globalization and informal jobs in developing countries
DESCRIPTION
This study presents an overview of current research on the relationship between trade globalization and informal jobs in developing economies. Based on existing academic literature and complemented by new research by the ILO and WTO, this report discusses the impact of trade reforms on different dimensions of informal employment. Various transmission mechanisms are discussed, setting results from country studies against international comparisons. The volume analyses the policies necessary for countries with large informal economies to take advantage of trade reforms and maximize the benefits from international trade. It discusses the obstacles created by high informality rates to translating trade openness into sustainably higher long-term growth rates. The book focuses on the connections between trade, labour and social policies, creating conditions for countries to successfully integrate into the world economy. It will be of interest to all those who are involved in this debate, in particular trade specialists, economists, policy-makers, employers and trade unions.TRANSCRIPT
Globalisation and informal jobs in developing countries
Marc Bacchetta, WTO
Ekkehard Ernst and Juana P. Bustamante, IILS (ILO)
MOTIVATION
“Addressing informality is not only a matter of concern
for social equity. It also helps to improve a country’s
efficiency, as the informal economy constitutes a drag
on the capacity to foster high value-added production
and compete in the world economy. Reducing the size
of the informal economy is therefore a key policy
objective from a developmental perspective.”
OUTLINE
•Informality: Key concepts and facts
•Trade opening and the informal economy
•Consequences of informality for trade and
growth
•Policies
•Open issues
I
Informality: Key concepts and facts
The informal economy comprises...
• Remunerative work that is not recognized, regulated or protected by existing legal or regulatory frameworks– Plus non remunerative work in income producing
enterprises
• Informal employment in both informal and formal enterprises– Self employment and wage employment – Employers and employees
• Small productive firms operated by entrepreneurs and survival activities– Independent or subordinated to larger (formal) firms
This diversity is reflected in a heterogeneity of views
• The dualist school focuses on survival activities– informal sector is the residual of a dual labour market
with no direct link to the formal economy…– … and it exists because the performance of the formal
sector is too weak
• The structuralist school focuses on the interdependence– informal economy comprises small firms subordinated to
larger ones
• The legalist/orthodox school focuses on small entrepreneurs– Informal economy comprises micro-entrepreneurs who
prefer to operate informally to avoid the costs associated with registration and regulations
A unifying approach is emerging
• All 3 approaches can claim validity in explaining parts of the informal economy
• Informal economy comprises different segments populated by different types of agents:– households engaged in survival activities,
– micro-entrepreneurs, and
– workers or firms subordinated to larger formal firms
• The relative size of each of these segments varies by region and country
• Challenge: measuring relative size and explaining the transitions
The informal economy is large and in many countries it has been growing
50.1
78.3
60.9
52.8
68.5
63.6
52.2
78.2
55.7
0
10
20
30
40
50
60
70
80
90
Latin America Asia Africa
Info
rmal
em
ploy
men
t (in
%)
Early 1990s Late 1990s 2000s
Source: IILS estimates based on the IILS Informality Database.
II
Trade opening and the informal economy
Empirical evidence on the effect of trade opening
• Early evidence for Morocco, Mexico and Egypt tends to suggest that trade liberalization pushes workers towards low-paid temporary work, or informal salaried work
• Colombia (2003): trade variables have a significant effect on the probability of informal employment but the effect is small in magnitude– A 1% reduction of the tariff raises the probability of informality
by 0.1%
• India (2005): anecdotal evidence of increased subcontracting following liberalization
• Brazil (2007): weakly significant increase in informal employment following trade liberalization
Is scarce and mostly country specific
• Brazil (2003, 2005): no significant relationship between the probability of informal employment and tariffs, import penetration or export orientation
• Mexico (2006): reductions in tariff (NAFTA) reduce significantly the likelihood of informality in the tradables sector
• Only one multi-country study (2008) with mixed results– Results differ depending on the type of informality data used
and on the econometric framework
..but labour market characteristics seem to matter.
• Colombia (2003): tariff cuts increase informal employment only in the presence of badly-designed labour regulations
• Brazil (2007): effect of trade liberalization is less important than effect of labour market legislation
Evidence on wages is even more limited and it is also mixed
• India (2003): – Informal real wage has grown between the pre- and the
post-reform period– Results support the idea that trade liberalization raised
informal wages in manufacturing via capital reallocation from the formal to the informal sector
• Brazil (2005): some evidence that opening narrowed the formal-informal wage gap
• Mexico (2006): trade opening widened the formal-informal wage gap– In line with the finding of an increase in the skill premium
in the literature on the distributional effect of trade reforms
Effect of globalization on informality
100
49.9
8.4
8.52.3
4.9
26.0
-40
-20
0
20
40
60
80
Economicdevelopment
Tradeopenness
Tradereforms
Geographicaldistance
Foreign directinvestment
Other factors Total
Fac
tor
cont
ribut
ions
(in
%)
III
Consequences of informality for trade and growth
Informality is associated with lower GDP growth...
• Informal employment is associated with lower economic performance of a country
0
1
2
3
4
Low Medium High
Ave
rage
per
cap
ita
grow
th r
ate
(in %
)
Average rate of informal employment
...as export chances are diminished…
• Export performance suffers from a concentration on a limited number of products and services– Almost 40% of observed export concentration can be associated with large informality
rates
15.0 0.2
44.3
38.7
1.8
100
-80
-60
-40
-20
0
20
40
60
Manufacturing share
Population growth Trade reforms Informality rate GDP growth Total
…adjustment processes are impaired…
Formal employment
Informal employment
No job
65.542.1
85.5
19.7
7.1
18.2
38.2
• Persistence in informality is high– Chances for upward mobility are low, while risk of downward
mobility is high in informal jobs
…and lack of skills pervasive
• Low-skilled workers dominate the informal economy
61.664.2 65.1
37.140.5
42.9
10.1 11.0 11.9
0
10
20
30
40
50
60
70
1996 2001 2005
Inci
den
ce o
f inf
orm
ality
by
skill
leve
l (in
%)
Low-skilled workers Intermediate skilled workers High-skilled workers
Informality makes developing countries more vulnerable …
Low Medium High
Average rate of informal employment
Fre
qu
en
cy
of
cri
sis
High
Medium
Low
• Frequency of crisis increases with informality– Countries with large informal economies are hit by shocks more
often and have lower sustainable growth rates
…countries have less resources to secure against shocks
• Policy space is reduced with larger informal economies– Countries have less fiscal resources to insure against external shocks…– …and to invest in higher sustainable growth rates– Automatic stabilisers are less effective– Investment in proper public infrastructure (transportation, education, etc.) is limited
• Informal sector firms are typically small, with little resources to support shocks and to grow– Small firm size lowers potential to increase productivity…– …and to trade internationally
IV
Policies
Supporting informal workers through the Decent Work Agenda
• Support social protection– A basic social floor helps workers in the informal economy
– This can improve their bargaining position,…
– …avoids exploitation in informality,…
– …and procures basic insurance against individual risks.
• Enforce core labour standards– Core labour standards can create level playing field across the
economy
– For instance: Minimum wages spill over to informal wages…
– …and can help lowering the size of the informal economy
Facilitating adjustment and transition to formal jobs I
• Develop active labour market policies– Extend public employment services also to the informal
economy
– Job search and matching can be improved when informal workers are being reached as well
• Focus on education, also in the informal economy– Improved education and skills is key for workers to find formal
jobs
– Vocational training systems in the informal economy can provide additional policy leverage
Facilitating adjustment and transition to formal jobs II
• Strong social dialogue between employers and workers helps...– ...in the design of measures
– ...extend the reach to the informal economy
• Reform product markets and enhance governance– Eliminate red tape and improve governance to lower entry
barriers and stimulate firm growth
– Well-designed taxation helps job creation in the formal economy
Promoting employment-friendly trade
• Carefully designed trade reforms– Credible announcement of reform path
– Gradual implementation
– Country-specific trade reforms
• Support trade– Aid-for-trade initiative: Least developed countries need support
to export diversification and export development
• Exploit complementarities– Countries reap greater benefits from trade opening when labour
markets allow better adjustment of jobs across sectors.
– Coordination of trade and labour market reforms
V
Open issues
Issues for future analysis
• Enhancing policy complementarities between trade reforms and decent work– Is there an optimal reform path to exploit complementarities
between trade and labour market policies?
– How can trade policies be designed to support the efforts to formalize the labour market?
– What is the role of initial country conditions?
• The role of agriculture– How can well-designed trade reforms and development policies
help exploit the agricultural potential in developing countries?
• Economic resilience– How can trade and labour market policies by complemented to
reduce a country’s vulnerability to shocks?