Formalization of the informal economy in South Eastern European countries and Moldova

The programme will strengthen the capacity and commitment of governments and the social partners to design and implement policies and measures that contribute to the formalization of the economy, thus improving the quality, decency and productivity of jobs.

The Eastern and South-Eastern European countries are characterized by a relatively broad informal sector, which is seen as an obstacle to a substantial modernization of the economy and society. The share of the informal economy is typically estimated in the range of 30 to 50 per cent of the official GDP in the Central and Eastern European region. Inadequate economic and social policies, the lack of appropriate legal and institutional framework, poor enforcement of regulation, reduced confidence into institutions and excessive administrative procedures, combined with economic downturn, are the main drivers for a share of economic activity to remain or to become informal.

This informality is manifested either by evading legal obligations when operating in formal economy or by a complete shift to informal economy whereby the economic activity/entity is utterly unregistered. Low levels of job creation, high unemployment and low levels of unemployment insurance and social assistance benefits leave workers and small entrepreneurs no other choice than to seek employment in the informal economy. In most countries of the region, the formal economy has only limited absorption capacity for surplus labour, particularly in the context of the current post-crisis economic stagnation. Rapid economic changes, as they were experienced in the political transition period, are often to the disadvantage of low skilled workers who cannot adapt to the new requirements in the formal economy and are squeezed out into the informal economy.

High instances of informal employment have various negative effects on the economy of the region as a whole, on working conditions generally, and on the policy making process. Endemic informal employment limits the effectiveness of employment as a tool to reduce poverty. Low tax revenues, due to the non-payment of payroll taxes, constrain the governments’ capacity to introduce effective labour market and social protection policies. In addition, the large informal economy and widespread practice of under-reporting of wages create serious problems for the coverage and financing of social security systems, thereby rendering these workers and their families unprotected against substantial social risks.

Objectives

The overall objective of the programme is to strengthen the capacity and commitment of governments and the social partners to design and implement policies and measures that, through the formalization of the economy, will improve the quality, decency and productivity of jobs.


Expected results

  1. The formalization of the informal economy becomes an explicit priority in the policy agenda of constituents in the countries concerned and action plans are adopted and/or implemented This shall be attained through policy design and advocacy – including public information campaigns;
  2. National studies will document the different dimensions of the informal economy, and will seek to identify its main drivers, with a focus on vulnerable groups (youth, women, old workers) and skills development issues;
  3. The ILO methodology on Enabling Environment for Sustainable Enterprise will be introduced in Bosnia and Herzegovina and follow-up work will be done on the exercise implemented in Moldova in 2013. Once this methodology is applied, measures will be proposed for small and micro enterprises to have enabling legal and regulatory frameworks, better access to credit, training and business development services and to ensure that the legal and administrative procedures for registration and formalization are simple and easily accessible at the local level;
  4. Tripartite consensus is reached on the identification of workable legislative, regulatory and operational solutions in order to regulate various forms of employment contracts and employment relationships in line with relevant ILO Conventions and European law and practice, with particular regard to non-standard and/or evolving forms of employment such as part time work, homework, domestic work, temporary work or casual employment, fixed term employment;
  5. The government and social security institutions design policies to extend coverage and services to the workers in the informal economy and build the capacity to improve the efficiency of the collection of social security benefits;
  6. Labour inspectorates design a strategy and a plan to expand their outreach to the informal economy.