This chapter introduces the definitions and international statistical standards to measure the informal economy and discusses main issues for measuring informality in the MENA region. It then presents the rationale for the Policy Assessment Framework developed in the report. This is proposed as a tool to identify “what works”, namely what policies are effective in enhancing formalisation or reducing informality in employment and businesses.
Informality and Structural Transformation in Egypt, Iraq and Jordan
A Framework for Assessing Policy Responses in the MENA Region
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1. Introduction
Abstract
In the MENA region, informality is pervasive, representing an estimated 64.9% of total employment in 2022 (Informal employment rate, ILO) and a GDP share of 20% or more in 2020 (Elgin et al., 2021[1]). Recent analysis has observed limited progress in reducing informality in MENA economies over the past two decades (World Bank (2023[2]); IMF (2022[3])).
Informality is a complex, multi-faceted phenomenon that encompasses a diverse array of activities, transactions, and individuals, operating largely outside formal businesses but, to a different extent, also inside them. This report uses the operational concept of informality developed by the ILO through the definition of informal economy and of standards to measure it. The informal economy encompasses economic activities by persons and economic units that are, in law or in practice, not covered or insufficiently covered by formal arrangements (Box 1.1).
From street vendors to unregistered businesses and undeclared economic activities, informality represents a critical, yet problematic component of global economic activity; that is: while informality can be a coping mechanism towards poverty alleviation when the economy is not producing enough formal jobs, high levels of structural informality expose economies to long-term vulnerabilities, which may be further reinforced when shocks hit them.
This was indeed the case during the COVID-19 pandemic crisis, a crisis followed by a new one, aggravated by Russia’s war in Ukraine and its impact on the global economy, from disruptions to supply chains of essential items (medicines, food) to rising inflation rates. The consequences were a vivid illustration of what had been known for a long time about the vulnerabilities associated to informality. Namely:
Jobs that are insufficiently covered by formal arrangements may result in precarious and/or exploitative working conditions, with low wages level of income from labour, lack of social protection and other measures adopted to mitigate the impact of the cessation or reduction of activity. Informal workers who cannot be active (e.g. because of lockdown restrictions), usually do not receive compensation and can only count on their own savings. Receiving social assistance might also be difficult in light of the informal condition, i.e. informal workers are “invisible” as not registered. Or they may fall is the ‘so-called’ missing middle, not poor enough to be eligible for social assistance.
The lack of formal registration may deprive businesses of opportunities. Firms that cannot operate would have no support from a government that does not know about their existence. Informality is associated to low productivity of informal firms and low investments in human capital and innovation, also due to no or limited access of informal firms to formal financial resources and government support programmes, thereby generating a negative feedback cycle of vulnerability and low growth.
Informality means tax avoidance, which reduces a government’s capacity to appropriately deliver public services and threatens its financial sustainability.
Box 1.1. Definition of informal economy and statistical standards
Over the past three decades, the ILO has elaborated, and progressively updated in response to developments in the world of work and economic production, definitions and standards to measure the informal economy.
The informal economy encompasses the informal sector, which includes unincorporated enterprises not constituted as separate legal entities independently of their owners, and informal employment, a condition of employment that occur in the informal sector but can also be observed outside of it, in the formal sector. What characterises the informal economy is that the economic activities performed by persons and economic units are, in law or in practice, not covered or insufficiently covered by formal arrangements.
A key feature of the ILO definition of informal economy is that it covers a broad range of different situations across and within economies, where informal workers and economic units are very diverse: the former in terms, for instance, of age, education level, income level, and degree of coverage of social and employment protection; the latter with regard, for instance, to size, sector, urban or rural location, degree of compliance with laws and regulations. It is important to acknowledge these differences, and their drivers, to design policies most effective to address informality and the transition to formality.
The international standards developed by the ILO to measure the informal economy are the reference for producing statistics on the informal sector and informal employment. In this report, ILO statistics and data produced according to ILO standards have been prioritised whenever available, but other data are also analysed as relevant that can partly depart from the recommended measurement standards.
Finally, it is worthwhile to mention that a new resolution was adopted in October 2023 by the 21st International Conference of Labour Statisticians (ICLS) to further refine the definitions and improve the measurement of the informal economy. To that aim, the resolution introduced the concept of “informal productive activities” to recognise that “productive activities can be “partly” informal when done by persons with formal jobs”.
1.1. Measuring informality in the MENA region
One of the main barriers to tailoring policy measures on informality is a scarcity of comprehensive and sound data on the phenomenon. Although informal economic activities generate market value, their lack of registration makes these activities difficult to observe, and thus challenging to adequately measure. Similarly, it is difficult to collect data on informal employment – which can occur in the formal, the informal sectors, and in households – due to the lack of registration of the employment contract that binds the employer to pay the related taxes and social security contributions. In times of shocks, such as the COVID-19 pandemic, the need for timely and granular data becomes even more important to inform immediate and adequate policy measures.
Two approaches are adopted for measuring informality: direct approach based on surveys, adding questions on informality, for instance, to labour force surveys, household income and expenditure surveys, or designing special surveys on informal sector enterprises, including mixed household-enterprise surveys; and indirect approach based on models that use observable proxies of informal economy (ILO 2013 ([9])), (OECD et al., 2002[10]).
Measuring informality in the MENA region is particularly challenging due to limited data collection as well as restricted public access to microdata in the region. Since 2011 several MENA economies have carried out labour force surveys .
Labour force surveys in Egypt and Jordan are conducted on a regular basis, allowing the analysis of the trends in informal employment over time.
Morocco and Tunisia have quarterly labour force survey; since the origin the measurement of informal employment is possible for Morocco, and since 2019 for Tunisia.
In Algeria, the labour force survey was annual, and then bi-annual until 2019 and allowed the measurement of informal employment, but data collection stopped with the pandemic and did not resume since then.
Nonetheless, numerous limitations restrict the possibility of using these data to study informal employment:
Not all labour force surveys contain variables that allow identifying informal employment.
Public access to microdata, and in some cases even aggregate data on informal employment, is restricted.
Measuring informal enterprises in the MENA region proves to be even more challenging given a very low number of countries carrying out enterprise or establishment surveys. For example, since 2015, Egypt, Jordan, Kuwait and few others have had such surveys. These surveys are not carried out on a regular basis and access is often restricted to public. In addition, some countries have carried out special surveys targeting the informal sector. For example, the Haut commissariat au plan of Morocco carried out a National Survey on the Informal Sector covering undeclared non-agricultural production units between 2013 and 2014.
Besides data collected by national statistical offices, there are several data collection initiatives which offer relevant data on the phenomenon of informality in the MENA region, with the usual caveats related to quality (e.g. accuracy, coverage, comparability) of non-official statistics. Some examples of data sources relevant for analysing the informal economy in light of the recent wave of shocks include:
The Economic Research Forum- ERF COVID-19 MENA Monitor, composed of household and enterprise surveys run in Egypt, Jordan, Morocco, Tunisia, and Sudan for the period 2020-21. ERF also conducted a labour market panel survey in several countries (Egypt, Jordan, Tunisia) which has been used by scholars for measuring informal employment.
The Arab Barometer Survey waves VI-VII (years 2020-21 and 2022 respectively) providing insight on informal employment and the perceptions regarding adequacy of government response to COVID-19.
The World Bank Enterprise Survey conducted on a rolling basis throughout the year and providing data on informal sector. In a context of limited data availability on informality, alternative sources offer the possibility to fill data and information gaps.
1.2. A framework for assessing policy impact
There has been extensive research and policy debate on effective formalisation strategies. These strategies generally comprise several policies which can be summarised into two policy pillars consisting of incentives and deterrence, and the mix of these two pillars aims to alter employer and employees perceived cost-benefit ratio in favour of formality.
Policies providing an incentive to formalisation can act:
On the supply side, through tax breaks on personal income, concessions on social security contributions and welfare bridges.
On the demand side, by incentivising consumers to purchase goods and services from formal entrepreneurs with consumer tax deductions, vouchers, and VAT exceptions.
Deterrence measures, on other hand, aim to prevent and discourage individuals from engaging in informal economic activities through sanctions and enforcement efforts (audits and labour inspections) that increase the risk for entrepreneurs and employers operating informally to be detected and punished.
The effects of these policies on formalisation can vary in magnitude and direction, presenting diverse outcomes across different contexts and studies. Given the variability of results across previous studies, employing meta-analysis proves to be a valuable statistical tool in deriving informed conclusions. Our literature review emphasises meta-analysis studies exploring the potential impact of economic and social policies on both formalisation and informalisation.
The literature also highlights the importance of indirect or ‘persuasion’ measures that aim to develop a culture of law compliance and tax morality. These measures aim at changing values, norms, and beliefs through awareness-raising and education campaigns on tax, social security and labour law targeting all population groups, as well as training and advice programmes targeting informal entrepreneurs. The persuasion measures comprise also changes in national legislation that improve the procedural justice of the system and hence its perceived fairness. The rationale behind these measures is that the drivers of informality are not only economic, and there is therefore a need to strengthen the mutual trust between the public institutions and informal entrepreneurs.
Based on this review, Chapter 6 of this report introduces a Policy Assessment Framework designed as a tool to identify “what works”, i.e. what policies are effective to enhance formalisation or reduce informality in employment and businesses. We believe that this framework will be beneficial for policy makers and researchers seeking to swiftly anticipate the impact of social and economic policies on formalisation. The framework does not extensively cover a range of policy areas such as education quality, reskilling and upskilling, social economy, or sustainable investment, that may support formalisation. These limitations are acknowledged as our primary objective centered on delineating the impact of policies implemented during the COVID-19 pandemic specifically, and hence the definition and scope of the Policy Assessment Framework was driven by those policies, rather than encompassing all potential policy aspects that could affect informality.
References
[3] Cardarelli, R. et al. (2022), Informality, Development, and the Business Cycle in North Africa, International Monetary Fund, https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2022/05/31/Informality-Development-and-the-Business-Cycle-in-North-Africa-464859.
[1] Elgin, C. et al. (2021), “DP16497 Understanding Informality”, CEPR Discussion Paper, No. 16497, CEPR Press, Paris & London, https://cepr.org/publications/dp16497.
[8] ILO (2023), “New standards, increased visibility: improving measurement of the informal economy”, ILOSTAT, https://ilostat.ilo.org/new-standards-increased-visibility-improving-measurement-of-the-informal-economy/.
[7] ILO (2018), Women and Men in the Informal Economy: A Statistical Picture, International Labour Organization, https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/publication/wcms_626831.pdf.
[6] ILO (2015), Recommendation R204 - Transition from the Informal to the Formal Economy Recommendation, International Labour Organization, https://www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB:12100:0::NO::P12100_ILO_CODE:R204#:~:text=.
[9] ILO (2013), Measuring informality: A statistical manual on the informal sector and informal employment, International Labour Organization, https://www.ilo.org/global/publications/ilo-bookstore/order-online/books/WCMS_222979/lang--en/index.htm.
[5] ILO (1993), Guidelines concerning a statistical definition of informal employment, International Labour Organization, https://www.ilo.org/wcmsp5/groups/public/---dgreports/---stat/documents/normativeinstrument/wcms_087622.pdf.
[4] ILO (1993), Resolution concerning statistics of employment in the informal sector, International Labour Organization, https://www.ilo.org/wcmsp5/groups/public/---dgreports/---stat/documents/normativeinstrument/wcms_087484.pdf.
[2] Lopez-Acevedo, G. et al. (2023), Informality and Inclusive Growth in the Middle East and North Africa - Overview (English), World Bank Group, Washington, D.C., http://documents.worldbank.org/curated/en/099062323201054687/P1773800417ccc08708034034fe0f9418be.
[10] OECD et al. (2002), Measuring the Non-Observed Economy: A Handbook, OECD Publishing, Paris, https://doi.org/10.1787/9789264175358-en.
For further reading
OECD (2020), Informality and Social Protection in the time of COVID-19, OECD, Paris https://www.oecd.org/dev/HLM-Thematic-note-Informality-social-protection-post-COVID-19.pdf.
OECD (2020), Tackling Vulnerability in the Informal Economy, OECD, Paris, https://www.oecd.org/fr/publications/tackling-vulnerability-in-the-informal-economy-939b7bcd-en.htm.