than 70% of total employment and nearly one-third of GDP. Its scale dwarfs the ability of these countries to mobilize the financial resources needed to boost their economies, implement effective macroeconomic policies and build human capital for long-term development during the crisis.

The report shows that the high degree of informality has weakened the policy implications of delaying the COVID-19 pandemic and boosting economic growth. Limited access to social safety nets means that many informal sector participants are neither able to afford to stay at home nor comply with social distancing requirements. In emerging market and developing economies, informal enterprises accounted for 72 per cent of services enterprises.

The report shows that the problem of informality in emerging market and developing economies can be solved. Between 1990 and 2018, informality fell by about 7 percentage points to 32 percent of GDP on average. This decline is partly reflective of the impact of policy reforms: over the past 30 years, many Governments in emerging market and developing economies have implemented policy reforms that have improved the welfare of participation in the formal sector or reduced the cost of formal sector economic activity. These include tax reforms, reforms to expand access to financial services, and enhanced governance.

The study provides policymakers in emerging markets and developing economies with five general recommendations: first, adopt a comprehensive approach, as informality reflects broad-based underdevelopment and cannot be addressed in isolation; To enable the formal sector to flourish; fifth, simplify tax regulation to reduce the cost of formal operations and increase the cost of informal operations.

"Informal workers are predominantly unskilled women and young people, according to The World Bank's Managing Director for Development Policy and Partnerships. During the COVID-19 pandemic, they are often left behind, unable to turn to the social safety net when they are unemployed or suffer severe loss of income. This analysis will help fill a knowledge gap in an under-researched area and put policymakers back on track to address informality, which is critical as we work toward a green, resilient and inclusive future. ”