The informal economy in Pakistan, often referred to as the shadow economy, is a substantial yet often overlooked component of the nation's economic institution. This informal economy sector includes all individuals and businesses operating outside the official economy, including street vendors, craftsmen, and even undisclosed sales for large organizations. While it offers essential sources of income for many people, it also compromises national development initiatives, which puts policymakers in a rather awkward position.
Pakistan’s informal economy is huge; it is said to contribute between 36% and 50% of the country’s Gross Domestic Product. The statistics obtained from the International Labour Organization (ILO) reveal that approximately 72 % of the non-agricultural employment in Pakistan is in the informal economy. As a result, this segment comprises about 27 million employees, which underlines its importance to employment generation.
At the first glance, the informal economy seems to be a source of sustenance for many Pakistanis by providing jobs and earning in a country where there are few formal jobs available. However, the informal sector's contribution comes at a significant cost:
Tax Evasion and Revenue Loss: The informal economy operates largely outside the tax net, depriving the government of substantial revenue. The Federal Board of Revenue (FBR) estimates that tax evasion costs Pakistan approximately PKR 3.2 trillion annually.
Lack of Social Protections: Informal workers often lack access to social security, healthcare, and legal protections, making them vulnerable to exploitation and economic downturns.
Undermining Formal Businesses: Informal businesses often compete unfairly with formal enterprises by avoiding regulatory compliances, creating an uneven playing field.
For many Pakistanis, the informal economy is not a choice but a necessity. Addressing the informal economy is a critical concern for sustainable national development. Let’s take an example of a man selling goods on the streets of Karachi; he wakes up early in the morning, works hard throughout the day in terribly hot sun with no proper wages under unfavorable conditions without any insurance, paid vacations, social security or protection of labour laws. These workers’ reality involves a constant struggle for economic survival with no prospects of a better position in the foreseeable future.
Conclusively, combating the informal economy is very important for any country that considers achieving sustainable development. Informal employment should be brought into the mainstream through incentives and policies to improve revenues from taxes, expand social security cover for employees, and promote the competitiveness of the formal sector. Effective policies could include:
Simplifying Registration: Making it easier for small businesses to register and comply with regulations can encourage formalization.
Incentivizing Formalization: Offering tax exemption and other incentives to informal businesses that transition to the formal sector.
Strengthening Enforcement: Improving the capability of tax and regulatory bodies in terms of monitoring and asserting compliance.
For the policy makers, combating informal economy implies a fine understanding that has to be done with considerable diligence. Severe punishments would deny the basic needs of the vulnerable employees thereby escalating their poverty levels; however, lenient measures would encourage persisting inefficiencies within systems. Good governance thus entails the formulation of policies that may enhance protection of the workers while encouraging increase in, and formalization of economic activities at the same time.