Informality and state policy – Umair Javed


SINCE the start of this decade, policy discourse in Pakistan has grown more cognisant of economic activity that takes place outside of the purview of state regulation. Dubbed a part of the large ‘informal’ sector, this can include things that are illegal — such as smuggling, proceeds from bribery, and trade in illicit substances and services — as well as legal trades that are simply unregistered or operating without formal cognisance by state authorities. Various estimates of such activity place it anywhere between 50 per cent to 75pc of the size of the formal economy (ie $150 billion to $225bn).

Contrary to media accounts of illegal wealth, which is usually associated with corruption or illicit actions, large segments of what is dubbed the informal economy are perfectly legal in occupational terms. The only difference is that these activities operate outside taxation and other regulatory endeavours. What’s also important to note is that Pakistan’s towns and cities, which is where definitionally speaking the informal economy operates, would not be able to function for most of its residents without such economic activity. Everything from various modes of transport, the retail of items of everyday use, to actual housing in informal settlements, and services required for personal and built-structure upkeep and maintenance are informally provided.

For the past 10 years (and probably longer), the question of what to do with the informal economy has been approached from two complementary perspectives — the closure of ‘illicit’ economic activity and capturing economic value for the perspective of taxation. This is precisely why we see steps like amnesty schemes being offered and why policies like imposition of withholding taxes, electricity bill deductions, and CNIC conditions on exchange of goods and services are floated. The state recognises its revenue constraints and seeks to overcome them by documenting lucrative informal sectors such as wholesale trade and construction.

Counter arguments to this approach have been well documented by recent analysis, including that by the Pakistan Institute of Development Economics that has centred the views of khoka owners and street vendors in Islamabad. Informal economy actors usually operate micro or small enterprises and provide an important source of livelihood for those who face credential or credit constraints. A person who sets up a small street-food stall, for example, will likely not have the resources to open up a sales tax and food authority registered restaurant, nor are they likely to join formal sector waged work (which requires credentials and other skills). The informal economy is the only avenue through which a livelihood can be obtained for many, and to be clear, it is a livelihood that helps others as well by providing goods and services at a cheaper cost.

One corollary of re-shifting this perspective would be to enhance focus on how the government can, instead of eyeing everything from the perspective of capturing value or upping regulation, address vulnerabilities associated with such work.

The baseline situation on this front is not encouraging at all. For example, street vendors, an important constituent segment of the informal economy, are frequently targeted by anti-encroachment operations in commercial and residential districts. Since 2010, there have been at least 10 large-scale operations seeking to remove street vending ‘encroachments’ in various parts of Lahore alone. These operations are carried out by town municipal administration officers and involve the seizure of vendor pushcarts and demolition of any temporary structures put up by vendors.

The Punjab Labour Policy drafted in 2018 states the government’s commitment “to work for the protection of labour and ensuring its dignity through coordinated efforts and policy integration”. While it speaks about expanding rights and entitlements of informal-sector workers, its core vulnerability focus rests on workers in home-based contracting, construction, and agriculture. Street vending is not addressed in the entire policy document. Existing social security institutions, such as the Punjab Employees Social Security Institution, cover only 3.2pc of the province’s total workforce and do not cover self-employed micro-retailers and vendors.

Even for sectors where some legislation or policy guidance has been passed, such as domestic workers, its implementation remains non-existent. In 2013, the Domestic Workers (Employment Rights) Act 2013 was passed by the Senate to provide labour protection to domestic workers employed in Islamabad Capital Territory. It took another six years for similar legislation to be passed in Punjab, while there are no such provisions in the other provinces.

However, with recent ad hoc judicial interventions and media coverage of high-profile abuse cases of domestic workers, specifically of women and children, there has been increased pressure towards instituting worker protections. The Punjab Labour Policy of 2018 specifically mentioned domestic work as a core vulnerability-addressing sector.Subsequently, the 2019 Domestic Workers Act makes provisions for sickness and medical care, accident compensation, disability payments and survivor pensions in line with the provisions of the Punjab Social Security Ordinance 1965. It also institutes a minimum wage as prescribed as well as a cap of a maximum eight-hour work day. Such legislation theoretically protects domestic workers, yet in practice grievance and redressal mechanisms still remain untested.

These examples of vulnerability gaps are just from two sectors, but there are plenty of others — mining, home-based subcontracting, construction, and even transport where workers continue to face a host of issues. Holistically speaking, the government’s focus on capturing value for the sake of taxation is understandable given its revenue constraints and the fact that many businesses (such as in wholesale trade etc) do operate with large margins and contribute very little by way of taxation. At the same time, an acknowledgement of the diversity of informal economic activity is also required, and that would entail understanding and correcting the vulnerabilities faced by millions of workers associated with this type of work in the labour force.