World Economy

New ILO Standard Tackles Informal Economy Trap

New ILO Standard Tackles Informal Economy TrapNew ILO Standard Tackles Informal Economy Trap

The informal economy is huge: it absorbs more than half of the global workforce and includes more than 90% of small and medium sized enterprises–a number that does not take into account a myriad of micro-enterprises in developing countries.

As a result, millions of workers and economic units around the world suffer from poor working conditions and a lack of rights at work. Low quality employment, inadequate social protection, poor governance and low productivity are some of the obstacles that workers and enterprises face when caught in the informality trap. ILO News reported.

That’s why the new international labor standard  that was adopted by the 104th International Labor Conference  was labeled as historic. Because it offers for the first time guidance to member states on how to facilitate transition from informality to the formal economy.

The aim of the new labor standard is three-fold: to facilitate the transition of workers and economic units from the informal to the formal economy, to promote the creation of enterprises and decent jobs in the formal economy, and to prevent the informalization of formal jobs.

 Putting Into Practice

“It is not just about adopting a new recommendation, it’s actually putting it into practice that will matter,” explains Azita Berar-Awad, Director of the ILO’s Employment Policy Department . “There are many examples of good practice around the world who lead the way out of informality.”

The FORLAC program launched by the ILO Regional Office for Latin America and the Caribbean provides a wealth of analytical work and evidence-based policy recommendations and guidelines on facilitating the transition from the informal to the formal economy.

In Uruguay, the social security administration and the tax collection authority decided to team up to establish a simplified and unified collection scheme for small contributors called Monotax (“Monotributo”). People covered by the scheme are entitled to the same social security benefits as workers in the formal economy.

Brazil, where a national integrated policy framework has been adopted to combat poverty, offers an example of a rapidly formalizing country.

 Innovative Investments

Targeted employment-intensive investments can also facilitate the transition to formality. Examples include the very effective employment programs undertaken in South Africa during the recent global financial crisis.

An innovative means of promoting formalization is through microfinance institutions. Microfinance loans, deposits and other service contracts contain elements of the formal economy, without being as sophisticated as mainstream banking services. Together with microfinance institutions (MFIs) in Burkina Faso and India, the ILO has piloted initiatives to test the impact of formalization.

ILO activities in the Philippines are a good example of a possible transition to the formal economy.

One of the positive changes for workers transitioning from the informal to the formal economy is access to social protection

The Self-Employed Women’s Association in India is a successful initiative to organize and empower poor women in the informal economy. The SEWA model has inspired other initiatives, not only in Asia, but also in South Africa and Turkey.

The 12 guiding principles in the new ILO standard have been inspired by these and many other successful country good practices and experiences.

“Isolated approaches which address only one aspect of informality usually have limited results. Successful country experiences in tackling informality were based on an integrated approach. The recommendation builds on the lessons learnt from these successful strategies, provides policy guidelines to help formulate and implement an integrated policy framework to facilitate the transition to formality, and ensure that the framework is included in national development strategies,” concludes Azita Berar-Awad.