Razia Baji, as she is popularly known in her area took me to various homes in the “katchi Abadi” of Kot Lakhphat Lahore where hundreds of craftswomen were striving for a living for their families. Commonly called home based workers, these women were largely dependent on Razia Baji to provide them with orders. Razia runs her own school, her active lifestyle and social demeanour led her to become councillor in 2002. Politics exposed Razia to new avenues, one being the wide and expensive field of NGOs thriving with opportunities for people with unlimited ambitions. After joining a local and leading NGO in Lahore, Razia assumed the image of a Godfather to salvage womenfolk of her area from the ruthless arms of poverty and growing injustice of society. With an apparent aim to empower women financially, Razia Baji as a middle person began securing orders from merchants of different trades: embroidered clothes, bangles, handmade laces, readymade garments etc, for these less privileged women, living in barely one and a half room shanties. Once the beginner’s romance was over, Razia started charging commission against any order she provided to these home based workers. The irony was that none of these workers knew the exact market price of the work they were doing. Whatever Razia Baji gave them on the delivery of the order, which has always been too little compared to the work, was accepted. Against any economic theory the more these women worked the poorer they got. However, Razia in the meantime got richer and obtrusive. When I met these women none of them wanted to speak out, on my insistence, and once I fell out with Razia over her nagging interference, these women talked about the blackmailing they had to bear from Razia in case they refused to comply with the price she offered or the deadline she chose for the completion of the order. Unfortunately these women realise that they would at least be able to provide two secure meals a day for their families, hence refusing Razia has become almost impossible for them. They sit in shanties with their children about them to earn for the day ahead. This single story has many angles to it. This is a narrative of poverty, exploitation and shattered ambition. It is an account of an informal economy that has morphed itself into various shapes to hoodwink the spectre of regulatory systems, labour force, work ethics and the supply chain.
The evolution of the informal economy: Informal economy is a concept disdained by the regulatory system that seeks a share from the profits of any organisation for developmental purposes. Tax payer money, as this share is commonly known, goes into cultivating an atmosphere favourable to businesses in terms of progressive and reliable infrastructure. Precisely it is all about building society one way or the other. From lending employment opportunities to giving taxes, while in many instances generating foreign reserves, organisations bring prosperity to a society. Ideally, this collective good should have been a driving force for people to work within the regulatory system of a given country. However, for years a relatively large population of business community has been working outside this fold by choice. This trend has been increasingly observed more in developing countries than the developed ones. Lack of taxes, poor compliance (hence enforcement), simple production processes, costless entry and exit for manufacturing sector, and cheap labour are said to be a few main causes behind the evolution of the informal sector.
Trust deficit: During one of my recent participation in a focus group organised by Alternative Solutions Institutions on Informal Economy in Pakistan, of the many policy concerns one viewpoint that gained enormous currency among the participants was the issue of trust deficit between the government of Pakistan and its citizens. It was argued that the blatant abuse of tax payers’ money, delayed processes, imperfect competition, cumbersome corporate laws, and unequal income distribution have been instrumental in extending the size of informal economy. A relevant argument came forth, regarding price competitiveness, of products produced in the informal sector. Given a highly unsubsidised business environment and lack of government support, small and medium enterprises choose to operate in an unregulated economic sector that makes their product affordable: though a representative of SME Bank, (a government entity) quite dryly claimed to have a system to pursue small business to lend them finances for business development.
Incentivising the sector: It is estimated that 70 per cent non-agriculture labour force is engaged in informal sector in Pakistan, with 20 per cent in the manufacturing sector. The economic contribution of informal sector is estimated to be around 36 per cent of the GDP. To have left such a big population on the mercy of unregulated working environment is akin to crime says Ume Laila, Executive Director HomeNet a Lahore based NGO. Laila has been working relentlessly persuading Pakistan government to identify and incentivise informal sector to for regulation, since women and children employed in it to a greater number appear to be the primary loser. “What I am trying to hammer down to our officials is that in the absence of any legal binding, employers do not only exploit workers through low wages, but go as far as making them work extra hours at times in insecure and hazardous environment without shouldering social security burden of the labour,” she said. According to one of the studies conducted by HomeNet, we have come to know that due to recurring outages and unreliable business policies of the government many industrialists have shut down their factories to operate through home based unregulated industries. It is more economical and practical for apparel, shoes, readymade garments and many sports item businesses to gather a few women in a small home or for that matter order their work to different households, than to run a factory and shoulder extra cost in terms of legal wages, social security expenses, coupled with the rising cost of production in the wake of energy crisis in Pakistan making their product uncompetitive locally as well as globally.
Tax evasion: Given the tax non-compliant behaviour in Pakistan, where only 19,000 companies file income tax returns, and a few thousand companies actually pay taxes, notwithstanding the number of companies registered with the Security Exchange Commission of Pakistan that stands at whopping 55,511 the need to amend business environment has become all the more important for the government. It has been increasingly demanded by different economic institutions and industrialists that corporate tax be reduced in Pakistan from 35 per cent to at least 30 per cent. This reduction would encourage corporate sector to be generous in investment and encourage the informal sector to switch boards. Presently, with 9 per cent tax to GDP ratio Pakistan is one of the lowest taxpaying nations. Though many arguments are forwarded explaining tax evasion tendency among Pakistanis, one that has gained ground rather strongly is the highly uneven taxation system where some sectors are taxed heavily while some are completely ignored. The manufacturing sector generates 60 per cent of the country’s revenue, with a 20 per cent share in gross domestic product, on the other hand, the agriculture sector with a 25 per cent share in GDP generates only 1 per cent of revenue. In a scenario where government is finding hard to meet its budgetary revenue collection target of Rs1,952 (FY11 collection of revenue stood at Rs1,550) the need to revamp corporate policies and devise incentives for informal sectors to come in the folds of regulatory system becomes all the more imperative.
Implementing reforms: What reforms should be introduced to incentivise the informal sector to become part of the economic system formally, Dr Qais Aslam, a renowned economist of Pakistan, suggested that the government work to formalise the gray economy, by improving the monitoring system to ensure product, environment and pricing standards already stipulated in law. On the implementation side we lack serious lapses in monitoring these standards resultantly we have multiple issues; from degenerated products to price stickiness and environmental hazards. Once the government gets serious in seeing through the implementation of law in its letter and spirit much of the informal sector would automatically start getting formalised. There is a dire need of understanding the notion called “Right of Collective Struggle.” This economic idea is clearly mentioned in our statutory books that seek to defend the rights of labour. It is the duty of the Government to institutionalise protection of community through its arms of law while on the flip side people should also know how to voice their problems. Toward this end the importance of education comes in, education not in its strict academic sense but in the sense of knowing ones rights. Unless people know what they should expect from their employers things would not improve. Many NGOs and private organisations are working toward this end but again unless the government functionaries be it the Police officer, the Revenue officer or the Judicial officer cooperates no good can come out of knowing ones rights. It is because of the inefficiency of our government functionaries that bonded labour or Middle man exploitation has inflicted informal sector so profoundly or for that matter the informal sector is ballooning out. Usually the business owners in informal sectors especially in the brick kiln business are powerful people either part of the government or having strong linkages with police and judiciary. We can lend legitimisation to informal sector by introducing the concept of “zoning”, wherein though the basic law of the country remains identical, the problem solving mechanism for each zone is made to suit that zone’s peculiar problems. Finally the government has to establish its writ. People should know that: they have to pay taxes, they cannot evade utility bills and that pricing is as much a government concern as it is of markets’. When such checks and balances are not put in place then even the formal sector begins slipping into the informal one to save costs and make hey on the cost of government’s complacency.”
Durdana Najam is a freelance financial journalist based in Lahore she can be reached at [email protected]
