Informality slows development in Latin America, says World Bank
Source: O Globo, 05/09/2007
Washington - Informality, which affects 54% of urban workers in Latin America and the Caribbean, impedes development in the region, but can be corrected by adopting more effective public policies, says a report released by the World Bank.
The analysis of those who live outside the formal economy highlights, above all, that workers voluntarily decide to flee to informality if they perceive few benefits - and many costs - in the formal economy. The rigidity of the procedures, the high cost of transactions, very low wages and taxes are some reasons that lead many workers and small entrepreneurs to opt out of the formal economy, says the document "Informality: flight and exclusion".
Even though it is an economic phenomenon, informality has important social repercussions for self-employed workers in the region. Therefore, governments must examine a series of institutional and labor market reforms to address the problem, experts said during a forum organized by the agency.
The informal sector, which is mainly characterized by companies with less than five employees or who are not registered in the social security system, affects the collection of taxes and, therefore, the provision of public services. In addition, it decreases productivity, social well-being and quality of life for workers.
According to the report, informal work accounts for 54% of total urban employment in Latin America, a percentage that includes informal self-employed workers and wage earners.
The informal independent sector includes owners of micro-enterprises and self-employed professionals, as well as artisans, construction workers, taxi drivers, handymen and street vendors. Among the wage earners are domestic workers, workers in family businesses without a salary and employees of micro-enterprises, says the report.
The World Bank emphasizes that a more favorable investment climate, increased levels of human capital and other improvements in productivity would contribute to significantly reduce informality in Latin America and the Caribbean. Without these improvements, the document says, "we will continue to find a very large number of micro-enterprises that would see little benefit from being part of formal institutions" or workers who will continue to prefer self-employment, the report warns.
But the informal economy not only affects the survival of street vendors or small business owners who seek to support their families, but it also serves as a “warning sign” about inadequate policies and their impact on the development agenda in the region, the analysis adds.
Bill Maloney, one of the authors of the report, says that "poor people with low vocational training are less likely to get jobs in the formal sector", so greater investment in education can help to reduce informality.
- In this bulletin we want to highlight the extent of the flight of individuals who, when analyzing the costs and benefits of the formal economy, conclude that it will not pay them much. In each country, informality can obey many reasons, but the idea is that governments tackle the problem from the root - said Maloney.
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