Regulatory costs and employment in the informal sector of Argentina

45 ESP Discussion Paper Series 20860 Regulatory Costs and Employment in the Informal Sector of Argentina Anna Luiza Ozorio de Almeida and Scott E.M. Graham October 1994 Education and Social Policy Department Human Resources Development and Operations Policy The World Bank  ESP Discussion P3pers reflect work in progress. They are intended to make lessons emerging from the current work program available to operational staff quickly and easily, as well as to stimulate discussion and comment. They also serve as the building blocks for subsequent policy and best practice papers. The views expressed here are those of the authors and should not be attributed to the World Bank or its Board of Executive Directors or the countries they represent.  ABSTRACT This work analyzes the evolution of te informal sector within the contet of reent labor markt tnds in Argentina. For the purposes of poverty reduction, it is useful to define the 'Snformal sector" as consisting of self-employed workers and those in firms with less than five employees. TIhis paper provides a theoretical model for quantifyn the burden of regulatory costs and for estmatng their possible impact on emnploymen and incomes in the informal sector. Regulatory costs in Argentina are cxamined in great detail (in the Appendix), and compared with other costs of production for microfirms in different sectors of the economy. As an illustrative exercise, we calculate the possible costs to the public sector of a policy of deregulation for nicrofims, as well as its potential benefits, i.e. the number of jobs created. While these results are not the product of rigorous statistical analysis, and therefore have no predictive value, they illustate the magnitude of regulatory costs for the smallest firms and draw attention to their potential impact on employment and incomes in the informal sector. Despite the widespread notion that informal businesses are successful in evading regulatory costs, this work finds that such costs may absorb as much as 21 percent of the average microfirn's operational xeses. In some sectors, such as mannfacturing and construction, the costs of regulation are about 44 percent. Deregulation of microfirms, then, might have significant potental as a strategy to generate jobs and inome in a sector of vital importance to the poor. .   ACKNOWLEDGMENTS We thank Joao Campari, Delia Keller, Irene Oiberman (INDEC), Cristina Vargas de Flood, Marcela Harriague, Emilia Roca (Min. Economia), Atilio Boron (EURAL), Juan Antonio Zapata (Sector Publico Provincial), Alberto Minujin (UNICEF), Luis Beccaria (PROMIN), Juan Luis Bour (FIEL), Monica Hirst, Roberto Bouzas, Osvaldo Barsky (FLACSO), Alfredo Monza (Min. Trabajo/OIT), Carola Pessino (CEMA), Jorge Carpio (Programa Global de Credito, IDEMI), Ivan Momenio (IDEMI), Jorge Vildoso (1DB), Nerio Neirotti (Ministerio de Promocion Socioeconomica y Accion Solidaria, Mendoza) Elba Luna (GADIS), Microenterprise Staff from Reconversion Productiva, Adriana Marshall, and Rosalia Cortes for their suggestions, comments, information, and data. A preliminary version of this paper was reviewed at Latin America 2000, a conference held at the University of Texas at Austin November 4th and 5th, 1993. The authors are grateful for the comments and suggestions of discussants. Kari Labrie and.Precy Lizarondo provided enormous assistance in preparing the final document. Errors and omissions are our own responsibility. Iist of Acronyms BCRA = Banco Central de la Republica Argentina CEPAL = Comision Economica Para America Latina FIDE = Fundacion de Investigaciones para el Desarrollo ILO - International Labour Office INDEC = Instituto Nacional de Estadistica y Censos MTSS = Ministerio de Trabajo y Seguridad Social OECD = Organzation for Economic Cooperation and Development PRONATASS = Programs Nacional de Asistencia Tecnica para la Administracion de los Servicios Sociales en la Republica Argentina iv   REGULATORY COSTS AND EMPLOYMENT IN THE INFORMAL SECTOR OF ARGENTINA Anna Luiza Ozorio de Almeida Scott E.M. Graham Washington, October 1994 Introduction and Sumary............................................................................................................... ii PART ONE: Poverty and the Informal Sector m Argentina 1. Trends in fte Argentine Labor Market .........................................2 II. Recet Evolution of the Infonmal Sector in Argenfina ......................................... 15 IH. Policies to Reduce Poverty in the Informal Sector ......................................... 24 PART TWO: Deregulation and Employment in Microfiins IV. Dereguating the Unrgulated .......................................... 30 V. A Model of Deregulation .......................................... 32 VI. The Case of Argentina .......................................... 47 Appendix: Regulatory Costs in the Urban Informal Sector .......................................... 60 Bibliography ...........................................90 .~~~~~~~~~~~~~~~~  vi  INTRODUCTION AND SUMARY Since the early 1980s, the most rapidly increasing fonn of amployment in Argeina has taken place among the self employed and those in microfinns (less than five employees). A relatvely high proportion of these jobs are held by migrants finm rual areas or neighboring countries, and by so- called 'hecondary workers," primarily women and the elderly. These secondary workers seek employment in order to supplement declining family incomes. There is a need for stategies to increase productivity and incomes in this sector, but such strategies must begin by recognizing the budgetary and adminiative limitations which constrain government activity. This study aims to contribute to the search for such policies through a quantitative investigation of regulatory costs and their impact on the microfinn. Throughout Latin America, the informal sector, roughly the sum of self-amployed workers and those in microfirms, is a critical source of jobs and income for the poor and those near the poverty line. For all its vastess and importance, however, it is a statistically elusive phenomnon. Definitional ambiguities, contradictions and uncertainties abound. Data, on the oher hand, are scarce. Rigorous statistical analysis of the iformal sector, which is desirable from the policy making perspective, is therefore virtally impossible or, at best, very costly. As a result, it is easily overlooked in the discussion of poverty alleviation and econom ic strategies in general. The lepcild" status of the infonnal sector is firther perpetuated by those who view its existence as symptomatic of the failure of Social Security programs or unenforced labor legislation, rather than as a viable arena for poverty reducing growth. The successes of Grameen Bank and other institutions (such as BKK in Indonesia, or Accion in Latin America) have served to refocus aention on the productive activities of the poor as a startng point for poverty reduction measures. The ability of such programs to massify their lending among the poorest segmeuts of society, while achieving significant cost-recovery figures, has inspired a wave of interest in small-scale production as a way out of poverty. The success of such programs, however, is partally attributed to their narrow focus on one single constaint facing the incrofirnn, the unavailability of credi, while other constaints persist. These include: lack of danand, limited skdlls and information, and the disproportonate burden of regulatory costs. This last constraint, the burden of regulatory costs, is significant for the smallest fims. This study shows that, in Argentina, regulatory costs may absorb as much as 21 percent of the microfirm's daily expenditures. In some sectors, such as M rin and Construction, the costs of regulation are much higher, on the order of 44 percent of total costs. Microentrepreneurs may devise srategies to avoid cosdy regulations, but the evasive straties themselves often entail high costs and foregone opportunities. One way of illustrating the weight of such costs is to express them in terms of jobs. Simply put, how any workers could a microfirm employ if all its regulatory costs were removed? In Argentina, an across-the board deregulation of microfirms might, under certain assumptions, genrate over 250,000 jobs in small-scale n i alone, and up to one million jobs in the informal sector as a whole. It should be emphasized that these figures are illustrative, and do not represent statistically rigorous predictions. Their sheer magnitude, however, indicates that employment and incomes in the informal sector may be very sensitive to regulations, notwithstanding the popular belief that informal businesses are immune to regulatory costs. vii  nii  PART ONE: POVERTY AND THE INFORMAL SECTOR IN ARGENTINA   L. RECENT TRENDS IN THE ARGENTINE LABOR MARIKET: THE INFORMAL SECTOR AS A LABOR MARKET RESPONSE 1.1 Introduction The labor market has been a principal arena for Argentina's recent impoverishment. Declining investment, falling production, and high inflation were reflected in high unemployment rates and a steep fall in the real value of wages - which, in turn, plunged many previously middle class fimilies below the poverty line. In Argentina, these fimilies cotitute the "new poor," for whm poverty is mainly the resuk of declining real wages or unemployment. At the same time, the labor market in Argentina is charaterizd by a burgeoning informal sector.' Impoveishment and the growth of an informal sector share at kast one proxime cause: insufficient demand for labor in the formal econmy. Workers expelled from formal firms and those unable to find work in such finns are absorbed into the informal sector, charActerzed by precaious working conditions and low wages. At the same tme, declining household income has tiggered the entry of "secondary' workers into a labor market which is unable to supply even 'prinwary workers with jobs.' For such job-seekers, the informal sector provides a means of subsistence in the absence of better alternatives. Increasing urbanization, due to migraion and urban population growth, and the changing structure of production contibute to the growth of the informal sector in Argeotina. A rise in the share of employment by micro- and small enteprises (MSEs) has been reiforced by an underlying shift in employment towards another common locus of the informal sector: "terfiazy activities, which will be explained in Section 1.7. The incrase in this sector's share of employment, however, has not been mtched by proportionate incrases in output. Such shifts imply the proliferation of low-productivity, low-wage jobs, with an increasing proportion of the job force in MSEs, especialy in services, commerce and some branches of manufacturing. 1.2 Growing Urban Labor Supply Population growth and fertility rates have been on a steady decline in Argentina since 1975, with the most drastic decrease occuring in the 1985 to 1990 period. Two trads, however, have contributed to recent growth in the labor force: rural to urban nigration and an increase in rates of labor force participation, especially among women. Given slow job growth in the past 15 years, these trends have resulted in unprecedented mtes of unemploymcnt in Argentina. Table 1.1 contains the annual growth rates of Argentina's populatin from 1960 to 1990, according to the Instituto Nacional de EFstadistica y Censos (INDEC) and the World Bank Atlas. The population is more or kss evenly divided between women and men. The table shows a continued decline in the annual population grmth rate since 1977. In th1i context, the infoml sector includes those farms of employmt which are typically mregscred. low- paying jos in uH firs. By exclusn, finms in the 'fomal"sector are thos that employ more than five employees. The rationale and implications will be ealored in Chapt IL 2 "Pnary" wkers are typically heads of housiolds, whic "seconTydy wxs awe othe members of the family whose income complements that of the primwy breadwinm. 2  Table 1.1: The Popul tion of Argentina: 1960-1990 Mid-year Annual Five-year Population Growth Rate Growth Rate (thousands) (%) Projection (