Transitioning to the formal economy through technology: The trends towards e-formality

Article | 10 May 2019
By Juan Chacaltana and Vicky Leung
Employment Policy Department

These days it seems like everyone is talking about how new technologies are affecting the labour markets. Yet, less attention has been paid to technology’s impact on policies affecting millions of workers in the informal economy. Now, an increasing number of governments are promoting new technologies that could facilitate the transition from the informal to the formal economy.

This was the key finding in a recent research report. In it, we highlight emerging trends in policy regarding the role of technology in this transition. Technology can facilitate providing access to social protection, simplify regulation, increase productivity, support inspection and compliance with laws, and give a voice to those working “underground” or in the shadows.

These technological trends include innovative, information-intensive and connectivity-based tools or approaches – what we call “e-formality” – which contrast sharply to traditional, time-consuming practices. Much progress has been made in applying these tools and approaches in high-income countries. Now, similar initiatives covering a wide array of pathways to formality are occurring in middle and even low-income countries.

What are some of the technological innovations that can smooth the road to formality? Take, for example, simplification of time-consuming procedures and registration of businesses. “Virtual one-stop shops” similar to the e-Business register in Estonia provides an advanced and secure platform for registering businesses online without going to a notary or other officials. Although more evidence is needed to assess if registration of business implies labour formalization as well.

Or registration of workers. The “Electronic Payroll” in Peru, a joint effort of the Tax Authority and the Labour Ministry, has significantly increased formality. Similar solutions exist in other countries, including innovative tools for hard to reach groups like domestic workers: in Uruguay, the Social Security Institution launched a free mobile app for employers to ease the registration and compliance concerning domestic workers rights. And in Ghana, digitalization of the health insurance renewal process can be done remotely using mobile phones or other digital devices.

Technologies are also being used to encourage the registration of transactions. These include tax deductions for the use of credit cards in South Korea, monthly lottery prizes for customers who ask for receipts in Sao Paulo, Brazil, and subsidies for small businesses to the use of cash machines linked directly to the Fiscal Control Unit in Hungary. Tracking transactions does not only facilitate the transition to formality through enhanced transparency. Some argue that this could make payment habits more secure and efficient, generate a financial track record that can facilitate access to finance, and create opportunities for start-ups in the electronic payment area.

Similarly, new technologies are being employed to strengthen enforcement bodies and systems to comply with business or labour obligations. For example, a “Digital inspector” scheme in Argentina and the “Labour Inspection System Application (LISA)” in Sri Lanka use a tablet to give labour inspectors enhanced access to several information databases of different interrelated agencies.

Innovative solutions have been tested for increasing productivity of low productivity economic units Take the case of Tabletas Concanaco in Mexico and the free Fiji Revenue & Customs Service (FRCS) point-of-sale (POS) App available in Fiji where new technologies are used to help SMEs record the provision of sales reports, enable electronic sales and billing and allow customers to settle payments with credit and debit cards.

New technologies based on information and intelligence could also help facilitate inter-ministerial coordination, better link between business and labour formalization, and ease the sharing of information and actions among tax, social security and employment institutions. Some examples include the “e-Social” system in Brazil or the Integrated Contribution Register (Planilla Integrada de Liquidación de Aportes (PILA)) in Colombia that unifies information from several agencies.

It is important to note that these e-solutions are not always explicitly linked to the transition to formality, but are promising as they bring more transparency, information and new approaches that can represent initial steps in the transition to formality.

In conclusion, we are at an early stage in the evolution of this new generation of formality related policies. It has good potentials, which can be realized only through effective policies. Given the significant uncertainty about the new technology for e-formality, policies need to be guided by timely data and reliable evidence. What’s more, social dialogue among the social partners could also play a key role for assuring that e-formality policies actually lead to decent work.