5 - Policy options and approaches

Summary

Introduction

Having shown the multifarious forms of informal work, diverse population groups who participate and wide range of motives for participation, we now turn to the issue of tackling the informal economy. To do so, this chapter reviews each of the four possible hypothetical policy goals available to governments: taking no action; eradicating the informal economy; deregulating the formal economy; or formalizing the informal economy. In each case, the disadvantages and advantages of these policy options are reviewed. This will reveal that if no action is taken, the disadvantages far outweigh the advantages. Secondly, if eradicating the informal economy is pursued as the policy goal, the disadvantages again outweigh the advantages, as is also the case when deregulation of the formal economy is pursued. In consequence, this chapter will argue that formalizing the informal economy is the most viable policy goal. Indeed, this is also the conclusion of the supra-national agencies when considering what is to be done about the informal economy (European Commission 2016; ILO 2015; OECD 2016).

Given this goal of formalizing the informal economy, the second section of the chapter reviews the policy measures available for achieving this objective. This will set out two broad sets of policy measures. On the one hand, there are direct policy measures, which seek either to dissuade participation in the informal economy and/or to incentivize and encourage participation in the formal economy. To do so, measures are used that directly increase the costs and reduce the benefits of informality, as well as reduce the costs and increase the benefits of operating in the formal economy. The aim in doing so is to address the formal institutional failing, namely the powerlessness of formal institutions, which results in the greater prevalence of the informal economy. Using these direct policy measures on their own, however, does not tackle the other formal institutional failures and imperfections that produce institutional asymmetry and thus the greater prevalence of the informal economy.

On the other hand, and to address these other formal institutional failures that lead to institutional symmetry and to large informal economies, indirect policy measures can be used.