Tackling Informality for Inclusive Growth in Developing Countries

Many employees in developing nations are stuck in informal employment, with no access to social security benefits or appropriate resources to manage risk for their families. According to recent estimates, 58.1% of women and 63% of men in developing countries work in informal jobs (ILO, 2018). Particularly in the Middle East and North Africa (MENA) region, it is disconcerting to note that almost two out of every three workers have occupations that are not formal. Numerous issues are brought on by the prevalence of informality, including a lack of social protection, restrictions on growth and production, financial constraints, and more complex structural issues. However, growth that is inclusive of all people can be achieved; informality is not a given state. This article examines the issue of informality and suggests key policy measures to address it, with a focus on Egypt, Morocco, and Tunisia.

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Unpacking the Challenges

• Limited social protection: Because informal employment undermines social protection institutions’ effectiveness and efficiency, many workers and households lack access to social insurance. The system’s ability to eliminate inequality and safeguard weak individuals and families is compromised by insufficient coverage.
• Constraints on productivity and growth: Since informal employment is more common in small businesses, economies of scale, productivity, and total economic growth are all hampered. Informality limits prospects for skill development, creativity, and technical advancement by preventing the emergence of formal jobs.
• Fiscal restrictions: The frequency of informal work lowers tax income, which makes it more difficult to provide basic public goods and services. This reduces the state’s ability to fund the social welfare, healthcare, and infrastructure projects required for equitable growth.
• Structural challenges: In an economy, informality is a reflection of underlying structural problems that impede progress and exacerbate disparities. It maintains an unlevel playing field where enterprises must abide by many rules and regulations, distorting the market and impeding progress as a whole.

Addressing Informality in MENA

The MENA region requires targeted interventions to tackle informality and foster inclusive growth. A comprehensive approach should focus on the following key areas:

• Coordinated reforms: To achieve a unified and coordinated approach to policy changes, governments should create cross-ministerial implementation groups. Policymakers may successfully address informality and create an atmosphere that supports inclusive growth by incorporating several stakeholders and streamlining initiatives.
• Tailored social protection measures should be adopted, with the goal of ensuring that everyone has access to fundamental healthcare services and a minimal level of financial support as they age. This can be done through increasing access to healthcare, changing the employee-contributed pension system, and implementing cash transfer programmes that are specifically designed to help the poor.
• Increasing tax revenue: Governments should give top priority to tax measures that support inclusive objectives. To encourage progressivity, the tax system should be changed with measures like taxing activities that are bad for the environment. Special tax regimes and VAT exemptions should be eliminated, and universal consumer subsidies that are regressive and disproportionately benefit the wealthy should be eliminated. Revenue collection will increase as tax enforcement procedures are strengthened.
• Enhancing delivery of essential services: To foster public trust and encourage tax compliance, it is essential to increase access to high-quality healthcare and public services. Revenue increases brought on by better service delivery can be reinvested to lessen inequality and encourage additional investments.
• Private sector reforms: Lax regulations governing employment stability, streamlined procedures for registering businesses, and enhanced advantages for registered businesses will all improve market conditions. These changes will encourage companies to operate legally, which will support formal employment, boost output, and stimulate the economy.

The informality of the labour market places serious obstacles in the way of social protection, economic development, and equality. Governments can, however, gradually address informality and promote inclusive growth by enacting specific policy measures. Understanding the distinctive causes of informality in the MENA area, particularly in Egypt, Morocco, and Tunisia, is essential for developing workable solutions. The MENA nations may establish an environment that encourages formal employment, boosts productivity, and allows for equitable economic growth by coordinating changes, customising social protection, raising tax revenue, enhancing service delivery, and enacting private sector reforms. Informality may be dealt with, and a road to inclusive development can be realised, with a clear vision and comprehensive policy.