Characteristics and Impact of Informal Sector Businesses in Peru
– An Analysis Based on World Bank Enterprise Survey
To: Professor Thomas C. Hilde
PUAF 798T Peru Spring Course
From: Jie Ren
School of Public Policy
University of Maryland
May 11, 2016
Table of Contents
I. Background ………………………………………………………………………………………………. 1
A. Informal economy ……………………………………………………………………………………… 1
B. Informal sector in Latin America ………………………………………………………………… 2
C. Informal Sector in Peru ……………………………………………………………………………… 3
II. Problems and Methodology ……………………………………………………………………….. 5
III. Characteristics of Informal Sector Businesses …………………………………………… 6
A. World Bank Enterprise Survey …………………………………………………………………… 6
B. Characteristics of Business Owners and Operations ………………………………….. 7
1. Features of Business Owners ………………………………………………………………………… 7
2. Features of Business Operations ………………………………………………………………….. 10
IV. Potential Negative Impact of Informal Economy ……………………………………….. 12
A. Impact on Productivity …………………………………………………………………………….. 12
B. Implications to Public Policies …………………………………………………………………. 14
V. Lessons from Ecuador …………………………………………………………………………….. 19
VI. Conclusion ……………………………………………………………………………………………… 21
Appendix
I……………………………………………………………………………………………
………….……………22
Appendix II
………………………………………………………………………………………………
…………………..23
1
I. Background
A. Informal economy
During the process of development, emergence and growth of informal economy is a
common concern for many countries. It is usually seen in the form of self-employment, which
represents 70% of informal employment in Sub-Saharan Africa, 62% in North Africa, 60% in
Latin America and 59% in Asia1. One the one hand, informal sector potentially generates more
jobs and income, especially for people with lower income or less access to opportunities in
formal sector. However, it also results in negative impacts on productivity, public service,
market efficiency, equality among others. As a result, economic and social cost of informality is
much larger in the long run. Unfortunately, this is not a problem that would eventually disappear
by itself when a country is moving forward towards higher development level. It needs to be
addressed by policies through constant effort and wide collaboration.
Meaning of informal economy can be approached from different perspectives. Because of
the nature of the problem, however, it is hard to define and measure informal economy in a clear-
cut way. The International Labor Organization (ILO) adopts a productive measure of informality
by defining it as economic units with scarce or even no capital, using primitive technologies and
unskilled labor, and then with low productivity2. Another definition adopted by the World Bank
is that the informal economy refers to activities and income that are partially or fully outside
government regulation, taxation, and observation. Despite different definitions, businesses in
informal economy usually share some common characteristics such as low entry requirements in
1 ILO, Women and Men in the Informal Economy, A Statistical Picture, 2002
2 ILO (1991), Dilemma of the informal sector. Report of the Director–General presented at the 78th International
Labour Conference, International Labour Office, Geneva.
2
terms of capital and professional qualifications, small scale of operations with labor-intensive
production, and skills acquired outside of formal education3.
B. Informal sector in Latin America
Regardless of the grown in employment, wage and social protection in Latin America and
the Caribbean, informal employment is still a huge concern in the area. According to ILO, nearly
15 million people are unemployed. For those who are employed, there are still 130 million
workers holding informal jobs, deprived of social protection and labor rights. Moreover, there
are approximately 20 million youth in the region who neither study nor work and are presumably
discouraged by high youth unemployment rates and poor labor conditions. Another report from
ILO on informal employment in 14 Latin America in 2013 suggests that 47% of jobs in Latin
America are informal, most of which exists within the informal sector while 11% of the
workforce has an informal job in the formal sector.
To measure the degree of informality among businesses in 135 countries, four indicators
are chosen in World Bank’s Enterprise Surveys to make comparison: percent of firms competing
against unregistered or informal firms, percent of firms formally registered when they started
operations in the country, number of years firm operated without formal registration, and percent
of firms identifying practices of competitors in the informal sector as a major constraint. Table
1.1 below shows that comparing with the average level of all 135 surveyed countries and other
regions, Latin America and Caribbean has higher value in all indicators thus a more severe
problem of informality.
3 Becker, Kristina Flodman. The informal economy: fact finding study. Sida, 2004.
3
Table 1.1: Informality indicators in selected regions and countries
Informality Indicators in Selected Regions
Economy
Firms competing
against
unregistered or
informal firms
(%)
Firms not formally
registered when they
started operations in the
country (%)
Number of years
firm operated
without formal
registration
All Countries
51.7
10.8
0.7
East Asia and
Pacific
44.8
10.8
0.7
South Asia
41.1
13.2
0.8
Middle East
&
North Africa
42.6
13.4
0.6
Latin America
& Caribbean
61.9
14.1
1.3
Data Source: Enterprise Survey, the World Bank
C. Informal Sector in Peru
There is a broad consensus that informal economy is a big problem for Peru’s
development. In a speech in April 2008, President García referred to informality as “slavery of
the twenty-first century.” To compare Peru with other countries in the region, three countries of
similar income level are chosen to examine their change rate in non-agriculture informal
employment from year 2009 to 2013. Gross national income (GNI) per capita (purchasing power
parity method) of these countries in year 2014 fall in a range of 8470 to 14420 international
dollars4. As shown in the table 1.2 below, Peru was one of the countries with highest non-
agriculture employment in informal sector in 2009. It has been decreasing since then, but the
change in four years has been relatively moderate comparing with other countries.
According to Enterprise Survey, of all 132 countries with data record, Peru ranks the 98th
in terms of percent of firms formally registered when they started operations in the country and
the 101st in terms of percent of firms not identifying practices of competitors in the informal
4 World Development Indicators Database, World Bank, April 2016
4
sector as a major constraint. The low registration rate and large adverse impact of informal sector
on formal businesses imply the urgency of related policy solutions.
Table: Non–agriculture informal employment percentage in five Latin American countries across years
Non-agriculture informal employment
Country
2009
2011
2013
Change from 2009 to 2013
Peru
69.9
68.8
64.0
-8%
Paraguay
70.7
65.8
63.8
-10%
Ecuador
60.9
52.2
49.3
-19%
Costa Rica
43.8
33.6
30.7
-30%
Data Source: International Labour Organization, Trends in informal employment in Ecuador: 2004–2012
International Labour Office, 2012 Labour overview: Latin America and the Caribbean
II. Problems and Methodology
The prevalence of informal economy can be seen in the development process of many
countries. It in a way promotes economic growth by mobilizing resources such as labor and
capital. However, it has negative impacts on society in the long run. One of the well-recognized
influence is that informal sector hinders growth of productivity. Another big concern is that a
strong informal sector means less government tax income thus worse public social services.
This paper studies the characteristics and possible impacts of informal businesses in Peru