Informal Economy Swallows LatAm Workers John Otis - GlobalPost
go to original July 4, 2012

GUATEMALA CITY, Guatemala — Suleima Ojer has worked full time since she was 11.

To help support her family in rural Guatemala, Ojer dropped out of elementary school to pick coffee beans. Later, she moved to Guatemala City where she worked 14-hour days cleaning houses for half the country’s minimum wage.  

Now, after 44 years of ignominious labor, Ojer has no savings, no health care, and no pension. Retirement seems like a distant fantasy. In Guatemala, said Ojer, who is 55, “you have to work until you no longer have the strength to work.”

Like Ojer, an astounding 75 percent of Guatemalan workers toil in the so-called informal economy. They are often self-employed or work at odd jobs that are untaxed and unmonitored by the state, also referred to as the underemployed.
 
But no matter the moniker, these workers nearly always lack government protections and benefits available to salaried, punch-the-clock employees — such as minimum wage, regulated hours, insurance, pensions, and the right to join unions and collectively bargain with employers.

Guatemala has one of the world’s highest rates of informal employment. But throughout Latin America, Africa and Asia, unregistered workers and businesses are ubiquitous. According to the World Bank, informal employment comprises half to three-quarters of all non-farm jobs in developing countries.

To some, these workers stand as an inspiring testament to the entrepreneurial spirit and the will to survive and prosper. However, armies of street venders and rows of improvised mom-and-pop stores also signal economic backwardness, said Michel Andrade, a labor analyst at the Guatemala City think tank Asies.

Off-the-books workers and businesses go untaxed and therefore deprive governments of vital revenue. Workers often find themselves stuck in risky, low-wage jobs with few chances of moving up the economic ladder.

This lack of mobility is tied to a dearth of credit. Informal workers rarely hold legal property titles that could be used as collateral for small-business loans that might allow them to expand and hire more workers.

“Informality is a trap because it prevents the emergence of a dynamic economy,” Andrade said. “It allows people to survive but nothing more.”

Legalize it

When the phenomenon was first studied in the 1950s, analysts predicted that informal workers would transition to formal jobs as economies advanced.

But for a number of reasons, these extra-legal laborers have become a permanent fixture in economies saddled with a massive influx of unskilled laborers migrating from the countryside into cities.

In many cases, government red tape can practically force people and businesses to stay informal.

In one widely noted experiment in the late 1980s, Peruvian economist Hernando De Soto tried to legalize a small, one-employee garment shop on the outskirts of Lima. His team began making bus trips into central Lima, standing in line and filling out forms to secure the required licenses and certifications. They finally registered the business after working full time for 289 days at a cost of $1,231 – which was 31 times the monthly minimum wage.

“Inevitably,” De Soto later wrote, workers and small business owners “do not so much break the law as the law breaks them – and they opt out of the system.”

Even when workers have the chance to join the system, some refuse because it means paying taxes in exchange for watered-down benefits, such as access to public hospitals that lack antibiotics or a minuscule monthly pension checks.

Many government officials view the informal economy as a useful escape valve that relieves some of the pressure on them to create good jobs. What’s more, some economies are based on environments in which labor rights are almost nonexistent.

In Guatemala, for example, some highly regarded agribusinesses rely on informal workers, including children, according to Alejandro Argueta, a Guatemala labor lawyer.

“The logic of the economic system in this country is precisely to deny workers their rights and to maintain informality,” Argueta said.

He added that because legions of underemployed people are clamoring to replace them, salaried workers in Guatemala tend to be more docile and are less likely to push for better wages and benefits out of fear of angering their bosses. It’s no wonder, he said, that only 3 percent of the country's formal labor force belongs to unions.

However, labor rights advocates argue that the difficulties in bringing more people into formal employment in developing countries hardly justify throwing in the towel. They claim that improved tax collection can lead to better government services and convince people of the benefits of formality.

In the United States, tax revenues represent about 25 percent of gross domestic product. That helps underwrite decent public services and social security. But in Guatemala, where the informal economy reigns, tax receipts make up just 11 percent of GDP, which helps explain the dismal state of public hospitals and schools and tiny pension payments, according to Carlos Gonzalez, a former director of the country’s central bank.

Rather than reforming their tax codes and social security systems, however, many countries — including Brazil, Mexico and Guatemala — sometimes encourage informality.

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