> The WTO and International
GENEVA (ILO/WTO News) — A joint study from the International Labour Organization
and the WTO has found that high incidence of informal employment in the
developing world suppresses countries' ability to benefit from trade opening by
creating poverty traps for workers in job transition.
The study is a product of the collaborative research programme of the ILO
International Institute for Labour Studies and the WTO Secretariat. It focuses
on the linkages between globalization and informal employment and finds that
informal employment is widespread in many developing countries, leaving
thousands of workers with almost no job security, low incomes and no social
protection. Levels of informality vary substantially across countries, ranging
from as low as 30% in some Latin American countries to more than 80% in certain
sub-Saharan African and South Asian countries.
“The study confirms what we know from experience, that by promoting
complementarity between decent work objectives and trade, financial and labour
market policies, developing countries are much better placed to benefit from
trade opening, advance the social dimension of globalization, and to cope with
the current crisis” said ILO Director-General Juan Somavia. He added that this
echoes the recent call by the G20 to implement “recovery plans that support
decent work, help preserve employment, and prioritize job growth....and to
continue to provide income, social protection, and training support for the
unemployed and those most at risk of unemployment.”
Informal employment involves private, unregistered enterprises which are not
subject to national law or regulation, offer no social protection and involve
self-employed individuals, or members of the same household. In most cases,
informality has remained high and has even increased in some countries,
particularly in Asia.
“Trade has contributed to growth and development worldwide. But this has not
automatically translated in an improvement in the quality of employment. Trade
opening needs proper domestic policies to create good jobs. This is all the more
evident with the current crisis which has reduced trade and thrown thousands
into informal jobs,” said WTO Director-General Pascal Lamy.
The analyses on the effect of trade opening on the size of the informal economy
suggest that the effect of trade opening on informality depends crucially on
both country-specific circumstances and the design of trade and domestic
policies. The empirical analysis in this study shows that more open economies
tend to have a lower incidence of informal employment. The short term effects of
trade reforms may in the first instance be associated with higher informal
employment. But longer terms effects point in the direction of a strengthening
of formal sector employment, provided that trade reforms are more employment
friendly and the right domestic policies are in place.
Reducing informality can release additional productive forces, enhance
diversification and strengthen the capacity to trade internationally. Adverse
effects of informality can mainly be related to the absence of productivity
gains and low average firm size resulting from barriers to firm growth in the
informal economy. Entrepreneurship and risk-taking is reduced when informality
is high, partly as a result of badly designed tax systems, weak social
protection and poor business regulation. Informality also prevents countries
from fully benefiting from trade reforms by creating poverty traps for workers
in job transition.
The higher the incidence of informality, the greater the vulnerability of
developing countries to shocks like the ongoing global crisis. Countries with
larger informal economies suffer more frequently from shocks and experience
lower sustainable growth rates. Also, informal employment reduces the
effectiveness of automatic stabilizers.
Integration into world markets and tackling informal employment through decent
work policies should be considered complementary. Facilitating formality of
firms and jobs helps a country to benefit fully from trade openness, improves
living standards and gives workers access to decent working conditions. Social
protection is also crucial for supporting transitions and realising the gains
from open trade. Greater attention should be devoted to social protection
policies as well as to the design of trade reforms.
The study suggests that trade reforms should be designed and implemented in an
employment-friendly way, making the reallocation of jobs more conducive to
formal employment growth.
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