The FINANCIAL -- GENEVA — A joint study from the International Labour Organization and the WTO has found that high incidence of informal employment in the developing world suppresses countries' ability to benefit from trade opening by creating poverty traps for workers in job transition.
The study is a product of the collaborative research programme of the
ILO International Institute for Labour Studies and the WTO Secretariat.
It focuses on the linkages between globalization and informal
employment and finds that informal employment is widespread in many
developing countries, leaving thousands of workers with almost no job
security, low incomes and no social protection. Levels of informality
vary substantially across countries, ranging from as low as 30% in some
Latin American countries to more than 80% in certain sub-Saharan
African and South Asian countries.
“The study confirms what we know from experience, that by promoting
complementarity between decent work objectives and trade, financial and
labour market policies, developing countries are much better placed to
benefit from trade opening, advance the social dimension of
globalization, and to cope with the current crisis” said ILO
Director-General Juan Somavia. He added that this echoes the recent
call by the G20 to implement “recovery plans that support decent work,
help preserve employment, and prioritize job growth....and to continue
to provide income, social protection, and training support for the
unemployed and those most at risk of unemployment.”
Informal employment involves private, unregistered enterprises which
are not subject to national law or regulation, offer no social
protection and involve self-employed individuals, or members of the
same household. In most cases, informality has remained high and has
even increased in some countries, particularly in Asia.
“Trade has contributed to growth and development worldwide. But this
has not automatically translated in an improvement in the quality of
employment. Trade opening needs proper domestic policies to create good
jobs. This is all the more evident with the current crisis which has
reduced trade and thrown thousands into informal jobs,” said WTO
Director-General Pascal Lamy.
The analyses on the effect of trade opening on the size of the informal
economy suggest that the effect of trade opening on informality depends
crucially on both country-specific circumstances and the design of
trade and domestic policies. The empirical analysis in this study shows
that more open economies tend to have a lower incidence of informal
employment. The short term effects of trade reforms may in the first
instance be associated with higher informal employment. But longer
terms effects point in the direction of a strengthening of formal
sector employment, provided that trade reforms are more employment
friendly and the right domestic policies are in place.
Reducing informality can release additional productive forces, enhance
diversification and strengthen the capacity to trade internationally.
Adverse effects of informality can mainly be related to the absence of
productivity gains and low average firm size resulting from barriers to
firm growth in the informal economy. Entrepreneurship and risk-taking
is reduced when informality is high, partly as a result of badly
designed tax systems, weak social protection and poor business
regulation. Informality also prevents countries from fully benefiting
from trade reforms by creating poverty traps for workers in job
transition.
The higher the incidence of informality, the greater the vulnerability
of developing countries to shocks like the ongoing global crisis.
Countries with larger informal economies suffer more frequently from
shocks and experience lower sustainable growth rates. Also, informal
employment reduces the effectiveness of automatic stabilizers.
Integration into world markets and tackling informal employment through
decent work policies should be considered complementary. Facilitating
formality of firms and jobs helps a country to benefit fully from trade
openness, improves living standards and gives workers access to decent
working conditions. Social protection is also crucial for supporting
transitions and realising the gains from open trade. Greater attention
should be devoted to social protection policies as well as to the
design of trade reforms.
The study suggests that trade reforms should be designed and
implemented in an employment-friendly way, making the reallocation of
jobs more conducive to formal employment growth.
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