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Unleashing the Potential of the World’s Informal Sector to Create Jobs and Tackle Poverty by John Sullivan

February 10, 2015

Creating jobs is one of the greatest global challenges facing the world today. While job creation is a top priority for policy makers here in the United States, worldwide poverty reduction is essential for our economic future as well.

One of the biggest impediments to poverty reduction, sustained growth, and higher living standards is the large percentage of the world’s workers who are confined to operating in the informal economy. People who work in the informal economy are essentially off the books. Entrepreneurs in this sector are locked out of the legal economy by a wall of red tape. They don’t pay taxes, their businesses aren’t registered, and they have limited legal protection or access to credit. They often operate at a subsistence level with little opportunity to thrive and grow.

It is estimated that about half of the world’s employed population work or conduct business in the informal economy. In poorer countries, the figure is often much higher. The reason the informal sector is so large is due to a lack of strong legal institutions and laws that protect citizens and businesses. Complex regulations and institutional barriers also make entry into the formal economy almost impossible for most.

Reducing world poverty is being tackled on a global level through the Millennium Development Goals (MDGs) that were established by the United Nations in 2000 and will expire next year. Deliberations on the post-2015 development agenda are currently underway and significant progress has been made toward defining the Sustainable Development Goals (SDGs) that will replace the MDGs. Two of the SDGs spell out what is needed to drive domestic economic growth and create environments where businesses can thrive.

Goal eight calls for the promotion of inclusive and sustainable economic growth, full and productive employment, and decent work for all; and goal 16 recommends building effective, accountable and inclusive institutions to support sustainable development. These are the reforms necessary to bring informal sector workers into the legal economy.

Governments and the private sector have a crucial role to play in this process by supporting business enabling environments that allow individuals to start and grow businesses and take part in the economy. Key are systems that give entrepreneurs and small businesspeople control over their assets and a legal framework that protects property rights and upholds contracts.

Such an environment requires institutions that support entrepreneurs and businesses. These institutions include the rule of law, property rights, and regulations that provide a level playing field where individuals can pursue their dreams and build a better life through hard work and innovation. Without these fundamental elements in place, many small businesses are unable to move from the informal sector where they have difficulty accessing the credit needed to expand their businesses and where they can fall prey to corrupt practices. When you create an environment that enables people to succeed, citizens have a stake in the economy and a sense of hope for the future.

In fact, Louise Kantrow, the Permanent Representative to the United Nations for the International Chamber of Commerce, has said that rule of law and effective institutions are the bedrock of our economies and societies, without which sustainable development would be impossible. Her office recommends that any new SDG framework include a greater emphasis on the implementation of laws in all sectors that effect the economy. But designing good laws is not sufficient in itself. Institutions must enforce laws to minimize the risk of bribery and corruption.

Concentrating on enabling environments that address the informal sector will help countries mobilize and attract domestic and international investment and build the infrastructure necessary to spur inclusive economic growth. Without a sound legal system and good governance, there cannot be long term economic growth. These elements are central to sustainable development.

Businesses and employees that pay taxes, and a fair and sound tax system, are also needed for building a nation’s economic and physical infrastructure. Without government revenue there cannot be education, healthcare, roads and other government services that are vital to a nation’s economy.

Policy makers and experts must keep these key issues in mind as they discuss future strategies for addressing global development challenges. Developing and building the institutions that allow entrepreneurs to fully participate in the economy will need to be a fundamental piece of any strategy to address world poverty and improve the quality of life for people around the world.

Source: Huffington Post

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