The informal economy, an important aspect of every existing economy, varies in scale in developed and underdeveloped countries. This sector can often be found on a large scale in underdeveloped countries and vice versa. However, the characteristics vary from country to country, but some universal characteristics are prominent everywhere, that the sector will be untaxed, poor, unregulated, and unrecorded. The International Labor Organization (ILO) defines informal economy thus: “The term “informal economy” refers to all economic activities by workers and economic units that are– in law or in practice– not covered or insufficiently covered by formal arrangements”.
Pakistan’s economy is on the brink of collapse and it is a tragedy, for the household, if not in the documents. Survival is getting harder with each passing month. This is true and must be accepted if one wants to survive and improve. Market forces are committed to increasing the labour force but less concerned about economic growth. Fortunately, and unfortunately, 36 percent of Pakistan’s economy is undocumented and informal, which has always served a large segment of the population that falls under the lower and middle socioeconomic classes. The purpose of this study is to discuss the potential in Pakistan’s informal economy and how its structure can help us.
The state should first take responsibility for providing and then demand returns from the sector, state policies should be inclusive. It is recommended to develop common facilities and spaces and provide infrastructure to improve the operating environment. Provide a suitable platform to connect the informal with the formal market to access a wider customer base and encourage business networks and associations for collective bargaining power. Also, it is recommended that the sector be encouraged to produce quality products and then market them for export. Enhancing the skills of informal workers to improve productivity and product quality. Financial inclusion is essential for the sustainability of the sector and workers. Microfinance programmes designed to meet the needs of small-scale businesses in the sector must be launched
The shadow economy has proved to be a blessing and a boon to the global economy. Mostly it operates in underdeveloped economies, and is also called the shadow economy. As the ILO mentions, about 60 percent of the population is benefiting from the shadow economy. Additionally, the sector accounts for more than 40 percent of Pakistan’s GDP and employs 75 percent of the country’s labour force. In addition, more than 90 percent of the country’s businesses, with 50 or fewer employees, operate informally in the country’s shadow economy, the Asian Development Bank said.
Despite all the good things, the sector has always suffered and never received enough attention. All these have negative images and stereotypes. Hearing this term, one imagines an old bazaar filled with filth and obscenities. The state tried to regularize it, but it ended in criminalizing it. Instead of facilitating the stakeholders, who are mostly street vendors, self-employed, small and medium businesses and micro- and agri- enterprises, the state institutions are a constant torment for the Small Medium Enterprises (SMEs) engaged in Pakistan’s informal economy. However, this sector, as mentioned above, is contributing more than the formal sector, providing jobs and income opportunities to highly unskilled workers who we already know are a burden on the state. Because Pakistan has a large proportion of unskilled workers in its workforce.
The market is facing several challenges which pose a major threat to the sustainability of the informal market and especially the people in the market. At the domestic level, it seems a duty and is certainly a culture for certain state agencies (police, levies, and municipal corporations etc.) to harass traders and obstruct commercial activities. The police and local bodies are widely involved in accepting bribes from traders to conduct their business activities in the market, and the money collected has no way into the national exchequer.
However, the market is being affected by some people in the state departments only because the state has failed to provide a proper framework for the market. Moreover, this harassment has a huge impact on the certainty of the market and the prices and sustainability of the businesses involved. In addition, such informal interventions by state departments are responsible for the immorality of the market and the self-respect of traders, as they are not criminals but are still treated as equals and this is a big turn-off for all those who can afford to trade in the market, but they fear the harassment of the state. This scenario has led to a decline in the economic productivity and efficiency of the informal sector.
This sector does not have access to social programmes. Limited access to credit, lack of adequate business knowledge and planning, high competition in the local market, lack of skilled manpower and technology, and high cost of raw materials and equipment are preventing the sector from contributing to its full potential. Moreover, the sector has always suffered from social insecurity in the long term and poor governance in the short term. Stereotypes and negative views of the informal economy are damaging the self-esteem of stakeholders. There is no incentive to stay in the market and plenty to leave the market. Pakistan is undermining the most potential sector of the economy through sector-oriented policies.
Business-specific and overly focused state policies have undermined the productivity and sustainability of the informal market. Pakistan’s shadow economy has the full strength and potential to boost exports to help Pakistan recover from its financial and balance of payments crises. Bad governance and inadequate policies have widened the trust deficit and created avenues for corruption. Bureaucratic corruption has made it easy for the sector to remain alienated and not enter the tax net and formal economy.
The state should first take responsibility for providing and then demand returns from the sector, state policies should be inclusive. It is recommended to develop common facilities and spaces and provide infrastructure to improve the operating environment. Provide a suitable platform to connect the informal with the formal market to access a wider customer base and encourage business networks and associations for collective bargaining power. Also, it is recommended that the sector be encouraged to produce quality products and then market them for export. Enhancing the skills of informal workers to improve productivity and product quality. Financial inclusion is essential for the sustainability of the sector and workers. Microfinance programmes designed to meet the needs of small-scale businesses in the sector must be launched.
