Among the most gravely misunderstood and unsettled economic issues in recent times, economic informality occupies the top spots. Informal economy is thought to be a pervasive feature of the economies where income is not equitably distributed, or is usually the outcome of weak business environment - one that is characterized by troublesome red-tape, excessive taxes, and weak governance.
According to World Bank, the size of informal economy hovers at 40 percent of GDP in most of the developing countries of Asia and Africa.
In Pakistan, informal economy is gaining impetus with every passing day. As the political and security backdrop deteriorates, most of the people prefer gluing to the notion of "ignorance is bliss" and thus hesitate in registering their businesses and rather engaging in casual homespun businesses whereby they can easily evade taxes and regulations by being undocumented and often unbanked.
Moreover, with the changing media landscape and ever growing number of internet users in Pakistan, many people are engaged in online businesses run via social media platforms such as Facebook, Twitter, Foursquare etc.
According to World Bank Statistics, 2012, Pakistan internet users showed double digit growth over the past few years clocking in at 16.8 percent in 2012, which is the second highest growth rate amongst the Saarc countries. This has proved to be amazing news for the online business owners who can effortlessly launch, advertise and run their businesses profitably at almost zero capital expenditure and avoid taxes by concealing their commercial presence, and by their physical non-existence.
Not only this, from home based tutors and beauticians to those engaged in casual and low-skill jobs such as construction, transport, agriculture, light manufacturing or even street vending, many businesses are operating outside government regulations and tax systems in Pakistan, reaching a size far beyond $100 billion, almost half the size of formal economy.
Looking into the positive aspects of shadow activities, certain empirical studies reveal that two-third of the income earned in the shadow economy is spent in the formal economy, thus buttressing its growth.
Moreover, in countries like Pakistan where there exists a rapid rate of population growth and urbanization, informal economy lends an invisible helping hand to the economy by absorbing surplus labor force. According to ILO statistics, 2012, the parallel economy provides employment to almost 73 percent of Pakistans labor force which equals 20.4 million people.
Besides some advantages, shadow economy brings its fair share of trouble. Transactions in the shadow economy keep state revenues lower than they otherwise would be, and in turn lessen governments ability to provide goods and services. The government may respond by raising tax rates-encouraging a further flight into the shadow economy that further exacerbates the budget constraints, thus perpetuating the vicious cycle.
Pakistan can afford an ever growing informal economy undermining national growth amid the country already grappling against one of the lowest tax-to-GDP ratios the region.
The efforts to fiscal consolidation urge governments to borrow excessively from the banking sector, thus sternly kicking out the private sector. Credit to private sector registered a decline of 62 percent YoY to 73.5 billion till December 28, 2012 as against Rs193.5bn in the same period last year.
All the steps taken earlier to document the formal economy have miserably failed. The latest tax amnesty schemes allow the tax evaders to legalise their wealth by paying 1.25 to 1.5 percent of their untaxed assets and incomes and no questions would be asked about the sources.
Such schemes show that the government has accepted the failure of its revenue collection machinery and have bowed in front of ill-gotten income earners. This is a harsh joke for honest taxpayers and tends to shatter faith in the dignity of sincere labour.
To rein in this gloom, building trust in government is crucial. Going forward, good governance combined with high-quality public services, structural incentives and increased financial transparency appears to be potential rescuers unshackling economy from shadows.
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