The cost of the shadow economy

 

The cost of the shadow economy

The contribution of the informal sector to Pakistan's economy is significant as it is estimated at $661 billion, equal to 35.6 percent of GDP. According to the International Labor Organization, 75% and 68% are employed in rural and urban areas; However, it is fraught with problems such as child and bonded labour, gender discrimination and workplace safety.

It also includes small and medium enterprises (SMEs) that are self-employed, micro businesses, informal associations, and agricultural and micro businesses supported by street vendors, making them more resistant to economic downturns. Despite its size and contribution to the economy, the informal sector creates financial vulnerability to formal contracts.

Let's look at the official market. The Growth Enterprise Market (GEM) board of the Pakistan Stock Exchange (PSX) is a micro market for small and medium enterprises and high growth companies going public. The GEM board is based on the Alternative Investment Market in London, which was established in 1995 by the London Stock Exchange as a sub-market to provide access to small and medium-sized businesses, start-ups and incubators. raising capital and providing a platform for investors. Return from entry from small business.

With over 3,000 listed companies from over 70 countries, it has become one of the UK's leading global growth markets for small companies. Although companies listed on the GEM board in Pakistan are subject to stricter listing criteria and regulations compared to companies listed on the PSX main board, only three SMEs have joined the GEM board so far, namely Pak Agro. Packaging Ltd, Supernet Ltd and Universal Network Systems.

Informal regulation is supported by special interest groups through a complex mix of tax laws and formal industry regulations

There are several reasons for this anomaly, for example, investor participation seems to be negligible, as only 0.3 million accounts are registered with Pakistan National Clearing Company Limited out of approximately 57.5 million bank accounts. This represents less than 0.5 percent of investor participation in the PSX forum.

With less incentive and regulatory burden on the informal sector, investor participation is reflected in asset price bubbles, high currency trading benefits and inflationary pressure. This route generates a lot of easy money with minimal risk and low consistency under the patronage of the state.

The government led by Imran Khan has launched a construction amnesty to support housing to create jobs and fill the gap of millions of housing shortages. According to Zameen.com, the average price per square meter increased from $3,300 to $7,000 by 2018, representing a 26% annual return on open space investment in Islamabad.

Apart from doubling property prices in other cities like Karachi, Lahore, Peshawar and Faisalabad, it has also shifted some of its investments into the real estate sector. Many industrialists have turned their attention to the real estate sector.

Similarly, in December 2017, the price of gold was $56,200 per tola, but now it is $201,000 per tola, which is 50% more than the annual return of gold investment. Similarly, on January 14, 2018, the value of the dollar was 110 to the rupee, and now it is 278 dollars - an average return of 30-35% per annum.

On the other hand, the KSE-100 index returned 14.55 percent year-on-year and the listed industry returned less than 15 percent year-on-year. In 2018, the inflation rate was 5.08 percent, now over 30 percent. If annual inflation-adjusted returns are calculated, the real return of investors in the formal market and industrialization can be negative.

Pakistan already has one of the highest income tax rates in the world, indicating that the wealth of formal sector investors is decreasing. As a result, more than 200 companies have been delisted from PSX since 2013. There are only 526 companies on the main board and only three SMEs on the GEM board; However, the total number of companies registered with the Securities and Exchange Commission of Pakistan is 176,000.

A good explanation for the disconnection is the trade-off between costs and benefits. If the marginal benefit/cost ratio of the listed company is lower than the reduction of avoidable costs, decapitalization may result.

However, investor participation is greater in the informal sector, where most businesses are not registered. Asian Development Bank (ADB) reported that more than 90 percent of SMEs in the informal sector were established with the help of family members and friends.

These businesses typically operate in the agriculture, food chain, agricultural machinery and textile sectors. Some of them collect money for seasonal products and services and close their business after the season ends. This setting is true in both rural and urban food chain sectors. Sugar, flour, wheat, grains, butter, etc. they make money by providing necessities.

They hire workers on a seasonal or contract basis and then fire them. In addition, without social security benefits such as health insurance and housing, they earn less than the minimum wage. As a result, the social and financial vulnerability of unemployed youth increases dramatically, leading to modern slavery.

Informal information, intensive documentation and widespread regulations to avoid income tax, which lead to decapitalization and insecurity in the labor market. These informal arrangements are supported by special interest groups of local politicians, bureaucratic families, and landowners through a complex mix of tax laws and formal industry regulations.

The author is Associate Professor (Financial Economics) at National University of Modern Languages, Islamabad. You can contact (abwahid.fms@gmail.com)