Of all the structural weaknesses in Latin American economies which the COVID-19 crisis is compounding, informality may be one of the most pervasive (OECD, 2020a; OCDE, 2020b). Both cause and consequence of many of the regions’ development traps (OECD et al., 2019), informality has been eroding tax collection, undermining productivity growth, and leaving a large share of the workforce vulnerable to shocks for lack of social protection, while feeding on low productivity levels, unsophisticated economic structures, rigid regulations, low skill levels and inefficient institutions. But the unfolding crisis might just be creating the policy impetus to move towards greater formality in the region.

Informality is the norm for many in Latin America

On average, close to 60% of workers are considered informal, with particular incidence across most disadvantaged socioeconomic groups (OECD, 2020a). In fact, 58% of informal workers live either in economic vulnerability (with USD5.5-13 a day) or in poverty (with less than USD5.5 a day) (Figure 1).

Note: Regional average is an unweighted average. Informality refers to i) contributing family workers; ii) employees not covered by social security contributions of the employer and/or not entitled to paid sick leave and/or paid annual leave; iii) own-account workers and employers where their economic units are not legally recognised and/or are non-compliant with fiscal and social security obligations. Due to the systematic approach to produce international comparable data and given that the use of household surveys differs from labour force surveys, informality estimates may differ from the estimates presented in other sources including national statistics. These figures are subject to updates.

Source: OECD Development Centre calculations based on household surveys. Informality definition is based on ILO (2018) and data construction is based the systematic approach proposed in The Key Indicators of Informality based on Individuals and their Households (KIIbIH) database (OECD/ILO, 2019).

People in a condition of economic vulnerability are frequently informal, have low-quality jobs associated with low social protection and volatile incomes. High rotation between precarious jobs makes people vulnerable to the effects of individual, household or macro shocks such as the ongoing COVID-19 pandemic. It requires focusing policy responses on certain socio-demographic groups at high risk of being left behind, such as women, youth, migrants, and poor (often indigenous) populations in remote areas or metropolitan borders.

The informal sector is the hardest hit by the COVID-19 crisis

With strict lockdowns in most Latin American and Caribbean countries, many informal workers, outside the boundaries of the social protection associated to formal jobs, lost their livelihoods and were left unprotected. Some of them, particularly in poor and extremely poor households, are supported by non-contributory social assistance programmes, such as cash conditional transfers, which multiplied in the region over the last decades. However, many others neither benefit of this type of support nor receive social protection from their jobs: close to 40% of workers are not protected by any safety net (Figure 2, Panel A); this figure increases to 65% for informal workers. Amongst the vulnerable, the share of workers who live in households not covered by social assistance schemes is 62%, while it stands at around 50% amongst the poor (Figure 2, Panel B).

Note: Regional average is an unweighted average. Informality definition is based on (ILO, 2018) “Women and Men in the informal Economy”. The main social assistance programmes refer to cash transfer programmes and non-contributory social pensions, although the availability of data of beneficiaries in household surveys varies by country, which may result in non-comparable data that the harmonization process cannot fully solve. These figures are subject to updates.

Source: OECD Development Centre calculations based on Household Surveys. Argentina - EPH 2018, Bolivia - Encuesta de hogares 2018, Brazil - PNAD 2015, Chile - Casen 2017, Colombia - ENCV 2017, Costa Rica - ENH 2018, El Salvador - EHPM 2017, Ecuador - ENEMDU 2018, Honduras EPHPM 2014, Mexico - ENH 2018, Paraguay - EPH 2018, Peru - ENH 2018, Uruguay - ECH 2018.

Informal firms, usually defined as not complying with regulations, mainly tax registry and obligations, are also deeply affected. With too little liquidity to stand a negative shock for long, micro and small and medium enterprises (MSMEs) are particularly vulnerable to the impact of the COVID-19 crisis and at risk of bankruptcy, which could cause an irreparable damage to the economy in terms of jobs and productive capacity (OECD, 2020). A recent survey shows that 26% of small and medium businesses in the world have closed between January and May 2020. In the region, the incidence was between 30% and 45%. The impact was particularly large in consumer-focused sectors, female-led businesses and microbusinesses (Facebook/OECD/World Bank, 2020; ECLAC, 2020).

Protecting the most vulnerable throughout the crisis: a temporary solution turned permanent?

As they strive to extend specific programmes to workers outside social protection schemes, policymakers are struggling to identify them -as many are unregistered - or reach them - as they do not always have a bank account. This seems to have stimulated the creativity of governments to crosscheck existing registries, and find alternative ways of delivering monetary transfers, mainly by using digital technologies and mobile phones.

In particular, governments have made significant efforts to reach informal workers and households by expanding non-conditional cash transfers. Here a non-exhaustive list of cases. In Argentina, the Ingreso Familiar de Emergencia explicitly aims to reach households that live from informal activities, self-employment or domestic work. In Brazil, informal workers and the unemployed have received a temporary new benefit, provided they earn less than half a minimum wage and are not covered by other social benefits except Bolsa Família. In Colombia, Ingreso Solidario aims to reach 3 million vulnerable households that are self-employed or work in the informal sector, and are not covered by existing social benefits. The Dominican Republic put in place the programmes “Quédate en Casa” and “Pa’ Ti”. In Ecuador, the Bono de Protección Familiar was expanded to reach informal households not receiving other social transfers. Finally, Peru also expanded the Bono Familiar Universal, implemented during the crisis, to reach 2.3 million households without a formal dependence labour relationship (OECD, 2020c).

Similarly, extending support to informal firms is hard, and they often fall outside the scope of programmes aimed at the productive sector. Direct transfers, credit guarantees, moratoria on the payment of taxes, utilities or social security contributions, they usually require formal status for eligibility. And as support to informal activities mainly targets the self-employed, a number of informal SMEs are falling through the cracks. Some countries are thus adopting measures to encourage those firms to “formalise”, at least to some degree: in exchange for signing up into registries, they would become eligible for support.

There might therefore be an unexpected benefit to the dramatic crisis Latin America is going through: what if policy efforts to support the informal economy opened an opportunity to expand the breadth of formality, and build stronger social protection systems? Ongoing efforts could pave the way to building universal registries including the self-employed, informal workers and productive units. Besides, whereas some informal workers and firms may choose informality to avoid the costs associated with being formal, the consequences of the current crisis could make the latter more attractive. The political economy of reforming social protection systems is complex, but a crisis of such magnitude may be the kind of tectonic shift that transforms perceptions. Getting there would demand additional, ambitious policy efforts, as part of broader development strategies to transform productive structures, boost formal jobs, and make the most of the digital transformation for all citizens and workers (OECD et. al, 2020d). Well designed fiscal frameworks would be essential to finance such strategies (OECD et al., 2020e).

This COVID-19 crisis challenges us to rethink social pacts in Latin America, with all actors involved, including civil society, private sector and academics. In the midst of the 2008 financial crisis, our work on developing countries got us to ask “Is informal normal?” (Jutting and de Laiglesia, 2009). A decade later, an even worse crisis, by revealing the formidable social and economic costs of widespread informality, may be the moment where policymakers, workers and firms start to turn the tide. The agenda is ambitious and requires a multidimensional perspective where fiscal, labour, and productive transformation aspects must be key ingredients of the rethinking of the social pact in the region.

References:

ECLAC (2020), “Sectors and businesses facing COVID-19: emergency and reactivation”, Special report No. 4 COVID-19, https://repositorio.cepal.org/bitstream/handle/11362/45736/5/S2000437_en.pdf

Facebook/OECD/World Bank (2020), The Future of Business Survey, https://dataforgood.fb.com/wp-content/uploads/2020/07/GlobalStateofSmallBusinessReport.pdf

ILO (2018), Women and men in the informal economy: A statistical picture, 3rd edition, International Labour Organization, Geneva, https://www.ilo.org/global/publications/books/WCMS_626831/lang--en/index...

Jütting, J. and J. de Laiglesia (2009), Is Informal Normal ?: Towards More and Better Jobs in Developing Countries, Development Centre Studies, OECD Publishing, Paris, https://doi.org/10.1787/9789264059245-en

OECD (2020a), COVID-19 in Latin America and the Caribbean: Regional socio-economic implications and policy priorities, http://www.oecd.org/coronavirus/policy-responses/covid-19-in-latin-america-and-the-caribbean-regional-socio-economic-implications-and-policy-priorities-93a64fde/

OECD (2020b) , "Informality and Employment Protection during and beyond COVID-19", Background Note for session 1, OECD-LAC Virtual Social Inclusion Ministerial Summit, https://www.oecd.org/latin-america/events/lac-ministerial-on-social-inclusion/2020-OECD-LAC-Ministerial-Informality-and-employment-protection-during-and-beyond-COVID-19-background-note.pdf

OECD (2020c), OECD COVID-19 Country Policy Tracker, https://www.oecd.org/coronavirus/country-policy-tracker/

OECD et al. (2020d), Latin American Economic Outlook 2020, forthcoming, OECD Publishing, Paris.

OECD et al. (2020e), Revenue Statistics in Latin America and the Caribbean 2020, OECD Publishing, Paris, https://doi.org/10.1787/68739b9b-en-es

OECD/ILO (2019), Tackling Vulnerability in the Informal Economy, Development Centre Studies, OECD Publishing, Paris,  https://doi.org/10.1787/939b7bcd-en

OECD et al. (2019), Latin American Economic Outlook 2019: Development in Transition, OECD Publishing, Paris, https://doi.org/10.1787/g2g9ff18-en