Asia’s hidden economy masks hard realities

The deaths of 39 migrants found dead last month in the back of a truck in the United Kingdom were a grim and tragic reminder that, despite Asia’s world-beating growth rates, poverty and low pay continue to push people to risk their lives to work overseas.

Vietnam’s gross domestic product (GDP) per capita has quintupled to US$2,563 over the last 15 years, buoyed by one of the world’s fastest growing economies, but all 39 dead were economic migrants who had left impoverished areas of central and northern Vietnam in search of more gainful employment abroad.

As elsewhere in Asia, these rural regions are dominated by the so-called informal economy, outside of the reach of government protection and regulation. Based on estimates published last year by the World Bank, 47% of all employment in the East Asia and Pacific Region is informal.

According to the United Nations’ International Labour Organization (ILO), two billion people, or more than 61% of the world’s employed population, toil in the informal economy, with the percentage for the Asia-Pacific even higher at 68.2%.

Speaking at a mid-November International Monetary Fund (IMF) seminar focused on measuring the informal economy, François Roubaud of the French Research Institute for Sustainable Development said “there is a massive underestimation of the informal economy in the national accounts of Vietnam.”

“The informal sector, and more broadly the informal economy, is ubiquitous in Vietnam as in most developing countries, and many households, in particular the poor, derive all or part of their earnings from it,” Roubaud and co-author Nghiem Thi Van, of the General Statistics Office of Vietnam, outlined in a paper on Vietnam’s informal economy.

According to the ILO’s estimates, the share of informal employment ranges from 94.3% in Nepal and 93.1% in Cambodia. In rich versus poor comparison, that figure is below 20% in Japan. Overall, the share of informal employment averages 71.4% in developing and emerging Asian countries and 21.7% in developed Asian nations.

In late 2018, The Tokyo-based Asian Development Bank Institute described small and medium enterprises (SMEs) as “the backbone of the Asian economy,” making up “more than 96% of all Asian businesses” and “providing two out of three private-sector jobs on the continent.”

Such small businesses, along with those in agriculture, employ much of Asia’s vast pool of informal workers, the laborers that drive a massive amount of economic activity that is generally off the radar of officials, regulators and tax collectors.

In countries such as Myanmar and Laos, among Asia’s poorest and smallest economies, informal workers make up between 60% and 80% of total employment, while 76% of Indian workers are categorized loosely as self-employed, according to estimates published by the World Bank in 2018.

Ranil Salgado, the IMF’s mission chief for India, “there are several factors contributing to informality in India, including rigidities in the labor market due to strict regulations as well as issues related to the regulatory framework and enforcement, the quality of institutions, and governance.”

A separate IMF report published in October suggested that India’s sheer size will see it jump ahead of the United States and into second place behind China as a source of global economic growth by 2024, with its 5% plus annual growth set to comprise over 15% of total world growth.

However, it appears unlikely that India can modernize its economy over that timeframe and thereby reduce its huge informal employment numbers, with Prime Minister Narendra Modi recently withdrawing from the 16-country Regional Comprehensive Economic Partnership (RCEP), a trade deal, under pressure from business sectors which fear foreign competition.

“Reducing informality in India would therefore require concerted efforts to deregulate and improve governance and institutional quality. In this regard, further modernizing labor laws to encourage formal sector job creation should take increasing priority,” said the IMF’s Salgado.

A similar dynamic is at play in Indonesia, where rigid labor laws are an incentive for businesses to employ informally, former finance minister Muhamad Chatib Basri argued in a recent paper published by the Singapore-based ISEAS-Yusof Ishak Institute.

The same strict laws are a drag on Indonesia’s economic growth, in part as they deter job-creating manufacturers from setting up shop in the country, according to UK consultancy Capital Economics.

Indeed, getting a handle on the the size and scale of Asia’s informal economies is difficult, as informal work or business is more or less off the books in most cases. “This is because this activity is unregistered and not, for example, in tax administrative records,” said Jennifer Ribarsky, senior economist at the IMF’s Statistics Department.

Estimates vary but recent studies by the ADB and HSBC bank suggest that developing Asia needs to spend trillions of dollars on infrastructure in the coming decades to sustain growth rates high enough to lift hundreds of millions of people still stuck in poverty.

Much-needed spending on infrastructure would likely mean thousands of new construction jobs, which would conceivably produce formal work from state-backed contracts.

However, according to United Nations Conference on Trade and Development (UNCTAD), in its newly-published annual report assessing the world’s Least Developed Countries (LDCs), “the main factors constraining the tax potential of LDCs include tax evasion, the relative size of the informal economy compared to the formal economy, weak tax administration systems, corruption, illicit financial flows and underperforming public policy and institutions.”

The informal economy, according to Shu Yu of the World Bank, who also spoke at the IMF event, is “associated with under-development, heavy regulations and weak governance.”

The scale and opacity of these vast informal sectors fuel high emigration rates in some parts of Asia.

While the majority of such migrants will not face the same grim end as the Vietnamese who recently perished en route to a hoped for better life in the UK, the numbers lend further weight to the view that growth rates alone often paint too rosy a picture of how prosperous the region has become.

There are an estimated 4.9 million foreign workers in Thailand, making up more than 10% of the country’s workforce, according to the UN. Most are from neighboring poorer countries such as Cambodia, Laos and Myanmar who toil in tough informal economy conditions.

Malaysia’s smaller but wealthier economy has also long been a draw for workers from the region’s poorer countries, with significant numbers of migrants from Bangladesh, Indonesia, Myanmar and Nepal who work across a range of informal jobs.

Singapore’s wealth-per-capita tops that of most Western economies and has long been a draw for workers from elsewhere in Asia, with only 3.5 million of the city-state’s population of 5.7 million listed as citizens.

Almost 200,000 Filipinos work in Singapore, despite their homeland enjoying some of the world’s highest growth rates in recent years, measuring between 6-7% since 2012.

The Philippine economy still relies heavily on overseas Filipino worker (OFW) remittances, which hit a record $32.2 billion and contributed 9.7% to GDP in 2018. Many of them fled because they cannot earn enough in the country’s informal economy, which is growing rather than shrinking even as the Philippines’ overall economy grows, research shows.

“In the 10-year gap from 2006 to 2016, the share of the unorganized sector in agriculture and in industry to nominal GDP has grown,” wrote Lisa Grace Bersales of the University of the Philippines School of Statistics, in a paper presented at the IMF event and co-authored with Vivian Ilarina, assistant national statistician at the Philippine Statistics Authority.

Bersales and Ilarina, however, acknowledged the available data has “not been enough” to enable accurate measurements of the Philippines’ informal economy, a statistical deficit found in nearly all Asian countries.

According to the IMF’s Ribarsky, “it is also difficult for statistical offices to capture this [informal] activity on traditional surveys because it is often small-scale and undertaken by households where the main objective is generating employment and incomes for the persons concerned.”