Asian countries seek to pull millions out of informal economy – Nikkei Asian Review

People living alongside this garbage dump outside Kolkata make a living by sifting through the mound for rubber that can be recycled or for items that could be gathered into a sack and shouldered away, to be re-used or sold on. Around 80% of India’s employed are estimated to work informally (Simon Roughneen)

Beyond trade and currency headaches, casual work seen as another drag on growth

JAKARTA — Across Asia, millions of small businesses or micro businesses, often family-owned and no more than a kart-sized kiosk, struggle on the margins of fast-growing economies.

“It is a kind of [a] part time job, sometime[s] I drive [an] ojek (motorbike taxi), my wife looks after [the stall],” said Arianto Rahadi, who sells sachets of tea, coffee, shampoo and other household items from a stall on wheels parked one of Jakarta’s bustling side-streets.

In December 2018 study, the Asian Development Bank Institute described small and medium enterprises as “the backbone of the Asian economy,” making up “more than 96% of all Asian businesses” and “providing two out of three private-sector jobs on the continent.”

In turn, such SMEs make up, along with agriculture, much of Asia’s vast pool of informal workers – many of them self-employed – which the World Bank estimates as making up 47% of all employment in the East Asia and Pacific Region. In poorer countries such as Myanmar and Laos, informal workers make up between 60% and 80% of total employment, while 76% of Indian workers are estimated as being self-employed.

The World Bank projects 7.1% expansion in 2019 for South Asia and 6% for East Asia and the Pacific, more than double what’s expected globally. Warning that world economic growth could dip below 3% in 2019, the bank last week cited Asia’s vast informal labour markets, along with widely-flagged concerns such as the U.S.-China trade stand-off and the region’s fluctuating currencies, as potential drags on the region’s world-beating growth.

As economies grow and modernise, informal work tends to diminish as jobs in manufacturing, bureaucracy and services increase, as regulations are reformed or made clearer, and as agriculture modernises. “If the economy is growing sufficiently strong, formal sector employment will increase. On the other hand, if the economy is bad, the informal sector will increase,” said Siwage Dharma Negara, an Indonesian economy analyst at the ISEAS-Yusok Ishak Institute in Singapore.

While prospects of reducing informal work depend largely on economic growth and urbanisation,”there is a broad range of policies that include economic and sectoral policies that increase formal jobs, enabling policies that facilitate business registration and labour protection policies that promote worker registration and protection,” said Sandra Yu of the International Labour Organisation.

Some governments are chipping away with reforms that could accelerate the transition to formal work. Last Wednesday, Bangladesh signed a $250 million deal with the World Bank aimed at supporting efforts “to create large-scale, better-paid and inclusive jobs,” which “will help the government’s ongoing initiatives to create labor intensive quality jobs while laying the foundation for a more resilient economy and stronger social protection,” according to a statement by Monowar Ahmed of Bangladesh’s Economic Relations Division.

That announcement came the same week as Indonesia’s central bank renewed a call for the country’s commercial banks to make 20% of their credit available to SMEs. “The objective is to support them for sustaining and if possible expanding their business. Eventually, this will help SMEs to maintain their employee[s] or expand the recruitment,“ said Siwage Dharma Negara, discussing Jakarta’s credit push, which was first mooted in 2015.

China last weekend announced banking measures which “could potentially release more than Chinese renminbi (RMB) 3 trillion (US$439 billion) of liquidity into the banking system” and “could encourage banks to increase lending to struggling sectors they had previously been wary of, such as privately owned or small enterprises,” according to Standard and Poor’s.

According to the ADBI, “it is vital for Asian economies’ economic success that they have fully functioning support measures for SMEs,” citing what it described as SMEs “major challenges in accessing cheap finance.”

Making it easier for small businesses to access credit could serve as an incentive to formalise. “Unregistered or informal SMEs do not need to comply with labor or any other regulations, but they also cannot avail of government support programs or finance, either private or public,” said Jayant Menon, an economist at the Asian Development Bank.

In the past two decades, hundreds of millions of Asian’s have moved from the countryside to cities — a transition that sometimes reduces the number of people in informal work when factory jobs draw labour away from small farms.

However the impact of urbanisation on informal labour varies, depending on local laws, According to the World Bank. “In China, for example, unequal access to public services between citizens with urban household registrations (hukou) and those without, although diminishing, has led to unregistered urban households that lack essential social protection,” the bank stated in its January 8 Global Economic Prospects report.

In general, “the size and breadth of the informal sector is also a symptom – usually of a highly restrictive regulatory system or other distortions,” said Jayant Menon. “Apart from growth and development, these factors have to be addressed along the way in order to reduce the degree of informality in the economy.”

In Indonesia, according to Muhamad Chatib Basri, University of Indonesia economics lecturer and former finance minister, red tape means that “companies prefer to employ contract or informal workers, who are often unskilled women and children.”

“Rigid laws, relatively costly severance systems, and declining return on labour have led investors to avoid labor-intensive sectors, preferring to focus on the natural resource and capital sectors.” Chatib commented in a recent article published by the ISEAS-Yusof Ishak Institute.

“There has been no progress on the badly-needed steps to free up the labour market that we have long identified as crucial if Indonesia is to nurture a competitive manufacturing sector,” according to consultancy Capital Economics, assessing President Joko Widodo’s reform efforts during his first term in office, ahead of his re-election bid this year.

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