It’s no surprise that the informal sector has been hit hardest during the pandemic

By Alessia Destefanis, Tetsushi Sonobe, Dil Rahut and Jeetendra Prakash Aryal

The informal sector: a major source of livelihood

The informal sector, which employs over 62% of the world’s population, is a fundamental source of income for more than two billion people (ILO 2020). Here, “employment” includes self-employment, and the informal sector refers to that part of the economy that is generally not controlled by a tax authority or other forms of government.

Before the coronavirus disease (COVID-19) epidemic, the informal sector represented 87.7%, 51.5% and 55.7%, respectively, of the population in low-, middle- and high-income countries (ILO 2018a ). The proportion was particularly high in low-income countries (ILO 2018b). A large variation in the share of the total population employed in this sector was observed between regions in 2018 (Figure 1), with shares of 84% in sub-Saharan Africa and 82% in South Asia, but 29% in Europe and Central Asia and 13% in the countries of the Organization for Economic Co-operation and Development (OECD).

Temporary construction workers, day laborers, housekeepers, small vendors and tour guides were among the most common informal employment activities. Figure 2 shows that as the level of education increases, the percentage of the population employed in the informal sector decreases considerably. Employment in the informal sector is concentrated in rural areas: around 90% are in the informal sector in the agricultural sector, against only 57% in the industrial sector and 47% in the service sector. The percentage of women in the informal sector is lower than that of men (63% men and 58% women), and the composition shows that 45% are self-employed or self-employed, 36% are employees and only 3% are self-employed. employers.

Both self-employment and paid employment in the informal sectors generally do not require registration, and the skills and investments required are minimal. Therefore, it is relatively easier to enter and exit this sector, mainly for those with very low levels of education, training and other economic resources. Nonetheless, informal sector workers in developing countries have been outside the scope of labor laws, insurance, pensions, retirement benefits, and social protection schemes (Narula 2020).

In addition, wages and returns have generally been low and experienced great variability (Binelli 2016; Meghir, Narita and Robin 2015). Combined with a lack of endowments and savings, individuals in the informal sector have been socially vulnerable and faced the constant challenges of exploitation, health shocks and retirement issues (Gidwani 2015). Not all individuals in the informal sector are poor and vulnerable; it is important to recognize the existence of socio-economic heterogeneity.

The informal sector has suffered the most from the COVID-19 pandemic

It is not surprising that the informal sector has been hit hardest during the pandemic. The COVID-19 outbreak has led to the collapse of precarious health systems and increased poverty due to widespread job and income losses.

Figure 3 shows that bottlenecks and declines in economic activities have severely affected 47% of the two billion people dependent on the informal sector. It further shows how the pandemic has impacted most individuals in the informal sector in low- and lower-middle-income countries. As a result of this pandemic, poverty will increase, making it difficult to achieve the Sustainable Development Goals by 2030: in 2020, 131 million more people fell below the poverty line, and 797 million will remain in poverty by 2030 (United Nations 2021).

Nonetheless, global poverty could be even worse in the future as COVID-19 continues to ravage the world and the response takes longer than expected. Globally, casual or temporary salaried workers and even regular workers have lost their jobs regardless of industry, location, education or social standing. Among them, people working in tourism, hotels, restaurants and construction, as well as those employed as food vendors, have been the hardest hit by the blockages (Ferreira dos Santos et al. 2020).

Additionally, COVID-19-related job losses could increase gender inequalities, as women are less likely than men to return to their pre-COVID-19 livelihood and employment levels (Agarwal 2021; Dang and Viet Nguyen 2021). Thus, in developing countries, the lives and livelihoods of informal sector households, especially those headed by women, are threatened by the pandemic.

Go forward

Globally, the immediate response to COVID-19 has been to maintain social distancing and contain the virus with lockdown measures. In the informal sector, this individualistic approach has either crippled economic activities, endangered livelihoods, or failed to protect individuals, endangering lives and, therefore, calling for the next response by creating a safety net. social Security. Although some developing countries have social safety net programs, their implementation has often been crippled by inefficient public delivery systems that suffer from a lack of transparency (Chakrabarti, Kishore and Roy 2016). This is hardly surprising: it is very difficult for the government to reach vulnerable groups as most of them are in the informal sector, about which, by definition, the government has little knowledge.

However, some notable successes have emerged recently. For example, Pakistan’s Ehsaas (which means ‘compassion’ in Pakistani) is a very large social protection program that was created a year before the COVID-19 outbreak and has proven to be excellent during the pandemic. The Mahatma Gandhi National Rural Employment Guarantee Scheme has also emerged as a successful program and aims to improve the livelihood security of rural people in India by guaranteeing 100 days of paid employment in a fiscal year to rural households. whose adult members volunteer to perform unskilled manual labor. .

Digitization, transparency and accountability, integrity policy, impartiality, political neutrality, avoidance of fragmentation, regular monitoring and evaluation are key ingredients for the success of social safety net programs .

National resilience capacities are not equally developed in the world. As a result, in the absence of any social insurance coverage, many informal workers in low income areas have entered what is called the poverty trap. In addition, limited resources and competing priorities make the situation difficult for low-income countries. To integrate the informal sector into the traditional economy, the Indian government launched on July 22, 2019 the National Pension Scheme for Traders and Self-Employed Workers (Vikaspedia 2021).

It is therefore clear that a sustainable and equitable recovery is needed to limit further inequalities. In light of the fundamental role played by the informal sector for livelihoods and local economies, it is imperative to design and invest in transparent, effective and well-targeted public safety nets and insurance systems. Public distribution networks need to be made more resilient to shocks, and food supply chains need to be more responsive to meet varying demand (Singh et al. 2021).

Attention should also be paid to building up public / private retirement or pension funds financed by individuals. Governments should enhance informal livelihoods by protecting them and including them in economic development plans at national and local levels. Combined, these initiatives can help to better cope with both idiosyncratic and covariate risks while simultaneously integrating the population engaged in the informal sector into the economic life of a country.

The advent of digital technology has helped to improve registration processes, transparency, monitoring and evaluation, thereby improving the effectiveness of the social safety net program. Therefore, the use of digital technology with financial inclusion policies ranging from inclusive insurance and pension plans to improving financial literacy has helped to develop and implement the registration process, the transfer of money and the provision of other public services quickly and without corruption.

(Source: https://www.asiapathways-adbi.org/)

The references:

Agarwal, B. 2021. Livelihoods in the Age of COVID: Gender Perils and New Pathways in India. Global Development 139: 105312.

Binelli, C. 2016. Wage Inequalities and Informality: Evidence from Mexico. IZA Journal of Labor & Development 5: 5.

Chakrabarti, S., A. Kishore and D. Roy. 2016. Arbitration and Corruption in Food Subsidy Programs: Evidence from India’s Public Distribution System.

Dang, H.-AH and C. Viet Nguyen. 2021. Gender inequalities during the COVID-19 pandemic: income, expenses, savings and job losses. World Development 140: 105296.

Ferreira dos Santos, G., LC de Santana Ribeiro and R. Barbosa de Cerqueira. 2020. The informal sector and the economic impacts of Covid-19: the case of Bahia, Brazil. Regional Science Policy and Practice 12: 1273–1285.

Gidwani, V. 2015. Waste work: inside the Indian sub-economy. Transactions of the Institute of British Geographers 40: 575-595.

International Labor Organization (ILO). 2018a. Informality and atypical forms of employment. Prepared for the G20 Employment Working Group meeting in Buenos Aires. Geneva, Switzerland.

ILO. 2018b. Women and Men in the Informal Economy: A Statistical Table. Third edition. Geneva, Switzerland: ILO.

ILO. 2020. COVID-19 crisis and the informal economy: immediate responses and policy challenges. Geneva, Switzerland: ILO.

Loayza, N., and C. Meza-Cuadra. 2018. A Toolkit for Informality Scenario Analysis. Washington, DC: World Bank.

Meghir, C., R. Narita and J.-M. Robin. 2015. Wages and informal in developing countries. American Economic Review 105: 1509-1546.

Narula, R. 2020. Opportunities and Policy Challenges of the COVID-19 Pandemic for Economies with Large Informal Sectors. Journal of International Trade Policy 3: 302-310.

Singh, S., R. Kumar, R. Panchal, et al. 2021. Impact of COVID-19 on logistics systems and food supply chain disruptions. International Journal of Production Research 59: 1993-2008.

The United Nations. 2021. World Economic Situation and Prospects 2021. New York: United Nations, Department of Economic and Social Affairs.

Vikaspedia. 2021. National pension scheme for traders and self-employed workers Yojana (Pradhan Mantri Laghu Vyapari Maan-dhan Yojana).

(Alessia Destefanis is a student at the Paris School of Economics. Tetsushi Sonobe is dean and CEO of the Asian Development Bank Institute. Dil Rahut is a senior researcher at ADBI. Jeetendra Prakash Aryal is a consultant for various organizations , including the International Maize and Wheat Improvement Center (CIMMYT) and ADBI.)