APEC Bulletin 12 May 2024
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Stepping Outside the Shadow of Informality: Real Life Lessons from an Imaginary Town
By Sylwyn C. Calizo Jr. and Andre Wirjo
Stepping outside the shadow of informality is a collective effort; those under its shadow and those outside have a role to play.
A cold morning breeze moves through the narrow streets of La Playa, an imaginary town situated near the coast. Mario, an elderly shoemaker, is preparing to open his makeshift shop just near where he lives. Mario is famous in the neighborhood for crafting affordable tailor-fit shoes—proudly saying that "the best shoe is the one that fits you!"
Mario's morning routine, however, was interrupted by a familiar voice. Veronica, a foreign peddler frequenting the town, asks if he wants to buy some vegetables. After purchasing a bushel of potatoes, Mario bids her farewell. Veronica pauses and turns around. A hint of worry dawns on her face. Nervously, she shared that Pedro, a well-to-do tailor in the city, was recently visited by local authorities who temporarily closed his shop. Many others too. She heard that all of their shops would remain closed until they could formally register their businesses—a task that Pedro and many others can now do online, they say.
As Mario returns to work, he too starts to worry. For years, he has honed his craft without proper registration. Partly because the nearest city is just too far away and partly because authorities have always been lenient. But things have suddenly changed. "Why now?" he thinks. He doesn’t know what to do, much less navigate online transactions. Lost in his thoughts, Mario takes a deep breath and resigns himself to what he does best: his shoes.
This fictional story depicts a common occurrence seen across the real world: the shadow of informality. Now, it’s important to understand that informal doesn’t mean illegal. A simple way to understand this is to see it as legal work that remains hidden from regulations. Like many things in life, this too can get complicated. But there are three lessons that we can learn from this fictional town of La Playa.
One, informality is everywhere but it exists for different reasons.
While the exact figures are unknown, estimates for APEC suggest that the informal sector provides work to millions of people and generates a noteworthy proportion of what economies earn yearly. But despite these perceived benefits, informality can also cause vulnerability. For example, people like Mario could lack access to social security and formal loans.
Of course, within this shadow of informality are people who engage in it for different reasons. Take Veronica, for example. As a foreigner, her options to get formal work may be limited. Forced to being a peddler, what she earns might be too little to justify becoming formal. Often, people like her engage in informal work as a matter of survival rather than profit.
In contrast, Pedro has a choice. As an established tailor in the city, he can formalize his business anytime, but the prospect of avoiding regulatory costs and taxes tempts him to continue operating informally. The same goes for Mario, although his reason is more about staying away from costly, burdensome and complicated requirements.
Two, solutions need to be targeted and comprehensive.
Since informality can lead to vulnerability, it shouldn’t be taken as a sustainable long-term arrangement. Rather, efforts should be geared towards formality. Ideally, aside from ensuring that pathways to transitioning are available, it is critical that they are targeted and comprehensive. In keeping with what Mario was saying, “the best [solution] is the one that fits!”
This means being sensitive to the situations that informal workers and businesses face. For example, stronger enforcement can help bring those like Pedro towards formality, but the same measure could push people like Veronica down the gutter. So, instead of stricter rules, perhaps capacity building, social security and other forms of support will be more helpful to her and her peers.
Nowadays, digital solutions are increasingly being used since these can help deliver targeted solutions. For one, digital tools can facilitate the formalization and delivery of public services, including online business registrations and digital identification systems. It can also lead to improved access to financial services and expanded market reach, thus better opportunities.
Three, while digitalization could help address informality, it’s not without challenges.
It’s worth emphasizing that just because digital solutions are used does not mean it will translate to better formalization rates. Strategic efforts to address challenges are still needed to maximize the benefits that such solutions can bring. One aspect that requires attention is the digital divide. People like Mario, for example, can find digital solutions intimidating and uncomfortable. These feelings can come from a general lack of digital exposure or literacy. At the same time, issues related to equipment and internet connectivity could further complicate matters.
Solutions must also be communicated properly and approached in a gradual rather than a sudden way. After all, increasing usage and trust in digital solutions takes time to adjust. The support of a digital ambassador whose role is to provide registration assistance, answer questions and clarify doubts could help, perhaps even aided by tools powered by artificial intelligence.
At the end of the day, stepping outside the shadow of informality is a collective effort. Both those under its shadow and those outside have a role to play. Remember: there is no one-size-fits-all approach to transition away from informality. Arguably, a helping hand rather than a clenched fist is a kinder approach to encourage formalization.
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Sylwyn C. Calizo Jr. is a researcher and Andre Wirjo is an analyst of the APEC Policy Support Unit. They are co-authors of the policy brief Stepping Outside the Shadows: Informality and Digitalisation.
