Just over two years ago it was reported that Barbados’ informal business sector was heading for the $3 billion mark and was being acknowledged by economists as “an important contributor” to the island’s economic activity.
In the May 18, 2009 BARBADOS BUSINESS AUTHORITY, then Central Bank Governor Dr Marion Williams said the sector was “underestimated” and was much larger than people realized, with a more significant impact on the economy than it was credited with.
She noted that the informal economy was now also “a big employer on its own”.
Barbados’ informal economy comprised business activity, such as street vending, for which operators paid no taxes and evaded regulation. It also included underground and illegal activity like prostitution and illegal drugs.
According to Central Bank statistics, the informal sector accounted for about 35 per cent of the country’s gross domestic product (GDP) – a figure supported by experts from Canadian National Accounts who were at the time working with the Barbados Statistical Department.
The issue was also addressed by Deputy Central Bank Governor Carlos Holder, economist Dr Kevin Greenidge and Stuart Mayers of the University of the West Indies (UWI)?in a 2008 paper entitled Estimating The Size Of The Informal Economy In Barbados.
“Our estimates indicate that this sector is quite large and has grown over time to about one-third the size of the official economy,” the researchers said.
The formal economy is estimated at about $7.4 billion.
According to the study, “After the 1991-1993 economic crisis, a lot of small businesses evolved”, and “in recent times there has been a proliferation of people selling food, clothing and other merchandise from vans”.
The economists noted that growth in the informal economies was creating a problem for governments and policymakers around the world because of the implications for tax collection and social security.
Furthermore, Dr Winston Moore, a lecturer in economics at the UWI’s Cave Hill Campus, said: “It is a very difficult thing for Government to regulate.” He observed that some governments had used alternative tax structures while others had sought to put greater emphasis on revenue collection through consumption taxes.
In the April 27, 2009 BARBADOS BUSINESS AUTHORITY, labour specialist, now Parliamentary Secretary in the Prime Minister’s Office, Harry Husbands noted that as more and more people around the world were thrown out of permanent employment, they were turning to the informal economy for their salvation.
“Much of modern development thinking accepts that the size of a country’s informal sector is an indication of a country’s level of development. For example, countries with large informal sectors are underdeveloped and countries with small informal sectors are highly developed,” he said.
Husbands noted that traditionally, economists and development planners had emphasized the negative aspects of the informal economy and had focused their efforts on strategies to move those business people and workers who operated in the informal sector into the formal sector.
“The negatives associated with the informal sector are well known.
“These businesses don’t pay taxes. They lack the capital and expertise to be highly productive and innovative and hence cannot provide high standards of living for their operators. While employment gains in the informal sector are slim, workers employed there usually lack basic safeguards such as employment protection and health and other benefits,” he said.
Against this background the International Labour Organization was motivated to organize a major discussion on Decent Work In The Informal Sector in 2002. The resolution emanating from that discussion confirmed the established views on the informal sector.
As Husbands noted, the resolution concluded that unregistered and unregulated enterprises often did not pay taxes or benefits and entitlements to workers, thus posing unfair competition to other enterprises. Also, workers and economic units in the informal economy did not always contribute to the tax system, although often because of poverty. These situations deprived governments of public revenue, thereby limiting their ability to extend social services.
The resolution went on to call for policies and programmes that focused on bringing marginalized workers and economic units into the economic and social mainstream, thereby reducing their vulnerability and exclusion.
However, the labour specialist said there seemed to be an emerging new approach to viewing the informal sector.
“The Organization for Economic Cooperation and Development’s (OECD) recent publication is appropriately entitled Is Informal Normal? Based on its own statistics it would seem that the informal economy is more normal than development planners are willing to admit.
“In this report the OECD called for immediate and unconventional action that promotes good-quality job creation not only in the formal sector, but also in the informal sector. Improving infrastructure, enhancing skills development, promoting institutional reform and access to resources for informal businesses are key elements in this strategy,” he said.
“In Barbados I think that there is tacit recognition that the informal sector has great value as part of the social safety net,” Husbands noted.
Indeed, in the January 17 BARBADOS BUSINESS AUTHORITY, Central Bank Governor Dr Delisle Worrell said the underground economy might be necessary.
He explained that every country had an informal economy and it was “one of the things that facilitate the smooth running of the economy”.
“[It] allows us to adjust in difficult circumstances like these because if we didn’t have the informal economy, a lot of people who have lost jobs or who are on short workweeks wouldn’t be able to eat,” he said
“Because they have some talents that they can do some hairdressing on the side or whatever the case may be, the pressure is taken off the Government. Otherwise we would have to have some kind of welfare arrangement to take care of these people because we can’t have them on the streets,” Worrell said.
Asked whether this “underground economy” deprived Government of tax revenue, he said “small people should escape the tax net”.
“If I have a little weekend business, how much money am I going to make?
“The tax that they are going to get from me is not going to be enough to pay the VAT (value added tax) man to even check my records. In any case, there’s a minimum for VAT anyway. People who are below that minimum are not eligible to pay VAT.
The governor noted that the number of people gravitating towards this sector would increase as a result of the increase in unemployment “because people have to live”.
