Bridges Weekly Trade News Digest • Volume 13 • Number 35 • 14th October 2009

Large Informal Sectors Limit Trade Benefits in Some Developing Nations: ILO, WTO

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Developing countries with relatively high levels of ‘informal employment’ - below-the-radar jobs that are not subject to government laws or regulations - tend to experience fewer benefits from trade liberalisation, according to a new report from the World Trade Organization and the International Labour Organization (ILO). Informal employment creates poverty traps for workers in between jobs, the study concluded, and social protections and employment-friendly trade reforms are critical to helping countries fully benefit from open trade.

“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 globalisation, and to cope with the current crisis,” said Juan Somavia, ILO Director-General.

The study also found that economies that are more liberalised tend to have lower levels of informal employment. Over the long term, trade opening generally strengthens countries’ formal employment sectors, provided that governments implement employment-friendly reform policies.

“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.

Informal workers, who by definition do not pay taxes, lack access to government-run social programmes such as insurance and pension funds, which means that they suffer a disproportionate blow when an economic crisis hits.

“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,” the ILO and WTO said in a joint statement.

The absence of a social safety net also translates into lower levels of entrepreneurship and other forms of risk-taking in countries with large informal sectors, the study concluded..

But no two countries have the same experience: the interplay between trade openness, trade benefits and the informal sector hinges largely on “country-specific circumstances and the design of trade and domestic policies,” the study found.

Indeed, levels of informality vary widely from region to region. A handful of Latin American countries have rates as low as 30 percent, while some African and South Asian nations register levels of more than 80 percent.

More information

The report is available online at http://www.wto.org/english/res_e/booksp_e/jobs_devel_countries_e.pdf

ICTSD reporting; “World’s poor see few job benefits from trade boom,” REUTERS, 12 October 2009; “Informal jobs account for 93% of India’s workforce: ILO,” THE TIMES OF INDIA, 12 October 2009.

One response to “Large Informal Sectors Limit Trade Benefits in Some Developing Nations: ILO, WTO”

Faisal Shaheen 15th October 2009 at 13:01
While the degree of informality certainly signals a weakness of the state to create employment opportunities and extend benefits to a significant number of workers, linking a lack of growth to the degree of IS growth hinges on the definition of the IS and degree of informality.

Developing nations have traditionally employing labour in artificially inflated ’sick firms’ and state entities, have been forced to reduce numbers without a sustained competitive advantage in other sectors to absorb shock. Globalization and the rhetoric of trade benefits for all has not supported equitable growth distribution in the global south, resulting in an increase in informality. Furthermore, recent growth in OECD nations has also been accompanied by increases in the casualization of labour and reduced benefits for all. A lack of loyalty, increases in temporary labour, precarious work conditions are all evidence of recent growth trends. Taken in a different light, the IS arguably enables poor countries to absorb shocks by providing a flexible pool of labour that can easily be allocated across sectors, allowing for more rapid deployments to meet supply side shifts in the market and retaining price elasticity on demand sides of the equation. The example from Ghana is perhaps a case where policy makers have taken the initiative to recognize and rehabilitate the IS. Northern policy makers would be wise to follow suit.