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The system?

Ja's informality and the pursuit of economic progress

Dennis Jones

Sunday, October 18, 2020

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PART of the current plan developed by the preceding Administration under Finance Minister Dr Nigel Clarke to rebuild the economy is to reduce informality.

Associated with that is the aim to increase the number and scope of those who are in the banking system. Prime Minister Andrew Holness recently bolstered his advocacy in this regard with the statement: “Real wealth cannot be created in an environment where there is a high level of informality. Every Jamaican, irrespective of age or class, ought to have a bank account.” (https://twitter.com/andrewholnessjm/status/1311753199150411776?s=21)

Now, many benefits can come from this, including making it easier for the State to know who are its citizens and what they are doing. Also, in principle, citizens should benefit from being about to use the banking system to intermediate and reduce dependence on cash. Of course, for many, cash is king because of its anonymity (aka keeping things informal, or less than fully formal). However, it's clear that informality has been a boon for Jamaica by giving it greater economic flexibility, which has been a crucial safety valve in the context of many structural inefficiencies.

I have lots of concerns about informal activities in Jamaica, because most of them are distortions. However, removing them doesn't automatically remove distortions or more positively create a society that is really full of level playing fields. I have mentioned many of these before, most recently in May, but I will repeat some of them here. I have also looked at them, as have others, as part of what we see as the normality of 'hustling'.

Squatting

Capturing land is a bigger national sport than track and field and has been the route for many Jamaicans to get into the 'housing market'. Of course, 'market' is a misnomer because much of the property and land acquired has been obtained cost-free. If we were to remove informality — and let's assume we do it totally, rather than gradually — we would then have to watch the real housing market deal with people who perhaps have low capital and income and may not be able to buy their way into the market, even if we assume they all want to enter at the lowest end.

New demand and supply would have to come on stream and prices will then reflect this. At the outset, it's likely that excess demand will exist, and housing prices would rise. Simply put, Jamaica does not have enough formal housing to deal with the transfer of people from informal housing. It can be created, but I cannot say how long it would take for some combination of the State and private sector to do this.

Jobs

We do not need to get the Statistical Institute of Jamaica (STATIN) to tell us precisely how many Jamaicans work informally; the anecdotes are extensive enough to do the main analytical job for us – vendors; labourers (urban and rural); work done for cash (which could be from odd jobs through to professional services that are 'off the books'; and small businesses that are not incorporated and may be as wide as from sole proprietorship through to several employees.

Simple case: One woman has a chicken coop to raise live chickens for sale and eggs. She employs four people every two weeks to help kill and clean chickens, as well as manage the eggs from a dozen layers who produce one egg each a day. None of this is illegal, in the sense that these are legitimate activities, but it all happens without any references to formal structures. Banks do not need to participate in financing, holding deposits or other roles. Cash is king, mainly. Money may go to banks, but it's not related to any economic activity and is likely never going to feature in any tax assessments.

None of this is confined to individuals, and corporations can participate as much as they are comfortable and it doesn't give rise to any moral problems. Businesses could actually be applauded if they did socially responsible things like supporting informal businesses.

There are bigger segments of activity, though, for example, public transport (taxi and minibus services) that can go on with high degrees of informality because our society does not insist on proper licensing of operators and all who are involved in such businesses.

Some of these same activities exist in other societies that are highly formalised and the anecdotes about 'gardeners' or 'odd-job men', perhaps illegal immigrants, can be culled from them, as well as taxi drivers who are asylum seekers, actual or not. (It's not hard to manufacture the needed documentation to make everything seem legal and above board. But much socio-economic activity thrives on trust, not confirmation of the basis of that. In the UK it could be 'Polish construction workers', in the US it could be the 'Salvadorian gardener' (none of these are meant to be racial or national stereotypes).

If, for some reason, we choose to formalise these activities when those involved in them are not ready, chances are the worker will not agree. The jobs won't get done if 'paperwork' is involved.

Now, all of that is fine because it means that incomes are maximised in many ways. 'Buyers' get jobs done/goods bought/services provided for less — lower basic prices and no sales tax/VAT/GCT, etc. 'Sellers' get tax-free incomes, which they can spend as they wish, ideally on similar informal goods and services — a win-win.

If that were to change, the basic situation is that Jamaica would have to operate on a higher price basis, as all of the taxes, fees, etc that should be incurred are recognised. So, reduced informality tends to give greater benefits to the State, especially the T reasury; that is, the collector of taxes, revenues, etc. That comes at a cost to many private operators, individuals and enterprises.

Utilities

One important element of informality is the stealing of utility services. We have seen during the pandemic an upsurge in complaints about bills, which have pointed to the standard global practices of utilities to try to compensate for theft by loading such losses onto the accounts of those who pay. If the Government is serious and comprehensive in its dealing with informality, then this is a huge elephant in the room that has to be addressed.

Again, put simply, many people and businesses live beyond their means by consuming utility services for free or far less than the going rates. If the Government were to eliminate that, then it would have to either provide income for people to be able to continue consuming at previous levels, or force people to consume what they can truly afford and recognise true poverty. Ideally, the Government would see the social value of access to water and electricity and have in place a safety net to support some minimum level of consumption for every household. (The essence of this was part of the PNP election manifesto with its proposed $3000 credit for electricity bills. (https://twitter.com/nationwideradio/status/1299091831758651393?s=21)

That's not the whole of the informality story in Jamaica. It goes, too, to things I know the Government wants to address, and we should too, such as the identification of citizens as unique and tying that identification into the delivery of government services and goods. But, that is a separate aspect of informality that is to be addressed. It's not really necessary for the economy to function in the sense that not much really depends on each of us knowing exactly with whom we're transacting. What we need is to know is services/goods will be given on agreed terms; payments will be made on time and in keeping with agreed terms (in full, over time, etc, with interest, with penalties, etc); taxes and fees due to the State for these activities will be duly recorded and made properly; and any legal rights of workers or providers are respected fully. I might have missed a few things, but I think the idea is clear.

All of that could occur if we each were assigned a number and that was all we had to exchange. The national database would then connect the number to individuals. So we could actually operate the economy on the basis of near total anonymity. If nothing ever went sour with transactions, we wouldn't really need to know precisely whom we should try to track down for retribution – the system could be able to search for 'xx22yy11' and get his/her particulars to then feature in whatever 'corrective' or 'restorative' processes were involved.

Finally, the concern with informality is also largely about measurement. We have a false picture of many things because data sets only or mainly cover formal activities. That's not trivial because policy is not going to be well-framed if it understates the extent of gains and losses within the country. So, reducing informality for that reason is good, but, again, its downside comes from the need to expose to the world things that happily go on 'under cover'.

If we accept that 40 per cent of true economic activity in Jamaica is informal, it means that policy levers tend to only affect just over half of what we want to affect. That's a huge frustration to policymakers.

I won't talk about illegal activities and formalising those. We have to move the moral compass a lot to bring many activities that are now illegal into the formal world because it would be legalising them. Now, it can be done, for example prostitution has been decriminalised or abolished as a crime in many countries. But to bring into the legal frame current crimes like lotto scamming would push the moral envelope, because it would be near impossible to say Jamaica will legalise it so that our scammers could fleece the world — it'd be great for our budget, though.

Likewise, society isn't likely to want to bring into formality a lot of violent crimes. Of course, one could posit that these changes happen, but it would be in a world most of us would not recognise or want to live in.

If none of the above is convincing, then take the view of the International Monetary Fund's (IMF) managing director when discussing informality and inclusive growth (my emphases): “Take the case of digitalisation. It has created more opportunities for individuals to engage in informal employment to supplement their income. Think of all the people who work in the gig economy. But we may be missing gig economy employment in labour force surveys. The informal economy can provide income or a social safety net. But it is a complicated issue.”

I rest my case.

Dennis G Jones is an economist. Send comments to the Jamaica Observer or dennisgjones@gmail.com.


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