…Says new incentives needed for formalisation
In a bid to make transition from informal business seamless, the International Labour Organization (ILO) has advocated for more incentives for enterprises to make formalization more attractive.
At an InfoPoint conference organized by the European Commission, the ILO discussed ways to make the transition of enterprises towards formality more attractive.
The ILO presented enterprise formalization during an InfoPoint conference organized by the European Commission, entitled “Unlocking economic potential – How formalising the informal sector drives inclusive and sustainable development”.
Informality is manifested in a variety of ways, ranging from small businesses that have not been registered by their owner, to undeclared work in formal enterprises, to micro or small enterprises that may be registered to some degree with institutions in their country. The root causes of informality are complex and vary depending on the country.
“If we want to formalize the informal economy, we will need to look at several causes, including legal, regulatory and institutional aspects, such as an unconducive business environment, tedious formalization procedures, and a lack of incentives to formalize,” said Craig Churchill, Head of Social Finance at the ILO.
Churchill underlined the need to provide new incentives to make formalization more attractive. First, the benefits of formalizing a business need to outweigh the costs, which include compliance, taxes and social security contributions.
The benefits include access to social security, markets, finance and business development services, such as workspace and training, and no more penalties for non-compliance.
Financial service providers are a potential conduit for promoting formalization because they have a significant outreach and can influence their clients’ business practices. By supporting their client’s businesses and helping them to perform better, banks and financial institutions will have more productive and more loyal clients and can also reach social and commercial results.
“Certain financial products could be accessible only to formalized businesses, and at the same time, banks can help improve the productivity of informal enterprises, stimulate growth and support them in their transition towards formalization,” said Churchill.
The upcoming 113th session of the International Labour Conference (ILC) will discuss innovative approaches to tackling informality and promoting transitions towards formality to promote decent work. Ten years ago, the Conference adopted Recommendation 204 on the Transition from the informal to the formal economy.
The ILO supports enterprises to transition to formality through different ways. It seeks to:
enhance their ability to formalize, by making it easier to comply (simplified procedures and requirements) make business apt to formalize (including productivity enhancement), and
make it more attractive to be formal, through incentives and support schemes
The informal economy is widespread through countries in Africa, the Caribbean and the Pacific and provides vital income and employment for millions of people. Yet, many informal enterprises – particularly those led by women and youth – struggle to grow, access finance, or transition into the formal economy.
Recognizing this, the United Nations Development Programme (UNDP), in partnership with the International Labour Organization (ILO), is implementing a five-year project: ‘Supporting Informal Enterprises Transition Towards Sustainable Growth and Formalization in the Africa, Caribbean and Pacific Regions’. Funded by the European Union and the Organisation of African, Caribbean and Pacific States (OACPS), the project is currently underway in Mozambique, Sierra Leone, and Solomon Islands.