Informality is not a new phenomenon but today, in face of the multiplication of domestic and global shocks, the vulnerabilities associated with informal work and businesses are an undisputable hurdle to economic resilience and more inclusive and equal societies. Yet, certain policy measures implemented with the intention of addressing the consequences of crises on vulnerable groups in the society – groups that include informal workers and businesses – can unintentionally induce more informality, in a vicious cycle that makes formalisation and resilience even more difficult to reach. The report Informality and Structural Transformation in the Middle East and North Africa outlines a framework for assessing the impact of economic and social policies on informality. The framework was developed jointly by the ILO, OECD and UNDP, and is thought as a hands-on instrument, allowing policy makers to foresee early on in the policymaking cycles the effects diverse economic and social policies could have on the informal economy. This tool adds to the vast literature on informality. Understanding the expected impact of different policies on informality can help governments to identify measures that support their key objectives, e.g. helping firms in financial distress or expanding social protection, without altering motivations and incentives to formalisation.
Informality and Structural Transformation in Egypt, Iraq and Jordan
Abstract
Executive Summary
In light of the pervasiveness and persistence of informality in the MENA region and the increasing exposure to global and regional shocks, the ILO, OECD, and UNDP have joined forces to advocate for effective forward-looking policies in MENA countries that can encourage gradual formalisation of businesses and jobs, and at the same time, that help create resilience to absorb new shocks while promoting the creation of decent jobs and sustainable growth. The ultimate objective is to achieve broader social and labour protection, higher level of labour income including fairer wages, a more even tax burden, and higher potential growth.
This joint ILO-OECD-UNDP report reflects the work so far conducted in the context of the cooperation. It contains initial policy recommendations to address informality in protracted times of shocks.
This report introduces a Framework for assessing the impact of economic and social policies on informality. The Framework, designed by ILO, OECD, and UNDP, is a hands-on instrument, allowing policy makers to foresee early on in the policymaking cycles the effects diverse economic and social policies could have on the informal economy. This tool adds to the vast literature on informality, and also complements recent work by the World Bank (June 2023).
The Framework aims to evaluate the direct and indirect effect of implemented social and economic policies, regardless to their primary objective, on informality of employment and business. It was developed on the basis of desk research and consultations with experts and policy makers from the MENA region. The accuracy of the Framework is fortified by relying on mainly meta-analysis studies that have previously tested the effect of the different policies on informality.
The Framework was tested on a group of three countries, Egypt, Iraq, and Jordan. The analysis particularly focused on policy initiatives adopted since the COVID-19 pandemic in the specific context of the MENA region. Consequently, policies pertaining to education, training, and social solidarity economy, among others, fall outside the scope of this Framework.
The exploratory exercise on Egypt, Iraq, and Jordan pinpointed policy measures with positive impact on increasing formality and facilitating transition to formality for existing informal firms or workers. In this study, these included four types of policy actions:
Making social insurance more affordable and accessible for all workers, both in terms of cost and procedural requirements.
Applying active labour market policies in the form of training and wage subsidies, even if just temporary, to help create a precedent in favour of hiring particular groups such as women and youth.
Facilitating business registration and access to inclusive financial services.
Ensuring more fair and consistent law enforcement that applies equally.
In fact, the most effective policy actions typically involve a combination of incentives and law enforcement, both creating more benefits for formal activities, whilst also stepping up enforcement in a fair and uniform way.
Beyond the main focus of formalisation, the report also highlights the urgent need to improve the working conditions of workers in the informal economy.
It is important to stress the effective use of the Framework counts on multi stakeholder dialogue being an integral dimension of the policymaking cycle. Policy recommendations should be the result of open and inclusive consultations with policy makers and interested parties from the target countries; and social dialogue should support the implementation of the recommendations, involving the relevant actors within each country, to ensure that all stakeholders are on board while taking local contexts into consideration.
Finally, the report points to the need for more accurate data on the informal economy to improve policy analysis and design.
