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INTERNATIONAL
LABOUR OFFICE
Regional
Office for Latin America and the Caribbean
Project
"Principles and Rights at Work in the context
of
the XIII Inter-American Conference of Ministers of Labour of the OAS"
“Informal
Economy in the Americas: current situation,
policy
priorities and good practices”
Background
document for discussion at the meetings of the
Working
Groups of the XIII IACLM
(Buenos
Aires, April 2005)
Preliminary
version (not to be cited)
Lima,
March 2005
TABLE
OF CONTENTS
1.
THE INFORMAL ECONOMY IN THE AMERICAS AND THE IMPACT OF GLOBALIZATION ON
ITS DEVELOPMENT
5
a.
Globalization and informality
6
b.
Informal work in the American hemisphere
9
c.
The challenges to be confronted
15
2.
GOOD PRACTICES (GP) AND THE INFORMAL ECONOMY
17
3.
ELEMENTS AND PRACTICAL EXAMPLES
19
a.
Labour legislation and its application
19
b.
Registration and
off-the-books work
22
c.
Freedom of association and associative experiences
24
e.
Enterprise development support
30
f.
Training and skills development
35
As
Víctor Tokman, one of the most representative students of the original term
“informal sector,” so aptly put it, the multicoloured, massive and
diversified presence of this sector has been one of the region’s most
characteristic images of the past few decades.[1]
Rising
informality is undoubtedly a hallmark of the occupational structure in the
Americas in recent years. The ILO
Labour Overview (2004)[2]
estimates that between 1990 and 2003, 6 of every 10 occupied people were working
in the informal sector. Although
the political and economic stability of the countries in the region rests
heavily on this “employment” creation (it is responsible for one of every
two non-agricultural jobs), as Tokman points out, it has built-in structural
problems associated with the vulnerability of the labour market.
The figures reveal that only about 5 of every 10 new wage employees have
access to social security services and that only 2 of every 10 new wage
employees in the informal sector enjoyed this coverage in 2003 (Labour Overview,
2004).
For
that reason, informality has also been considered decisive in explaining the
region’s deficit of decent work. To
be able to discuss and define policies and promote good practices that will have
an impact on employment and its quality in general, an accurate picture is
needed of the main features, the trends and the challenges the informal economy
must confront.
Varying
perceptions and characterizations of the informal economy doubtlessly influence
the orientation given to policies associated with this sector.
For some, the informal sector is a synonym for illegality because it
involves production sectors that are left unregistered (in order words, that
have not been formalized) only to avoid tax payments to either the central or
local governments and having to comply with labour obligations, particularly
those affecting non-wage labour costs. According
to this approach, the informal economy is what Europe calls the underground
economy.
For
others, informality is the result of legal and administrative systems that make
the formalization process burdensome time- and money-wise.
De Soto[3]
has expanded widely on this approach which, although it does identify part of
the problem of informality (or, better said, one of its causes) tends to
oversimplify by failing to consider important aspects, such as technology,
productivity, etc.
A
third approach, developed by Portes,[4]
considers the informal economy as a kind of subproletariat --a huge group of
“wage workers” on which the economic system draws, but outside the margins
of formal employment.
To
conclude, the ILO and other institutions consider informality the result of
structural mismatches between supply and demand for labour
--mismatches that keep the formal or structured economy from being able
to generate all of needed jobs. Lacking
social protection schemes, such as unemployment insurance, the large masses who
are not accommodated by a reduced demand for labour, are forced to “invent”
jobs by turning to the only factor available to them:
their own work. The low
capital-labour ratio results in very low productivity and, as a result, a meagre
income. It is not by chance that
most informal workers are not only unprotected, but also poor.
No
matter what definition and approach are used, the subject is obviously a crucial
one. For that reason, the XIII
IACML, at the meeting of the Working Groups held in Washington, D.C. on 11-14
May, 2004, initially proposed examining “priority issues relating to the
informal sector, including, among others, the promotion of micro-enterprise
registration and the expansion of social protection for workers in the informal
sector,” according to the conclusions of Working Group 1.
The final report of Working Group 2 underscores the need to “develop
an approach to study the relationship between globalization and informal work
(identify best practices in the areas of labour inspection, labour relations and
others, provide information on ‘centres for employer productivity,’ or other
initiatives.”)
The
working groups entrusted the ILO with the study of the issue, requesting the
preparation by the USDOL-financed IACML support project executed from the
Regional Office for Latin America and the Caribbean of a background paper and
summary to encourage its discussion at a workshop prior to the meeting of the
working groups or within the agenda of each.
At a planning meeting held in January 2005, the task was shared with the
IDB, which was to contribute to the study its own experiences with good
practices.
This
document offers a brief coverage of the study, resting on two key axes:
an introduction to the policies (involving an examination of priority
issues relating to the informal sector and the relationship between
globalization and informal work) and another section dealing with the programmes
and good practices carried out to date, with which the Office is familiar.
As
a result, it seeks to cover both the two issues raised by the IACML working
groups: the priority issues relating to the informal sector and the relationship
between globalization and informal work, and good practices used in the informal
economy.
The
document presents a statement of the situation and sums up the facts and its
only intention is to offer a very brief explanation using general instruments
that will contribute to reflection on and a discussion of the subject.
It consists of background material and a synthesis of the main points of
interest from the viewpoint of the ILO, given its experience.
The
term “informal economy” was used for the first time in the classic 1972
Kenya report that opened the discussion of the issue and, above all, established
doctrine that has virtually become the heart of labour study over the past 30
years. We are not concerned in this
paper with the evolution and formulation of the concept over that period;
however, the contributions made by Portes and Benton or De Soto’s The other
path, already cited, which touch upon issues relating to illegality,
investment, loans, etc., are illustrative of the wealth of studies that exist on
the subject and the importance attributed to it in the hemisphere.
Considering
the labour activity of the sector as a whole, “informal” work was
characterized as having four distinguishing features, to wit:
i) easy entry because little or no capital was needed to start working
and there were no specific training needs; ii) small size of the production
unit;[5]
iii) low productivity, as a
direct result of the two preceding factors; and iv) absence of business
organization.[6]
The root economic problem (quality employment, production, etc.) was seen
to be worse in these categories, for the fabric of labour was woven in secret,
unstable, unhealthy, illegal and juridically invalid spheres.[7]
As
the sector became increasingly heterogeneous and continued its unstoppable
growth, experts on the subject decided a change was needed.
At the 90th meeting of the International Labour Conference in
2002, the ILO changed the definition and the approach, which up until then had
been economically-determined, to address the informal sector both in terms of
its conception and of the appropriate policy design for tackling it.[8]
In that way, the ILO began to address a new concept:
INFORMAL ECONOMY, a term that encompasses the varying, dynamic and
heterogeneous scenario this unstoppable phenomenon shows itself to be in
practice. The coverage is extended
to take in also the self-employed engaged in survival-type activities, domestic
workers, home-based workers, wage employees and the self-employed in
micro-enterprises. Informal workers
are generally non-covered statutorily, highly vulnerable, and lacking in
security (of the labour market, of training, of social protection, of income,
etc.) --in short, persons with a shortage of decent work, which is a basic
element of survival in the new globalized sphere.
Their common element is that all are workers and the emphasis has been
placed on this fact ever since.
The
ILO seeks to deal with this deficit, in order to allow for transition to formal
work and, in the long-term, to create formal and decent jobs --in other words to
“tackle the root causes of informality and informalization.”[9]
The greatest problem of informality, particularly among the groups most
strongly inclined towards formalization,[10]
is undoubtedly the achievement of social and economic rights to which they have
no access in practice. It is for
that reason that creating an economic and social policy has become
increasingly necessary to avoid exclusion and social disintegration.
The
legal and labour study of the informal sector has posed a huge challenge ever
since the beginning of the seventies that calls for new proposals and starting
points because of the heterogeneity of the sector and, in some cases, the
inability to determine the number of workers involved.
Essentially speaking, the start-up is highly practical, beginning with a
study of each category of workers in the informal sector and a definition of its
characteristics, needs and degree of market vulnerability.
The second step, once the situation analysis has been made, is to
determine and to guarantee to what extent the application of the existing right
to work is adequate and how far new standards will have to be developed to
extend the protection they need to all workers.
The
conditions for development of this sector (scarcity of economic means, lack of
professional qualifications, little productive development, illegality, etc.)
mean that the workers who operate in it are a particularly vulnerable group.
Confusion over use of the proper terms only worsens the lack of
protection of this group of workers. Terms
such as illegal workers, off-the-books work, underground
workers, clandestine workers, and so forth are frequently identified
incorrectly with the informal sector and become mixed up with it in people’s
minds.
Because
of this, more precision is needed in dealing with this term, which means
returning to the starting point. Informality,
as considered today, marks and defines a situation that exists in the labour
market. Approached in this way, the
informal economy encompasses many different workers, enterprises and
entrepreneurs[11]
that perform activities either not covered by law, to which the law is not
applicable or is not applied, or in regard to which the law itself not does not
encourage compliance because it is inadequate, burdensome or overly costly.
In any case, the activities involved are lawful, and not criminal in the
penal sense.
Integration
in a globalized world can present ambiguous results in countries that are not
industrialized. Trade
liberalization/opening, for example, by prompting changes that increase the
demand for skilled labour to the detriment of unskilled labour, can accentuate
inequalities, rather than reduce them. Such
openings could encourage importation of low-skill-labour-replacement
technologies and/or skilled-labour-complementary technologies that could have a
negative impact on formal employment offering social protection for low-skill
workers.
The
so-called skill enhancing trade hypothesis claims that trade opening
leads to the adoption of new technologies that increase the demand for skilled
over unskilled labour, which only heightens wage inequality.
That theory illustrates the fact that liberalization processes can
increase inequality in developing countries, in opposition to the claims of the
traditional theory of “comparative advantages” of international trade, or of
the theories of Hecksher-Ohlin, Stolper and Samuelson.[12]
As
a result, the integration of developing economies into the globalized world
increases the need for policies to promote decent work with a view to fostering
more inclusive globalization.
As
the conclusions of the 90th ILC[13]
indicate, informality is above all a matter of governance, created by the
application of inadequate and ineffectual macro-economic and social policies not
backed by tripartite consultations as a rule and that lack appropriate legal
frameworks and institutions to allow for correct law enforcement.
The Report presented by the DG to the 2003 International Conference at
its 91st session, Working out of poverty, reaches a similar
conclusion when it points out that the access of informal workers to basic
rights generally depends upon fair and equitable labour market operation.
The
absence of strong and sustained economic growth limits the capacity of
governments to facilitate the formalization process, and the application of
macro-economic policies or economic or production restructuring policies that
fail to give employment its due weight only worsen the situation.
One element that obviously contributes to informality is the mistaken
idea that the amount and quality of work is a residual element only, and not an
essential component of economic development.
As
the ILO points out,[14]
trade, investments and technology, in adequate conditions, can offer less
developed countries opportunities to improve employment quality, but the
existing globalization process is not sufficiently influential or just and the
benefits are not shared correctly, thus exposing the problems of bad governance.
In order to guarantee good governance, the Executive must play an
essential role in consultation with the social actors.
A true political commitment and will are required and the necessary
mechanisms and structures must be established for that purpose.
Concrete
laws, policies and programmes[15]
are required to deal with the elements responsible for informality, and must be
designed in keeping with each country’s specific needs and culture, in such a
way that protection is extended to all workers and barriers are removed to their
entry into the formal economy. Many
of these barriers are legal and administrative and go beyond mere formalities.
The reduced or limited sphere of application of a regulation or
institution is as much a barrier as its effective operation.
As the ILO Administrative Council[16]
indicates, governance is more than just law and also involves the control,
direction and regulation of the institutions and policies that determine
economic and social operation. In
the framework of the informal economy, this bears with it a large number of
recommendations for better governance. As
Trebilcock[17]
states, a good conflict resolution system in operation can help build smooth
labour relations and adequate inter-relations between informal producers and
local authorities. At the same
time, good governance should also take into consideration the difficulties
generally faced by micro- and small entrepreneurs in their operations.
In
analysing how the various dimensions of globalization[18]
affect workers’ opportunities for employment and well-being, it is important
to consider to what extent the countries’ incapability of participating in
globalization processes, rather than the fact of globalization itself, is
responsible for keeping them from benefiting from the ensuing trade, investment
and technology.
It
should also be considered that poverty[19]
eliminates opportunities for decent work by keeping people from getting the
training and skills they need to increase their employability and productivity,
as well as from contributing continuously to social security schemes and that
this is part of the environment in which the informal economy evolves.
Governments are responsible for creating a macroeconomic, legal and
political environment that will promote decent work and effective markets and
their institutions, including labour market information systems and loan
institutions. In any case, the
strategies connected with the millennium poverty reduction targets (DELP) should
specifically address the problems of the informal economy.
A
marked relationship undoubtedly exists between the informal economy
(particularly in the case of women workers) and poverty, which means that
informal workers and employers have been affected by globalization.
By way of example, the self-employed and entrepreneurs face the
competition of imported products, while wage employees are confronting growing
numbers of informal workers who seek new opportunities in this broad economic
sector. This has touched off a race
towards cost-cutting, with the result that companies move from one country to
another in a search for lower costs and lower wages.
The
pressure of global competition and technological advances has increasingly led
transnational enterprises to subcontract or outsource the production of
components and inputs to first-, second- and third-tier suppliers, many of whom
are in micro-enterprises or are home-based in the informal economy in developing
countries.[20]
In
addition, heavy international competition encourages formal firms to shift
formal wage workers to informal employment arrangements and informal units to
switch from “semi-permanent” contracts with their workers to piece-rate or
casual work arrangements without labour security, minimum wages or contributions
to social insurance systems.[21]
Another
important aspect to be stressed is that the recent expansion of the informal
economy has been linked not only to the capacity of formal firms to absorb
labour, but also to their willingness to do so.
More and more firms are decentralizing production and organizing work
along the lines of “flexible specialization” --by forming smaller, more
flexible specialized production units, some of which remain unregistered or
informal. A global variation of
flexible specialization is the rapid growth in cross-border commodity and value
chains in which the final producer in many cases is the informal economy in
developing countries.[22]
Global commodity and value chains are clear examples of how the formal and informal economies are linked across the borders of many countries, influencing decent work for workers depending on which segment of the chain they are in. The lower down the chain, the more likely employment relationships are to be informal and the larger the decent work gaps.[23]
Even
so, these links between formal and informal economies can also be found in more
traditional activities, just as there are direct and indirect linkages between
informal workers and formal businesses. The
informal economy includes many “disguised wage employees” who may not even
be aware of who their ultimate “boss” is, but who are clearly dependent on
someone for the inputs, equipment, work location and sale of the final products,
etc.
Political
concern should focus on reinforcing existing positive links and guaranteeing
decent work along the entire economic continuum.
The situation of informal workers needs improvement from the very
grass-roots, by introducing better production technologies that will add value
in the local sphere and information and communications technologies and trade
facilitation centres that could help local producers avoid numerous middlemen
and deal directly with world markets.
A political agenda is needed to collaborate with informal producers and workers and to minimize negative aspects of globalization[24] by:
