Policies and Practices to promote formalization of informal sector enterprises : Intervention framework and R204

Transcription

1 Policies and Practices to promote formalization of informal sector enterprises : Intervention framework and R204

2 Learning objective Present the integrated framework to promote business formalization, based on the guidelines of R204 Discuss some promising practices 14/11/2017 2

3 For individuals (workers and/or employers) RECAP - Why enterprise formalization? For society at large Improved access to rights at work, social security and decent working conditions; Better access to representation and national policy dialogue; For enterprises Better access to credit and other productive factors, including through public programmes; Expended access to markets: participation in public procurements, access to imports and exports through formal channels; Reduction of the influence of corruption, greater respect for commercial contracts, etc. Broadening the tax base (increasing the scope of public action, reducing tax rates, etc.); Increased equity with regard to the contribution to public budget and to benefits of redistributive policies; Increased efficiency and sustainability of preventive & compensative measures to address risks; Fairer competition in national and international markets Greater social cohesion Designing an integrated policy framework for the transition to formal economy 3

4 IV. Focus on the multiple causes: main drivers of informality Macro economic context Inability of the economy to create enough formal jobs Economic crisis and economic restructuring Flexibilization of formal jobs as a result of globalization pressures Regulatory framework inadequate or lacking Lack of transparency & accountability of public institutions => lack of trust in public institutions Multiples drivers and incentives of informality Lack of information/ communication => lack of awareness Attractiveness of Weak enforcement systems, incl. informal activities labour inspection (evasion of tax/ Lack of adequate social benefits to contributions, work secure income or inappropriate family balance) modalities to comply Low educated and qualified workforce => low mobility from informal to formal jobs Discrimination (exclusion of workers from categories of jobs based on race, gender, age) Poverty Low productivity Inability to overcome costs of formalization Lack of access to market; finances; technology Lack of voice and representation of workers

5 2) Regulatory framework, public instit. & enforcement mechanisms 1) Macro environment / context Issues & policy responses: Macroeconomic, trade, industrial, tax, sectoral and infrastructure policies aiming to promote employment, enhance productivity and facilitate structural transformations Policies responses (examples) Reform or development of new laws (e.g. extension of social security laws) Reduce the costs of compliance with law (e.g. simplify procedures easier registration procedures; simplify forms; Targeted VAT reductions; Increase resources devoted to compliance mechanisms Root causes of informality and main policy interventions Main policy responses depending on the combination of drivers Another way to look at possible interventions o Formalization of economic units o Formalization of jobs o Productive job creation in the formal economy Attractiveness of informal activities ex. Increase the cost of informality/ decrease the cost of formalization (campaigns to inform about the risks and 3) Micro level determinants Policy responses (examples) 1) To improve productivity/ reduce poverty o Improve access to financial services; o Improve access to training/ retraining, skills development o Improve access to BDS, to technology, to information on markets for goods and services; o Improve effective access to social security coverage o Promote access to public procurement (ex. public procurement quotas; simplification) Improved transparency/ 2) Organization of IE workers / eco units accountability Recurrent of institutions questions o Promote and strengthen Measures o Need to change for coordination perceived (identify constraints; inform organizations & set up of appropriate workers & fairness of mechanisms) the system employers in the IE; Coordinating strategy across o Traditional unions & employers org. o Focus on a particular group costs of of workers informality; type of government, expand enterprises their membership & services Use of penalties and etc. to those in IE fines ;

6 The change we want to see

7 Business formalisation : HOW? or Addressing unregistered/disguised forms of employment in the formal sector Promote formality in micro/small entrepreneurs There are strong arguments in favor of applying welldesigned policies to promote the transition from an informal economy to a formal economy. 1. Informal enterprises may be motivated to formalize by lowering the costs of becoming (and remaining) formal. 2. Another way to motivate informal enterprises to formalize is by improving the benefits of being formal. 3. The development of the formal economy may be stimulated by improving the general business environment. Amongst others, this implies that policies to lower costs and improve the benefits of formalization should also target formal firms. 4. Strengthening law enforcement

8 Formalization of MSEs Formalized MSEs Ready to formalize Will formalize with incentives/persuasion Necessity Entrepreneurs 8

9 What is the intervention logic? From informal to formal Costs of operating a formal business Benefits of operating a formal business Entry / registration costs Required to : Pay taxes Pay social contributions Comply with labour laws and other regulations Access to: Business devt. services Finance Social protection Markets Reduced risk of harassment or bribes 9

10 Group work : which policies to boost business transition to formal sector! 14/11/

11 GROUP 1 You have a consultancy in an country which has been experiencing economic growth of an average of 6.3 per cent of GDP over the last 4 years. While Government is pleased with this growth, the Minister of Trade and Industry has a serious concern. This is that despite impressive growth, ILO statistics suggest that the number of people employed in the informal sector has increased from 43.8 to 52.6 per cent. Given the Government s pre election pledges on decent work, this is of serious worry. You have been commissioned by the Ministry to assess the policy measures that might be put in place to stimulate the formalisation of small enterprises. The minister has requested that you come up with 5 policy measures for upgrading the enterprises for sustainable growth. Come up with 5 measures that will potentially achieve this. Justifying your choices for policy measures. Present your results

12 Group 2 You are a senior official working in the Ministry of Employment dealing with wit young people and employment. Your country, like many others, has a challenge with youth unemployment. This includes unemployment among graduates of universities. Of particular concern is unemployment among new graduates from the University of Technology, who even when equipped with technical skills and knowledge find it difficult to find employment. A research suggests that significant numbers of those graduates start small businesses, but these business are inevitably very small, informal and lacking in ambition in that they have no long term plans You are interested in developing programmes to encourage these expensively educated young people to take their small business aspirations more seriously and wish to encourage them to think about business in more formal terms and with a longer term horizon. You have approached the vice chancellor of the University of Technology (Utec) encouraging him to address this issue and hinting that your Ministry may be willing to fund an appropriate initiative. His response has been not encouraging. His vision for Utec is to encourage academic excellence and an expanded programme of research. However he has given you the opportunity to make a presentation to the University Academic Planning Committee to put your case for a programme to encourage new graduates to consider establishing small businesses on a more formal basis. Your task, working in groups, is to outline such a presentation which should cover: 1. Socio-economic benefits of encouraging technology graduates to set up formal small enterprises 2. The type of initiative that might encourage them to plan their small enterprises before commencing trading 3. What support such and initiative would require of Utech 4. The advantages that would accrue to Utec from supporting such and initiative 12

13 Main causes of Informality in MSEs: Main strategies to promote Formalization in MSEs: Low productivity and high costs of formalization Promoting productivity in MSEs Small and micro enterprise development policies (access to markets, finance, technology) Association building, cluster development, local economic development Complex procedures, inadequate regulation for the size and characteristics of MSEs Revision / adaptation of regulations, procedures and norms Simplification of administrative procedures Differential regulations Informality as an attractive option: flexibility and independence Incentives to formalization Access to social security Access to public procurement Access to financial and non-financial business development services Limited inspection, state and social control Enhancing the capacity to enforce compliance Inspection with technical assistance Unique identification numbers Effective sanction systems Institutional coordination

14 1. Promoting productivity in MSEs Skills training and capacity building Access to finance Innovation and transfer of technology Access to markets Association building, clusters, value chains Local economic development Sectoral policies

15 2. Revision / adaptation of regulations, procedures and norms Temporal or permanent reduced obligations Size-related contributions or rates Gradual application of obligations and norms Simplification of administrative procedures Administrative coordination Periodic payments in accordance with seasonality Flexibility / subsidies in times of economic crisis Common commencement dates Electronic services Trinidad and Tobago: Approved small company status Brazil: SIMPLES PYMES Costa Rica, CREAPYME

16 3. Creation or improvement of incentives to formalization Access to finance Access to public procurement Access to enterprise development programmes Social security benefits Colombia: SME support in public procurement

17 4. Improve capacity to enforce compliance Inspection with technical assistance Unique identification numbers Effective sanction systems Institutional coordination Colombia: Formalization brigades Chile: training instead of fine programmme

18 Formalisation Experiences: Integrated Approach in LAC Good news: increasing adoption of an integrated approach to promote formalisation in LAC. ARGENTINA 2014 REGISTERED LABOUR PROMOTION AND LABOUR FRAUD PREVENTION ACT Economic incentives for registering with social security Activities for encouraging formalisation in highly informal sectors Strengthening of labour inspection MÉXICO 2014 GROWING TOGETHER (CREZCAMOS JUNTOS) Progressive tax benefits during 10 years Access to social security Other incentives: access to financing, housing credit, etc. BRAZIL 2014 NATIONAL PLAN TO COMBAT INFORMALITY Tax incentives State provided credits for enterprises with registered workers Strengthening of labour inspection PERÚ 2014 NATIONAL PRODUCTION DIVERSIFICATION PLAN & SECTORIAL STRATEGY ON LABOUR FORMALISATION Strategies to improve productivity (information, services) Strategies to Improve incentives for MSEs, own-account workers Strenghten compliance capacity

19 Formalisation Experiences: Productivity Productivity increase improves economic capacity to face the costs of being formal. At the macroeconomic level: Formalisation in LAC happened during an economic growth context (4% per year during last decade). Macroeconomic stability is a necessary but not sufficient condition for formalisation. At the meso and micro economic level: Instruments to increase productivity and competitiveness are developed in order to achieve firms sustainable growth. Some examples of these instruments are: Access to government procurement linked to formalisation (Chile, Costa Rica, Colombia, Peru, Mexico). Policy frameworks for micro, small and medium enterprises (SEBRAE in Brazil, MSE Law in Peru, MSME Law in Colombia, SME Statute in Chile, etc). ILO s SCORE Programme (Bolivia, Colombia and Peru) Employment policies can also be useful for encouraging formalization at microeconomic level: training programmes (Mexico).

20 Formalisation Experiences: Norms Experiences considering norms applied to both business and employment formalisation: Dissemination of information on how to register enterprise/workers, benefits (rights), costs, sanctions, obligations, etc. Streamlining of administrative procedures for registering/formalizing an enterprise, registering workers at social security institutes, tax payment, social security obligations payment and others. Some strategies: one-stop shops, single payroll regimes, online procedures, etc. Social dialogue to promote formalisation. Brazil Chile Colombia INFORMATION Social Security Education Fund Chile Emprende Formalisation Networks, National Business Creation Portal, Colombia goes formal STREAMLINING SIMPLES and SUPER SIMPLES, Law on Individual Microentrepreneur, esocial website, REDESIM website Your business in a day, Law on reducing red-tape for new firms, PREVIRED website, Family-Owned microenterprise Law Anti-Red Tape Decree Business Support Centres Costa Rica Creapyme SICERE, Law on protecting citizens against red tape Guatemala Panamá Ventanilla Ágil, Procedure Simplification Programme Panamá Emprende

21 Formalisation Experiences: Incentives Debate has usually focused on costs instead of benefits of formalisation. The main incentives applied in LAC are: Taxation incentives special tax regimes for smaller firms Social security incentives firm registration allows access to social security for workers and employers These initiatives were usually carried out in order to include vulnerable groups into the social security system, not for increasing government revenues. Country Regime CHARACTERISTICS Argentina Brazil Uruguay Single Tax Regime (Monotributo) SIMPLES & Individual Microentrepreneur Monotributo & Monotributo social Single tax regime or Monotributo Simplified regime for MSEs and own-account workers which merges tax payment and social security contributions in a one fixed monthly payment. Unification of contributions with other household members Access to pension benefits and Medical Programme. Simplified regime for MSEs and own-account workers. Merge of federal taxes and social security contributions in a single annual payment. Reduced cost of social security payments Special regime for workers in simple activities, own-account workers, domestic workers or entrepreneurs below poverty line. Small contribution for access to social security and tax exemptions. Access to health system for an additional fee.

22 Formalisation Experiences: Enforcement LAC governments have carried out actions to increase the State capacity to ensure norms are met: Encourage compliance through information about benefits and sanctions. Strenghtening inspection capacity by sharing of labour/tax information among public entities, use of new technologies, etc. Or alternative specific approaches Argentina Brazil INFORMATION STRENGHTENING INSPECTION OTHER APPROACHES Digital Inspector Electronic Payroll esocial Update of inspectors remuneration system Chile Chilean Labour Direction website Substitution of fines with training Colombia Electronic Payroll (PILA) Formalisation agreements Ecuador Dignified Domestic Work Strengthening of labour inspection Mexico Strengthening of labour inspection Paraguay Decent work Operation Share of information among entities Peru Uruguay Inspection brigades Inspection brigades (Plan Reto) Electronic Payroll (Planilla Electrónica) Share of information among entities

23 market productio n organizatio n finance Business environment To stimulate and retain investments and economic opportunities Laws and Regulations Business Registration / Commercial Laws Enterprise formalization and productivity : a framework Property Laws make appropriate to informal economy understanding regulations and upgrading capacity SIYB, KAB, Get Ahead, Business counseling Value chain promotion Producer and buyer meet Improve Your Exhibition Skills Use of radio and mass Factors that affect BE Institutions (corruption, inefficient bureaucracy, property rights, length of registration, tax rates, quality and consistency of laws/regulations) Macroeconomic environment (inflation, public debt which affects services, foreign current regulations) enterprise Technical/Vocational training OSH through work improvement programmes Other laws e.g. vending / transport policies BDS market Organizational assessment / counseling Business group formation Infrastructure (roads, power, phone) Health and education Labour market conditions Financial market (access to finance) Crime and theft Technology readiness and innovation Labour law Business services To promote a market of business development services BDS providers Financial literacy training Payroll management and bookkeeping services Various financial products

24 Group work JIGSAW on R204

25 Objectives of R204 Facilitation of transition of those in the informal economy Creation, preservation and sustainability of enterprises and decent jobs in the formal economy Prevention of further informalization of formal jobs

26 What does R204 say? R204 - Towards the transition to formal businesses With respect to the formalization of micro and small economic units, Members should: (a) undertake business entry reforms by reducing registration costs and the length of the procedure, and by improving access to services, for example, through information and communication technologies; (b) reduce compliance costs by introducing simplified tax and contributions assessment and payment regimes; (c) promote access to public procurement, consistent with national legislation, including labour legislation, through measures such as adapting procurement procedures and volumes, providing training and advice on participating in public tenders, and reserving quotas for these economic units; (d) improve access to inclusive financial services, such as credit and equity, payment and insurance services, savings, and guarantee schemes, tailored to the size and needs of these economic units; (e) improve access to entrepreneurship training, skills development and tailored business development services; and (f) improve access to social security coverage. Designing an integrated policy framework for the transition to formal economy 26

27 What does R204 say? LEGAL AND POLICY FRAMEWORK INCENTIVES, COMPLIANCE & ENFORCEMENT DATA COLLECTION AND MONITORING After a proper assessment of factors, characteristics, causes, circumstances of informality, Members should design and implement laws and regulations, policies and other measures to facilitate the transition These measures should cover all workers and economic units in the informal economy Need for integrated policy framework, included in national development strategies, plan and budgets ( national, local levels ) Use the carrots (incentives) and the stick (preventive measures, law enforcement and effective sanctions Formalization of micro and small economicunits through different measures ensuring compliance with national laws and regulations appropriate system of inspection, extend coverage of labour inspection to all workplaces in the informal economy in order to protect workers collect, analyze and disseminate Statistics monitor and evaluate the progress towards formalization. Compromise between enforcement of law and compliance and the need for incentives

28 DIAGNOSTIC Overview of main steps and possible sequence of the diagnostic 1. Quantify the extent and qualify the nature of the informal economy Complemented by a broader assessment of the labour market & macro economic situation 2. Identify national priorities, Overall policy framework (first step) 3. Identify main actors involved; vision(s) of the informal eco & coordination mechanisms if any Option 1 Identify the categories of workers and enterprises or sectors warranting priority action and engage in next steps of the diagnosis focused on those groups Option 2 Continue the process without setting priorities at this stage but after Identify the main incentives and drivers of informality 5. Identify and assess current policy approach, specific measures and impacts 6. Identify priority measures and sequencing to facilitating the transition from informal to formal 7. Provide a set of policy recommendations & a sequencing to formulate the road map 28

29 Informal units informal employment From the idea to the consolidation : Designing adequate policies to reduce informality along the entrepreneurship development process. Stage O: Potential entrepreneur There is no economic unit. Only business ideas and some degree of preparation to enter the market. Stage 1: Emerging entrepreneur Without signs of registry or tax formality; minimizes its visibility; generates precarious employment and does not register in any public registry Stage 2: New entrepreneur (1-2 years) Growth forces the business to greater formalization. Part of the employment is formal and the rest can be informal or subcontracted. Some registration phases are completed. Stage 3: Established entrepreneur The business is consolidated and formal registration requirements are met, tax is paid and labor formality is achieved Stage 4: Mature entrepneur (advanced, mid/longterm) Fuente: Zevallos, Emilio (2012). El Modelo de Desarrollo Empresarial. Documento de Trabajo 003, Proyecto Avanz@. Fundación Omar Dengo, San José, Costa Rica 14/11/

30 Step 0: potential entrepeneur Involved previously with the sector in which you will develop your product / service In the process of building your product / service Definition of the business objective (differentiation / positioning) Start of resource allocation to the design process Intuitions around strategic definitions Micro level: from a potential to mature entrepreneur Step 1: emerging Entrepreneur Informal registrations and control / At least one basic record of income and expenses Entrepreneur multitasking Search for first customers Search for first partners Company prepared to assume a time of loss. Develop some type of action plan (business plan) Step 2: New entrepreneur Separate business administration from personal budget More stable clientele, develops client portfolio Increase in profitability Meet suppliers Inventory rotation Definition of market strategy Adaptability to environmental changes Step 3: Established entrepreneur Delegate functions Establishment of alliances Invest in training for your employees and for yourself Full formalization Registration to chambers and associations Optimization of the use of resources Is involved in corporate social responsibility (CSR) activities Step 4 Mature entrepreneur Document key processes. Diversification of the offer of products or services Productive chains Knowledge management and communications Standardization of processes: ISO standards for example Application of measurement methodology and productivity improvement

31 Step 1: emerging Entrepreneur Step 2: New entrepreneu Step 3: Established entrepreneur Step 4 Mature entrepreneur Transition from stage 1 to 2: Transition from stage 2 to 3: Transition from stage 3 to 4: Increase in clientele Sales growth Start the process of internal and external formalization Start consolidating a portfolio of fixed suppliers Develop some kind of action plan Create informal employment Sales level consolidation Increase staff (formal and informal) Assigns resources to promotional operations Try to consolidate the basic formalization process Create formal and informal employment Increase productivity Diversify and invest in quality improvements of products or services It expands territorially Document key processes for the business Comply with all or almost all legal procedures

32 macro-meso level: example of a results chain ACTIVITIES OUTPUT OUTCOMES IMPACT Organization of Information campaigns on the benefits of formalization Provision of Business Development Services to ready-to-grow enterprises Formalization status of clients: Registration of clients with relevant authorities Clients trained in business practices Clients Application for potentials benefits linked to the enterprise status Clients have improved business management practices and access opportunities: Improved use of financial services Social security coverage for client and employees Improved business management practices (marketing and delivery of products, use of management tools Clients access government schemes and subsidies Improved economic and social performance of clients: Income from the business increased growth of enterprise Better management of financial services Income for the household increased Asset accumulation by household Implementation Results Baseline survey and 2 or 3 follow up surveys to track the impact

33 From policy to impact: Access to Finance and BDS OUTPUTS OUTCOMES IMPACT Loans paid to start ups or enterprises Training delivered to potential and existing entrepreneurs Assumption: Inputs are invested in the business; Skills learned are relevant New start-ups are established Performance of existing enterprises is improved (sales, profits) Investment is increased Management skills are increased Assumption: Increased labour demand and adequate labour supply Additional income Increased employment Improved quality of employment Poverty reduction Greater economic empowerment of women

34 From policy to impact: an enabling environment for enterprises OUTPUTS Policy dialogue on reforms held Reform action plans developed Draft policies, laws and regulations available Capacity of stakeholders developed OUTCOMES Reforms adopted Improved capacity of stakeholders for evidence-based dialogue Reduced business costs and risks, and increased competition IMPACT Increased profit Increased enterprise investments Increased productivity and competitiveness Increased wages Increased employment Improved quality of employment Assumption: Enterprises are made aware of reforms and are not merely survivalist firms Assumption: Decreased compliance costs trigger new investments

35 From policy to impact: formalising enterprises OUTPUTS OUTCOMES IMPACT Draft policies, laws and regulations on: Simplified business registration Simplified tax administration/reduced tax rates Increased benefits of formalisation Reformed inspection services Assumption: Enterprises are made aware of reforms and are not merely survivalist firms New policies, laws and regulations adopted Protection of property rights, enforcement of contracts Increased business registration Widened tax base Increased access to financial and nonfinancial services Increased company productivity and growth Increased income Increased employment Improved quality of employment Assumption: Decreased compliance costs lead to business expansion

36 Towards an integrated policy approach for the formalization of MSEs Understand the motivations for formalisation/informalization/informality Recognise disparities among informal enterprises (size, age, gender, youth, skills, motivations Finding the right policy mix : Develop an integrated, holistic response Equilibrium between incentives and sanctions : Balance incentives with better enforcement Assuring policies are geared both to the formalization of enterprises and the formalization of labour relations in MSEs Dissemination of policies to local administration and MSEs : Communicate reforms Social dialogue, Broaden reform dialogue, Increase engagement with the corporate sector - Work with non-traditional representative organisations Complement policy reforms with support services Pay attention to implementation, invest in more evidence and better monitoring