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Understanding decentralization and its impact on transition to formality; focusing local reforms, improving representation and dialogue

Addressing informality and the promotion of sustainable enterprises

Article | 05 August 2021

Addressing informality and the promotion of sustainable enterprises

Simon White - August 2021
Employer and business membership organizations (EBMOs) have a vital role to play in representing private businesses of all kinds and advocating for reforms that make the business environment more conducive for businesses to start, grow and compete in local, national and global markets. This challenging work is made more demanding in the face of government decentralization and when considering the concerns of informal firms, which are typically less organized than formal firms and largely under-represented.

The 2007 International Labour Conference (ILC) Conclusions Concerning the Promotion of Sustainable Enterprises provide a coherent and comprehensive approach to the ILO’s enterprise development programme. They define 17 components of an enabling environment and show how the creation, growth and transformation of enterprises on a sustainable basis combine the legitimate quest for profit––one of the key drivers of economic growth––with the need for development that respects human dignity, environmental sustainability and decent work.

Informal enterprises are a major component of the informal economy, which dominates many Asia-Pacific economies. The ILC 2015 Recommendation Concerning the Transition from the Informal to the Formal Economy promotes the role of EBMOs to improve the representation of those in the informal economy, while assisting workers and economic units in the informal economy and facilitating the transition to the formal economy.

The ILO Decent Work Team for East and South-East Asia and the Pacific office has instigated research to better understand how government decentralization affects the business environment at national and subnational levels and businesses operating in the informal economy. This information will help EBMOs and governments support the transition of informal business towards a more formal status.

Improving the local business environment

The business environment contains the policy, legal, institutional, and regulatory conditions that govern business activities. This includes interactions between public, private and civil actors through social dialogue and public-private dialogue. It highlights the way government policy and regulatory decisions, at national and sub-national levels, directly affect the decisions made by businessowners and managers. These decisions include investment and employment decisions, as well as the decisions taken by informal firms to formalize.

Governments seek to improve the business environment to development the private sector to grow the economy and create more and better jobs. In this way, business environment reform helps to reduce the costs and risk of doing business, while increasing competitive pressures, firms become more competitive by making market entry easier and by stimulating the efficiency and innovating incentives of the market.

Decentralized government systems increase the power and resources available to local government authorities, as well as decentralised national-government authorities. This opens new opportunities for place-based and local economic development. It also highlights the role of the local business environment, creating new entry points for local EBMOs to engage with government in their efforts to improve the local conditions for business. Indeed, more attention needs to be given to subnational social dialogue and to the role EBMOs can play.

Points for local EBMO engagement and advocacy

The results of this research have identified several entry points for EBMOs to engage with local government and decentralized national government authorities to consider business environment reforms that foster the transition to formalization of informal firms.

  • Local enterprise policies and strategies. Work with local government and decentralized national government authorities to consider the need for a local, gender-inclusive enterprise development policy or strategy that encompasses the informal sector and presents a basis for formalization.
  • Local business registration and licensing. Review the requirements for business registration, licenses and permits, including national and local requirements, and the ways national laws and regulations associated with registration, licenses and permits are administered locally.
  • Local land reform, area planning and infrastructure. Initiate dialogue with local government and decentralized national government authorities regarding the issues affecting access to land and land titling, local area planning and the provision of appropriate infrastructure and facilities. Special consideration should be given to the provision of informal market facilities, local zoning (e.g., homebased businesses), and issues related to crime and security. 
  • Local procurement. Investigate the extent to which these local authorities can create new market opportunities through their procurement of services and products and how this can be presented in a way that encourages capable informal firms to formalize.
  • Digital reforms. Investigate the opportunities for the application of new digital technologies to make to LBE reform. This may include virtual one-stop-shops, local payment systems and digital identification.
  • Local business representation and public-private dialogue. Consider the extent to which local informal businessmen and women are organized and represented. Support dialogue with local authorities which is specifically designed around the issues faced by informal firms and consider the range of options available to support the transition to formality.

Recommendations for EBMOs

In addition, the research presents a series of practical recommendations to EBMOs, which suggest that all forms of EBMO have an increasing need and interest in building local capacities for policy engagement, services and representation. Particular attention is given to the evolving roles of EBMO roles in a decentralized political and administrative system. This includes the need to rollout services, advocacy and other support for the informal economy, by undertaking research and strategic planning to guide engagement, while advocating for government to explicitly integrate data and evidence about informality into policymaking.

EBMOs should improve representativeness by being the main private sector partner in private-public dialogue. With better representation, local EBMOs can exert more influence on local government and decentralized national government authorities.

It is recommended that EBMOs work directly with associations whose members are predominately or entirely in the informal economy to deliver advisory and other services. Moreover, EBMOs should support the creation and development of member-based, accessible, transparent, accountable, and democratically managed representative organizations catering for informal economy operators.

As a voice for the business community, EBMOs are in the best position to inform and work with policymakers whose decisions impact on companies, particularly at the subnational level. EBMOs should work closely with governments in creating a regulatory and institutional environment that minimises the negative effects and harnesses the opportunities of decentralization.

Next steps

More work is required to better understand the challenges faced by informal firms in the Asia-Pacific region and how EBMOs can represent these constituents and advocate for reforms that improve private investments and encourage the transition to formality. The Bureau for Employers’ Activities (ACT/EMP) will continue to work with EBMOs in the region to strengthen their capacity to engage effectively in dialogue and advocacy national and local levels.

About Simon White

Dr Simon White in an international expert in private sector and economic development. With over thirty years’ advisory experience, Simon provides independent policy advice to governments, business organisations and development agencies, specialising in in business environment reform, entrepreneurship and innovation, regional and local economic development, and market systems development.