Karachi's informal economy - part I

There is a wide consensus that the size of informal economy in Pakistan is huge. However, what economists don't agree on that how huge it is. A host of studies, using various methodologies, have estimated the size of the informal economy, and these estimates range between 20 and 91 percent of the formal economy, of which about 30 to 40 percent is estimated to be illegal economy.

While the lack of consensus on that front is already something to be concerned about, even more discomforting is the fact that the size of informal economy across various sectors and provinces/regions in Pakistan is also unknown. Academic research to that end has been "little", according to a latest study by United States Institute of Peace (USIP), which in this column's view is a euphemistic expression for 'none'.

The good news is that USIP's recently released study (titled: 'Informality in Karachi's land, manufacturing and transport sectors') attempts to fill that gap, though it's another thing that it provides a conceptual framework to analyse the state and level of informality in Karachi's economy, rather than putting a number on the estimated size of the same.

Some of the findings of that report are rather interesting, and BR Research will follow up on those findings in our subsequent columns. But a few teasers in today's piece wouldn't probably hurt. Or probably it will.

For instance, "27 percent of land in Karachi is used for formal residential areas; conversely, 8.1 percent of the land is used for informal residential areas, catering to more than 50 percent of the population". That's quite a haunting estimate and puts serious question marks on those politically and administratively responsible for the state of economic affairs in Karachi.

In a myth-busting exercise, the report goes on to say that "Karachi's transport sector is a victim rather than a perpetrator of instability, contrary to the perception that a Pakhtun mafia controls it. Informality in this sector rose dramatically after the state stopped providing public transport".

The historical and political linkages to informality in Karachi's land and transport sectors is one of the themes that this column will talk about next week, but for today we will limit the discussion to a rare and bold political statement, which is usually absent from economists' speak, especially if they are writing for donor-funded projects.

While setting the context of Karachi's informal economy vis-a-vis ethnicity and its impact on political and social instability, the report says:

"From 1997 to 2002, the state response continued at varying levels of intensity as MQM's political influence receded. However, after the 2002 general elections, Pervez Musharraf's government provided the MQM de facto power through the provincial government in Karachi, which was further reinforced by its success in the subsequent local body elections held in 2005.

Thus began MQM's domination through to 2008. A precipitous increase in petty crime ensued (mainly mobile phone snatching at gunpoint and extortion rackets), along with the targeted killing of policemen who had participated in the state's operation against the MQM and against some political opponents. This domination over Karachi by the MQM also allowed them to corner rents, mainly through land and by inducting its supporters in government jobs.

This, in turn, created significant tension with other ethnic groups, many of whom were at the receiving end of land acquisitions and were deprived of government jobs".

Whether or not this holds truth is another matter; rest assured. It will likely ruffle many feathers.