Q: should the informal sector be repressed or encouraged by policy makers. Discuss?

Ans: The question of whether the informal sector should be repressed or encouraged by policymakers is
a complex and debated issues as informal sector is ubiquitous and a complex par of developing
countries and varies for every country. The informal economy is mostly include small street vendors,
unregistered builders, electricians and most of the small paying jobs that don’t have much
accountability. While a lot of firms are unregistered with the tax authorities that way they avoid paying
taxes and have limited access to legal systems and other benefits as for governments they don’t exist
and for some countries it might be larger than the formal economy which can be alarming. A lot of
young workers, mostly with less education are more likely to be part of the informal economy as it is
easier to enter.

For better understanding of the argument we can take example of Zaire which is now known as Congo.
McGuffey’s study shows that the official economy of the Zaire may be 3 times the real GDP. While we
can take another example of Pakistan, according to QIES (world economics London) the size of Pakistan
informal economy is to be 35.7% of GDP, approximately 450 billion dollars in 2022. While the official
labour force survey in 2021 nearly 75% of Pakistan’s working age population is in the informal sector and
majorly part of the agricultural sector. For country like Pakistan its informal economy plays an important
part as resident of its town and cities mostly earn form informal sectors such as street vendors,
transporters, daily use retail items, as for these small business it is difficult bear taxes and regulation in a
country like Pakistan plus not much benefits are being provided to them which leads to people move
towards informal economy. For most of business working informally has its benefits such as hiding
revenues, paying cash for everything and that way they are able to save taxes and increase their profits.
These informal business have weak property rights and also less access to other state entities due to
which there is a small or no chance of growth. But the problem is once an informal economy has
formed, it can be very difficult to deal with for governments.

According to one of the world banks report informality is a drag on growth and development, while the
governments need to find a solution for it. The informal economy is promoted due to two major reasons
of exclusion and exit. Exclusion is what prevents workers from leaving the informality and joining formal
sector. To further explain it an economist De Soto explained origin of exclusion in his book other path.
As he believes that heavy regulation on entry makes it difficult for smaller firms to cross the line and
enter the formal economy. He also states the in earlier decades the population shift from rural to urban
areas also played a part in creation of informal economy as the elites and already settled urban people
considered rural people as their competition and not allowed them to grow. Further he highlighted the
inefficiencies of formal sector and for that he made bureaucratic and controlling state accountable, as
he states that business elites having political connection have access to all necessary measure and that
way they eliminate their competition and other small business struggle to grow due to lack of these
resources. One more approach to strengthen the informality is exit approach by Hirschman, as he states
that workers value the benefits they get in return of joining with formality and institution and mostly
decide to go against it. For unskilled labour they might differentiate in the benefits they get in return of
paying in form of taxes or social protection, which might be less than what they are getting as an
informal worker. The same scenario is for larger firms or individuals as they try to manipulate their
incomes or their company’s reports to evade taxes and have more gains in profit. Thus these two
approaches have a different perspective but plays a major part in growth of the informal economy.
For countering informal economies, governments can come up with some policies to shift individuals
and firms from informal economy to the formal one by making it easily accessible, changing labour
market policies and increasing safety benefits in return of what the worker. As these practices might be
able to attract individuals and firm to shift to the proper formal economy. By improving oppurtunities
for worker and reducing barrier for smaller firms to enter formal economy will promote their growth
and economic growth as well and it can be done by reducing taxes and cost associated with entering a
certain industry.

Q: is policy autonomy the right of every government irrespective of the policy choices they make?

Ans: Policy autonomy for a government can be described as an ability to independently make and
implement its policies without any external influence. While these policies are designed on the basis of
the preferences and priorities of the citizens. However it is debatable whether the government should
have absolute autonomy or not.

For decades foreign aid has been one of the most important policy for governments, which has been
manipulated in many different ways. Foreign aid is considered as a bridge between the rich developed
nation and wretched underdeveloped nations. Mainstream advocacy of aid rarely addresses the deeper
impact of aid as it is difficult to examine whether aid really promotes development and improves life of
poor, nor do they examine its adverse effects. Disregard conduct of governments as well as political and
economic condition in some countries result in many anomalies. It has been seen that aid recipients
have heavily spent on arms which then were used against their own civilians or other recipients such as
in 1979 substantial aid to Tanzania was used for military action against Yemen who was another aid
recipient. To further support the argument for aid is that it is crucial for the development process and as
less developed countries have low income levels which leads to low investment required for higher
income levels and without external help societies cannot emerge. Aid can be a barrier for growth, since
official wealth transfers goes to governments and not to people directly which leads to politicization and
increase in power of politicians. One such example is Congo, when Mobutu sees seko was in power and
demanded a palace at his birthplace with a landing strip big enough to accommodate the comrades he
liked to rent from Air France. Mobutu and ‘Big Vegetables’ weren’t interested in developing Congo
instead they were more focused towards generating wealth for themselves as Congo was a mineral rich
country at that time. While mobutu and his cronies made Congo so

weak that it wasn’t able to deliver basic services to its citizens but just wealthy enough to provide to
elites and under such conditions people tend to to divert their resources and attention from productive
economic activity to bribery, which eventually leads to provoke political tension or even civil war.

In a subtle way aid tends to perpetuate ideas and modes of conduct which are adverse to material
progress for instance it supports the idea that improvement in one fortunes depends on other people,
the government, rich and one’s superiors or foreigners. While inflow of aids tends to raise the exchange
rate by increasing money supply in case of actual increase in productivity this damage can be offset
however if that’s not the case it reinforces inflation. To support the argument marshal plan is cited as
success story to advocate aid however it remains irrelevant the west already had the facilities and
institution favorable to development thus it Was case of rebuilding, not development. Further recipients
governments often spent heavily on politically inspired prestige project made possible by external aid
such as inefficient airline or western type university. Beside aids loans from IMF and world bank for
developing third world countries leads to structural adjustment programs which comes at a price for
countries, one of major example can be Pakistan. As these programs lead to internal and external
changes in from of privatization, deregulation and reduced trade barriers and these measures sounds
like economic development but particularly in Pakistan the Saps from 1988-91,1997-2000 saw changes
in policy such as reduced subsidies, decrease in monetary spending and increased sales, which
automatically increased the commodities prices. The monetary policy was also contracted which
reduced the availability of credit. Even in the recent times we could see that during 2022-2023 when
Pakistan approached IMF for bailout package, it took IMF 9 months to approve the loan as Pakistani
economy was at the brink of collapse and foreign currency nearly crashed by 43% and loan was
approved on basis of helped being provided by united Arab emirates and Saudi, as they guaranteed IMF
for return of loan.