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How Productive is the Informal Sector?
By Lykke E. Andersen*,
La Paz, 25 February 2008.
“In Bolivia there are informals and there are idiots”
Luis Alberto Quiroga
The informal sector is often perceived as a sector for excluded,
un-educated, low productivity workers who cannot get a “real”
job. According to last week’s seminar on Informality in Bolivia
organized by the Superintendencia de Empresas and CAF, this
perception is quite misleading.
Fernando Landa from UDAPE presented the following table, which
shows that the informal sector in Bolivia generates about 65% of
GDP and accounts for about 67% of total employment. These
numbers are very high compared to other countries, but what is
really interesting about them is that they imply that the
informal sector is just as productive as the formal sector:
Two-thirds of workers generate two-thirds of GDP.
This is in contrast to countries like Chile, Costa Rica and
Ecuador, where workers in the informal sector on average are
only half as productive as workers in the formal sector.
(In Panamá, however, informal workers are apparently substantially
more productive than formal sector workers.)
Table 1: Measures of informality
|
Country |
Size of the informal sector
(% of GDP)
Loayza (1997) |
Size of the informal sector
(% of total employment)
ILO (2004) |
|
Bolivia |
65 |
67 |
|
Panama |
62 |
43 |
|
Peru |
58 |
56 |
|
Honduras |
47 |
56 |
|
Brazil |
38 |
46 |
|
Uruguay |
35 |
39 |
|
Colombia |
35 |
62 |
|
Venezuela |
31 |
52 |
|
Mexico |
27 |
41 |
|
Argentina |
23 |
44 |
|
Ecuador |
21 |
55 |
|
Costa Rica |
22 |
45 |
|
Chile |
18 |
39 |
Source:
(1).
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The numbers refer to different years, and there may be problems
related to differences in definitions, but even if they are
only roughly right, they are striking. Workers in the informal
sector in Bolivia have much less education and much less capital
and natural resources to work with, so it is quite impressive if
they are about as productive as workers in the formal sector.
Rolando Morales
pointed out that about 90% of all businesses in
Bolivia are informal, so it is not exactly a marginal sector.
Rather, they constitute the heart of the Bolivian economy, and
their decision to be informal is the rational decision given the
huge penalties to formality in Bolivia.
Alejandro Mercado of IISEC suggested that we stop using the
negatively loaded word “informals” and instead call them
entrepreneurs, or even heroes, because they are the ones that
make the economy work at all.
So, if the informal sector is so productive and
well-functioning, why do the people working there earn only a
fraction of what people in the formal sector earn? In urban
areas, workers in the informal sector earn only 48% of the
average income in the formal sector, despite the fact that they
work more hours per week
(2).
One explanation is that incomes are not properly measured in the
informal sector. A family which runs a little corner shop, for
example, can take out all the groceries they need without that
counting as income, and a woman that runs an informal
lunch/dinner service, makes sure to make enough food to feed the
family too.
Once we compare consumption levels instead of income levels, the
families of informal workers consume about 64% of the average
consumption level for families of formal workers.
There
is still a substantial difference, but it can be at least partly
explained by the lower education level of workers in the
informal sector (8.2 years, on average) compared to workers in
the formal sector (11.7 years). There are also a much larger
share of women and indigenous workers in the informal sector,
although that shouldn’t count.
The remaining difference may be well worth the price
to pay
if you value flexibility, independence, spending time with your
family, being your own boss, and not having to constantly deal
with red tape and frustrating bureaucratic procedures.
Thus, we don't
have to feel sorry for the informals. Rather we have to feel
sorry for the formal productive sector, which has to compete not
only with the tax- and bureaucracy free informal sector, but also
the completely distorted salaries of the public sector and the
international development community.
(*) Director, Institute for Advanced Development Studies, La
Paz, Bolivia. The author happily receives comments at the
following e-mail:
landersen@inesad.edu.bo.
(1)
Landa, F. & Yañez, P. (2007) “Informe
Especial. Informalidad en el Mercado Laboral Urbano 1996-2006”.
Documento de Trabajo. Unidad de Análisis de Políticas Sociales y
Económicas, La Paz, Bolivia.
(2) Comparisons based on the 2005 MECOVI household survey.
Ó
Institute for Advanced Development Studies 2006.
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