Urban Informal Sector - bids.org.bd

Urban Informal SectorDualism, Employment and Growth

BIDS Research ALMANAC 2019

Binayak Sen, Anwara Begum, Mohammad Harunur Rashid Bhuyan, MdIqbal Hossain and Shahidul Islam

December 1, 2019

Structure of presentation

• Two Types of Dualism

• Contribution to Employment

• Economic Correlates

• Policy Implications

Sen-Shahid-et al-BIDS

Sample Distribution by Urban Locations (N=966)

Chattagram Dhaka Khulna Rajshahi Rangpur

Percent 25.31 46.78 9.65 8.92 9.34

0

5

10

15

20

25

30

35

40

45

50


On Dualism


Distribution of enterprises by size of workers

38.51 39.09

50.97

42.07

29.05 30.45 28.96 29.3932.43

30.45

20.08

28.54

0

10

20

30

40

50

60

Dhaka Chattagram Others All enterprises

% o

f en

terp

rise

s

Single employee 2 employees >2 employees


Types of workers by enterprises

40.70

11.36

89.88

11.39

Permanentworker

Temporaryworker

Unpaidworker

Femaleworker

% of enterprises employing different types of workers


Distribution of Capital of Informal Enterprises by Cities

Enterprises

Ranked by

Size of

Capital

Dhaka

Mean BDT

(col %)

Chattagram

Mean BDT

(col %)

Others

Mean BDT

(col %)

All

enterprisesMean BDT

(col %)

Bottom

one-third

19372

(23.73%)

18462

(32.93%)

22226

(50.18%)

20343

(33.47%)

Middle

one-third

91096

(37.47%)

102652

(32.93%)

79994

(32.84%)

90943

(35.02%)

Top one-

third

391736

(38.8%)

390651

(34.15%)

409848

(16.97%)

394169

(31.51%)


Distribution of enterprises by buyers’ characteristics

• Only 9.71 percent of our enterprises responded that their sales is mainly linked with formal sector

• Only 5.68% of the enterprises have “business license” and 1% of them have either TIN or VAT identification

20.69

58.52

16.53

4.26

Poor class Lower middleclass

Upper middleclass

Rich class

Income class of the buyers


Distribution of enterprises by buyers’ characteristics• A large percentage of enterprises with the following businesses sells

to upper middle class:Metal fabricating, retail shop of groceries, electrical household appliances and handicrafts

• A large percentage of enterprises with the following businesses sells to formal enterprises or sectors:

Embroidery of textiles and wearing, Metal fabricating and Handicrafts


Informal Enterprises Differ by Growth Potentials (2016-18)• Negative growth rate: 55% of enterprises

• Below Median: 22% of enterprises

• Above median: 23% of enterprises

• Note: (a) the median growth rate over 2016-18 is 1.7% (for thoseexhibiting positive growth); (b) the matched figure for the entiresample is -0.24% per year.


Contribution to Employment

Trends in the Share of Informal Employment in Total Urban Employment (%)

0

10

20

30

40

50

60

70

80

90

1991-92 1995-96 1999-00 2002-03 2005-06 2010-11 2012-13 2015-16 2016-17

% d

istr

ibu

tio

n o

f u

ban

lab

or

forc

e b

y em

plo

yme

nt

stat

us

Formal Informal


Who participates in urban informal employment?Variable

(Non-farm formal=1;

Non-farm informal=0)

Urban Non-farm Formal (LFS 2016-17)

Male Female

Age 15 to 64

Age 0.0261*** 0.0116***

Age squared -0.000246*** -9.72e-05***

Unmarried -0.0172* -0.0645***

Separated/widowed/divorce 0.0028 -0.00656

Household who have kids<6 0.0133*** 0.0182**

Class 1 to 5 0.134*** 0.0845***

Class 6 to 8 0.188*** 0.115***

Class 9 to SSC 0.265*** 0.170***

HSC and above 0.300*** 0.281***

Total Cultivable land 0.0481*** 0.0287***

Asset (Non-land) score 0.00554*** 0.00231***

Total Rainfall (2000 to 2013) 6.43e-05*** 8.81e-05***

Standard Deviation of Rainfall (2000 to 2013) 0.000845*** 0.000154

Distance to Dhaka -0.00101*** -0.000396***

Seasonal Shock (i.e. off-season) -0.202* 0.0981

Health Shock (i.e. illness/injury) 0.00361 -0.00511

Chittagong -0.103*** -0.0586***

Dhaka -0.163*** -0.110***

Khulna 0.0708*** -0.0146

Observations 31,700 9,024


Who participates in urban informal employment?• We estimated marginal effects from the Logit Model for Formal vs.

Informal job choice for urban areas by male and female non-farm workers(Non-Farm formal=1, Non-Farm informal=0) to explore the choice betweenformal and informal jobs in urban areas based on the 2016/17 LFS.

• The results show the importance of human capital and non-land assets foropting for formal jobs.

• In contrast, distance from Dhaka and susceptibility to seasonal shocksencourage informal jobs.


Economic correlates of Urban Informal Sector

Broad sectorial distribution of enterprises

Broad sectors All cities

(%)

Dhaka

(%)

Chattagram

(%)

Others

(%)

Industry 11.88 10.42 16.67 9.96

Business/Trade 64.88 71.84 44.31 71.96

Services 23.24 17.74 39.02 18.08


Sectorial distribution of enterprises…

8.9

7.97

6.63

8.49

7.66

4.45

2.69

3.73

4.76

4.14

4.14

3.42

2.59

1.04

4.24

4.14

4.04

9.73

3.21

4.04

0 2 4 6 8 10 12

Retail sale of food in specialized stor

Retail sale of grocery and general sale

Tea stalls

Tailoring services

Retail sale of clothing, footwear and l

Other retail sale not in stores, stalls

Retail sale of pharmaceutical and medic

Hairdressing and other beauty treatment

Retail sale of electrical household app

Other non-mechanized road transport

Fast food shops / restaurants

Retail sale of mobile phone and equipme

Sale, maintenance and repairs of ricksh

Hardware and paint shop

Handicrafts

Garments accessories

Construction materials

Metal fabricating

Embroidery of textile goods and wearing

Others

Distribution of specif sector/business


Summary Statistics of selected correlates: Enterprise level data

Variables All enterprises Dhaka Chattagram Other cities

Mean Mean Mean Mean

Sales 1,214,246 1,428,464 1,071,590 984,488

Sales per worker 702,631 822,166 601,130 602,298

Capital (Tk.) 162,853 190,736 173,272 106,993

Capital per worker (Tk.) 106,895 137,238 99,453 64,199

Number of workers

(including self-

employed)

2.41 2.37 2.07 2.30

Wage Cost (Tk.) 214,999 195,812 233,089 233,994

Profit 282,539 368,680 204,833 208,599


Background of the owners by Cities

Variables Dhaka Chattagram Other cities All

enterprises

Mean Mean Mean Mean

Age (in years) 41.36 38.87 40.48 40.48

Married 0.90 0.83 0.94 0.89

Years in current business 9.98 9.67 8.79 9.57

Previous business

experience

1.61 1.81 1.70 0.31

Years of schooling 7.85 7.64 7.40 7.67

Working wife 0.07 0.04 0.03 0.05


Regression results of sales, productivity and profit (Contd.)(1) (2) (3) (4)

VARIABLES Log(sales) Log(sales) Log(sales per worker) Log(profit)

Log(K) 0.060*** 0.041*** 0.046***

(0.014) (0.011) (0.012)

Log(L) 0.733*** 0.573*** 0.156**

(0.062) (0.078) (0.078)

Log(K/L) 0.043***

(0.013)

Business License 0.426*** 0.466*** 0.469***

(0.093) (0.096) (0.156)

Years of schooling 0.027*** 0.025*** 0.001

(0.005) (0.005) (0.005)

Age of the owner 0.030*** 0.031*** 0.040***

(0.012) (0.012) (0.012)

Squared age -0.000*** -0.000*** -0.000***

(0.000) (0.000) (0.000)Sen-Shahid-et al-BIDS

Regression results of sales, productivity and profit(1) (2) (3) (4)

VARIABLES Log(sales) Log(sales) Log(sales per

worker)

Log(profit)

Temporary worker -0.038 -0.220*** -0.249***

(0.073) (0.070) (0.074)

Permanent worker 0.244*** -0.004 0.329***

(0.059) (0.049) (0.061)

Sells to poor -0.194*** -0.180*** -0.094*

(0.052) (0.058) (0.056)

Dhaka 0.223*** 0.211*** 0.252***

(0.056) (0.061) (0.054)

Chittagong 0.057 0.036 -0.047

(0.058) (0.060) (0.051)

Constant 12.381*** 11.982*** 12.039*** 10.588***

(0.163) (0.306) (0.302) (0.319)

Observations 964 954 901 923

R-squared 0.448 0.532 0.475 0.301Sen-Shahid-et al-BIDS

Summary of the findings

• We find a large contribution/share of labor in total sales compared to the capital. But still capital per worker is a significant determinant for sales/output per worker.

• Education of the owners of urban informal enterprises is significantly important for sales and productivity.

• We find a positive effect of business/trade license for sales, productivity and profitability.

• Among others, there is a strong and significant Dhaka effect on all of the indicators, suggesting proximity to upstream and richer markets

• Expanding sells beyond the poor customer group is an important linkage for boosting output/ sales.


Policy ImplicationsRoute to Formalization

• Informality in construction sector study suggested some regulatory measures toformalize this sector including workers registration, ID card, and othercompliance issues (Amin, 1981).

• Ghani & Kanbur (2013) suggested that the mayor of cities should focus on threeI’s—integration, intervention, and institution—and one E—entrepreneurshipfor the formalization of informal economy.

• ILO suggests a pathway of transition from informal to the formal economy-toease the registration process and reduce its cost and at the same timeadministrative procedures should be simplified.

• Tax simplification program in Brazil called SIMPLES has large effects offormalization.

• Department of Strategy Development, Turkey (2009) initiated steps to make taxand audit system more user friendly. They also used educational andpromotional activities to procure and strengthen societal consensus.

Route to Formalization: Relevance of National and International Experience


Policy Implications…

• Not to force the informal enterprises into the formal line by any administrative control or decrees

• Need to respond to the differential needs of the informal sectorcategorised by very small, small, medium and large.

• Supportive policy environment for the “dynamic segment” of informalsector especially with a view to strengthening their linkages with theformal economy

• Social protection for urban informal sector workers as a whole, especiallyfor those employed in “residual” or subsistence sectors.


Policy Implications…• The subsistence informal entities may be kept informal

with just simple registration or providing IDs for growthmonitoring and welfare support

• Medium entities have to be provided with support likeSIMLES of Brazil.

• Semi-formal or large entities can be gradually transformedas formal or quasi-formal with proper policy support suchas business licence and TIN so that they can access formalcredit and trade facilities

• Cost reduction of registration and simplifying theregistration process will work as major incentive.


Policy Implications…

• Our survey suggests that about 10% of urban informal enterprises employ femaleworkers. But, they encounter the greatest number of constraints when it comes tojoining the workforce or carrying out their job due to early marriage, low esteem andrespect, lack of safe transportation, toilet, childcare facilities, and general work placesafety, all combine to hinder them;

• Many women are joining informal business by making their own products ranging fromhandicrafts to jewelry, boutique, home-based tailoring, snacks, food, beauty and fitness.The barriers they encounter could be minimized by creating awareness about existinglaws and formulating new policy frameworks for protection and incentivizing them withcost support so that the process of formalization becomes easy;

• Although the BLA, 2006 and subsequently, the Bangladesh Labour (Amendment) Act,2013, have incorporated several important items such as retirement benefit, deathbenefit, appointment letter, enhancement of compensation for both death andpermanent disability, introduction of provident fund for workers, punishment for sexualharassment etc. for which effective coordination is required, amongst MOL&E, relevantministries and ILO with respect to monitoring and follow-up actions.


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