Thursday, June 1, 2023

Informality as a multidimensional phenomenon

One of the biggest problems that almost all Latin American economies have is the high level of informality in their companies, especially micro and small businesses. This phenomenon occurs when the owners of relatively smaller economic units prefer to be hidden from the tax authorities, as well as ignore social security.

It is clear that with the informality of the companies, informal employment is also dragged, where thousands of workers are not reported as employees, with the consequent loss of benefits that this entails. According to the International Labor Organization (ILO), labor informality is a structural characteristic in the countries of the region, counting more than 130 million workers, as of 2018, in this condition.

Different studies reveal that the informality of companies is linked to low levels of productivity, as well as the inability to do more business. Also, the complexity of procedures, the perception of few benefits from formalization and the reduced supervision and social sanction, are other factors that, according to the ILO, do not contribute to the formalization of micro and small businesses. In this same sense, it is argued that the costs of formalizing an SME are greater than the benefits that can be received.

In the Dominican case, studies reveal that, by 2021, 45.4% of the income of Dominican households came from informality, and that this informality had reached 59%, being higher than the 56.5% that Latin America and the Caribbean had. . Furthermore, it is suggested that 64.6% of the people in the poorest income quintile and 56.6% of the rural population lived in a totally informal household.

According to the Labor Overview of Latin America and the Caribbean 2022, the reality is that one in two people works informally, which is usually accompanied by job instability, low income, and no social protection. Finally, ILO estimates establish that “informal workers are between 3 and 4 times more likely to be poor than formal workers.”

Based on the previous situation, the experts bet on the implementation of public policies that go in the direction of establishing incentives that promote the formalization of companies, so that they can have access to markets, can increase their productivity, and can access to social security.

In many countries of the Latin American region, efforts have been made in different areas to reduce the levels of informality in companies, but the results have not been so evident. And it is that informality has multiple dimensions and factors, among which the economic, institutional, legal, social and cultural ones stand out.

In any case, and as summarized by the ILO, the transition towards formality requires a comprehensive approach, in addition to the granting of incentives rather than the establishment of taxes and regulations.


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