Informal workers contribute the most to the economy in the region but are excluded from the legal and contractual protections of formal workers.
As the COVID-19 crisis continues to unfold across the world, informal workers remain exceptionally vulnerable to the economic and labour market shocks of the pandemic. Many of these workers are likely to lose their jobs and face extreme poverty and food insecurity as the disease intensifies across large informal economies, such as those in South Asia.
The risk of civil unrest and social tension is also growing making the plight of informal workers a major political worry for South Asian governments. A lack of regulatory, policy, and legislative structure to reach informal workers in the region is making it more challenging for governments to provide relief and take measures to restore basic livelihoods for informal workers at this time.
Informality in South Asia
In the absence of reliable statistics, the informal sector remains poorly understood in South Asia. In its first ever assessment of informal employment in 2018, the International Labour Organisation (ILO) estimated that over two billion (61.2%) of the world’s employed population is informal. In South Asia, this figure may be as high as 80%, if not more.
- Almost 90% of the 500 million workers in India (the world’s third largest economy) are part of the informal sector, contributing to at least half of the national gross domestic product (GDP).
- More than 85% (over 25 million) of the labour force in Bangladesh is informal, amounting for almost 50% of the GDP.
- In Pakistan, up to 72% of the jobs outside agriculture are in the informal sector, contributing a third of the GDP.
A significant proportion of informal employees engaged in non-agriculture work across Pakistan, India, and Bangladesh are involved in one of the four broad occupational groups: Street vendors, waste pickers, home-based workers (subcontracted by both formal and informal enterprises), and domestic workers.
These workers are subject to an unpredictable and irregular employer-worker relationship, not defined by conventional forms of workplace and labour regulations. Many formal businesses also hire informal workers. In Pakistan, the formal sector accounts for almost 5% of all informal employment.
Unprecedented economic slowdown
South Asia happens to be one of regions in the world where containment measures were introduced swiftly and strictly before the number of COVID-19 cases began to spike. By 25 April, South Asia accounted for just under 2% of the global cases -compared to 30% each for the United Stated (US) and European Union (EU). Even so, the World Bank has predicted that growth in South Asia will fall between 1.8% and 2.8% within 2020, down from an earlier prediction of 6.3% just six months prior.
In the worst-case, the entire region could face negative growth. Pakistan is currently under-going its thirteenth International Monetary Fund (IMF) bailout and is expected to see negative GDP growth by the end of the current fiscal year. This will amount to a possible loss of four to 18 million jobs across formal and informal sectors.
The World Bank has cut projections for India’s economic growth from an earlier 6.1% to between 1.5% and 2.8% for next fiscal year. Around 30 to 100 million Indians may lose their jobs (formal and informal). GDP growth in Bangladesh for 2020 is forecasted to be in the range of 2% to 3%. Around 2.5 to 3 million layoffs have been estimated for the apparel sector alone.
During previous economic slowdowns in the region, the informal economy (comprising of both small businesses and individual workers) chugged along without encountering any major disruption. However, in the face of the current pandemic, South Asian countries are finding it excessively challenging to sustain the informal economy. A range of workers, including salaried factory workers, small/daily wage earners, home-based workers, and migrant labourers are suffering economically.
Restrictions in movement are disrupting the supply chain for food, agricultural goods, essential services, and reliable access to markets. Thousands of small and medium-sized enterprises (SMEs), which rely largely on informal workers, are now facing a reduction in domestic demand and are at risk of permanently shutting down their operations. Those reliant on the cash-based sector are struggling to earn the bare-essentials to survive. Workers associated with the informal retail, wholesale, hospitality, and transport sectors are hit worst by the containment measures.
Impacts on informal workers:
- Loss of income
The most widespread impact of the economic slowdown has been a loss of income. As it is, informal employees are more prone than their formal sector counterparts to poverty. One in every four poor households in Bangladesh is engaged in non-farm informal activity, such as construction work. This type of work has been significantly affected by lockdowns.
While there is not enough data to predict how many people will retain a secure job once the pandemic is over, for many the loss of livelihood could be long-term. Some lockdown measures in India have led to the demolishment of street vending infrastructure by local governments denoting a permanent loss of income. Even a temporary loss in income can have devastating consequences for those whose livelihoods are based on hand to mouth subsistence, without any savings or assets to fall back on.
- Disproportionate health burden
The overall burden of any illness, accident, or disability tends to be high for informal workers, given the nature of their work and where it takes place. Those that continue to work during the current pandemic face high exposure to the virus itself. They often live in slums or congested housing compounds without access to adequate sanitation or clean drinking water.
In South Asia, the health risks more specific to the virus are layered on top of the systemic issues already existing in the region. South Asia lacks a universal health insurance system and has weak health infrastructure. In 2017, South Asia only spent 0.9% of its GDP on public health; half of what was spent in sub-Saharan Africa (1.9%) and one-fifth of the allocated budget in East Asia and the Pacific (4.5%).
- Lack of legal recognition and protection
Informal workers are often unable to access social safety nets and labour rights as they are not officially acknowledged as workers. In India, among the regular wage/salaried workers in the non-agriculture informal sector, almost 50% do not have access to any social security benefit. They seldom have secure employment contracts in place and are therefore excluded from the protection of conventional labour laws. They also lack workers' union representation and corresponding access to collective bargaining.
- Limited access to social protection
Direct cash transfers typically and predominantly target the ultra-poor. Due to exclusion errors, informal workers are often left out. An adverse income shock could be distinct from their baseline wealth/asset scores used to determine enrolment into existing social protection schemes. For example, Pakistan’s Benazir Income Support Programme (BISP) targets households below a certain threshold based on their means testing score - this targeting approach bypasses informal workers.
In the absence of any coping mechanism to counter economic shocks, thousands of migrant workers residing in Indian cities had no choice following the sudden implementation of the twenty-one-day lockdown but to rush back to their villages, many by foot and with scarce food. In the face of limited access to savings and contingency funds, their households are likely to resort to negative coping strategies, such as selling assets, borrowing from informal moneylenders, or engaging in child labour.
Responding to the impacts on informal workers:
- Data to inform the design of large-scale programmes
Setting up big official machinery to implement social protection and relief programmes is not easy. A major constraint in rolling out targeted relief programmes is the lack of information on informal workers. In January, India was all set to create its first national database of an estimated 450 million informal sector workers to provide them with universal social security coverage. In Pakistan, the results of a comprehensive population census conducted in 2017, after a lapse of almost 20 years, are still pending approval and unavailable for policymaking.
While technology can be used to fill critical information gaps, policymakers should be realistic in their expectations, increasing their reliance on spatial data and mobile phones to gather geo-tagged data. Average mobile phone penetration across India, Bangladesh, and Pakistan remains under 40%. Using digital technology to make mobile payments may not be as effective in places where access to banking is limited.
- Designing the right kind of policy interventions
Tax relief and wage subsidies are usually only offered to formal enterprises and do not reach informal firms where the bulk of the workforce is employed. Bailouts for small informal enterprises or businesses is also rare. As a long-term measure to stabilise the economy, a renewed focus on formalising the economy could in fact hurt the informal sector by increasing the tax burden on small business.
Determining mechanisms to quickly deploy economic support to informal businesses and individuals, and establishing methods to target them effectively, is especially challenging for the undocumented economy. In the absence of functioning markets and intact supply chains, policymakers may need to consider food/in-kind transfers in the form of rations in place of cash.
- Creating fiscal space to provide relief
Governments in India, Pakistan, and Bangladesh have already passed large stimulus packages to provide support to the most economically vulnerable in their countries, including emergency funding/relief for businesses and individuals. These packages are modest compared to those of developed countries and reflect the region’s limited financial resources. However, they do include some form of relief to the needy, mostly in the form of rations and/or a one-time cash transfer.
For example, India announced a US$ 22.6 billion economic stimulus plan (2% of GDP), including direct cash transfers. Bangladesh announced a US$ 11.6 billion stimulus package (close to 3.5% of GDP), even though stimulus spending to date is biased towards industry, instead of the poor and vulnerable. Pakistan also announced an US$ 8 billion stimulus package (1.5% of GDP) with an additional US$ 0.4 billion to protect small businesses and the unemployed.
These economic support packages are well-designed but not large enough to address the urgent challenges of informal workers, as governments are fiscally constrained. Options for creating additional fiscal space will vary for each country – ranging from the restructuring of debt, to official assistance, to altering domestic fiscal policy.
Policy recommendations: Recognising the contribution of informal workers
- To react instantly, governments must work with what they already have before new and better systems can be built.
This means that approaches in each country can look vastly different, reflecting the underlying systems of delivering social assistance.
- Devise mechanisms to extend the coverage of existing social protection programmes to informal workers to enable them to survive the immediate impact of the pandemic.
Where existing registries or databases exist, quick assessments can be made on their relevance for the scale-up of social protection interventions. Governments also need to introduce reforms to stabilise the long-term impacts of the economic shock on informal workers and find innovative and sustainable ways to identify and reach those that need assistance.
- Move away from restrictive means-tested poverty-targeting towards broader interventions.
Essential information parameters, such as identification document (ID) numbers, names, addresses, and mobile numbers can be used instead of relying on additional monitoring information, such as assets, household composition, and socio-economic details that are difficult to collect.
The International Growth Centre (IGC) is supporting the provincial government in Pakistan in designing a social protection scheme based on self-targeting, where potential beneficiaries will be verified via a machine learning algorithm trained to differentiate a poor locality from a rich one. Background verification via electricity bills can also be explored, especially at a time when means/asset testing is not practical.
- Protect economic sectors that rely extensively on informal workers and can otherwise put food security at risk, such as the agriculture and food industries.
Restoring disruptions in the food supply chain and strengthening market linkages for local producers can benefit informal workers and ensure the provision of some of these essential services and goods. There are examples in India of vans delivering vegetables to citizen’s doorsteps. Some state governments have also ensured provision of required groceries to make midday meals, which children are usually served in schools, at their homes.
Solutions developed for COVID-19 response should be linked to broader social protection initiatives towards building a comprehensive system that is resilient to pandemics. Underlying all these efforts must be a commitment to introduce legislation to recognise informal workers as significant contributors to the economy.
Disclaimer: The views expressed in this post are those of the authors based on their experience and on prior research and do not necessarily reflect the views of the IGC.