Speech

The Informal Economy and Inclusive Growth

November 14, 2019

As Prepared for Delivery

Introduction

Thank you, David, for the kind introduction.

I am so sorry I cannot join you in person today. However, it is my pleasure to welcome all of you to the 7th IMF Statistical Forum.

As David noted, informality is an issue we deal with every day in a range of economies. It is usually concentrated in unregulated activities that are difficult to measure, including agriculture and retail.

I have been interested in this topic for some time. In fact, when I was at the World Bank, I wrote about how technology can be used to reduce informality.

The reality is that far too many governments face difficulties in measuring informality. Because of poor official statistics, policymakers depend on unofficial estimates. This is why IMF staff has engaged to provide more reliable estimates. For example, we recently estimated that informality comprises 38 percent of GDP in sub-Saharan Africa during 2010 - 2014 and, in some countries, accounted for up to 90 percent of jobs [1]!

We have to better understand informality, because growth depends on it. Let me take a few minutes to explore this critical issue.

How does the informal economy relate to inclusive growth?

Take the case of digitalization. It has created more opportunities for individuals to engage in informal employment to supplement their income. Think of all the people who work in the gig economy. But we may be missing gig economy employment in labor force surveys [2].

The informal economy can provide income or a social safety net. [3] But it is a complicated issue. Poverty levels among people in informal employment are, on average, twice as high as that of people in formal employment. Why? Because of low productivity, low incomes, and limited access to government benefits.

Informality results in lower tax revenues that hinders the government’s ability to spend on social programs and investment. This means the individuals that are most in need of social programs and public infrastructure may not receive them.

IMF recent analysis has shown that persistently high inequality is associated with lower, less durable economic growth and greater financial instability.

That is why understanding informality is part of how the Fund is delivering on its commitments to help countries meet the 2030 Agenda for Sustainable Development Goals. Through policy advice, through lending programs, and through capacity development we are helping countries close the gaps and meet this enormous challenge. If we get a better handle on informality, it may unlock much needed progress in a range of areas. Let me explain what I mean.

Measuring the informal economy means better policies

More accurate estimates of the informal economy can help make policies more effective and better targeted. In Uganda, for example, we assessed different changes to tax policies and found that, since a large part of the economy is untaxed, changes in tax policy did not significantly affect income distribution.

The informal economy is also an important source of employment for women. The ILO estimates that in developing economies, 92 percent of women workers are informally employed. This is the opposite of what we see in advanced and emerging market economies, where it is a greater source of employment for men.

For women, the challenge is compounded by the fact that, in addition to being paid less than men in formal employment, they are also paid less than men in informal employment.

If we are missing out on measuring the size of the informal economy, are we also underestimating the contribution of women to economic growth?

We also know that informality is more concentrated in some activities—but to what extent, and how does concentration vary from one economy to another? Statistics on the activities in the informal economy, in employment, productivity, and even the regions where the activities are prevalent are critical for designing targeted policies to support them.

If we cannot measure informality, we cannot evaluate how inclusive economic growth really is. So we may not be able to determine whether policies are working as they are intended.

Let me conclude with my sense of optimism. I hope you will leave here with a better appreciation of the challenges and opportunities in measuring the informal economy and a broader recognition of the benefits of doing so. I believe this Forum will provide further momentum to improving these statistics. We at the IMF will continue our collaboration with member countries and international organizations to improve the estimates of the informal economy and in the process help countries realize their full economic potential.

Thank you.