Formalizing Nepal’s Informal Economy: Issues, Challenges and Approaches
By
Bandita Sijapati
Research Director
Centre for the Study of Labour and Mobility
Social Science Baha, Kathmandu, NEPAL
Email: bsijapati@ceslam.org
Prepared for
Consultation Workshop on Developing Trade Unions’ Strategy
for Formalizing Informal Economy in Nepal
South Asia Regional Trade Union Council/International Labour Organization
7 September 2015
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1. Introduction
As in other developing countries, the informal economy in Nepal is a pervasive and persistent
feature its economy and society, contributing significantly to employment creation,
production and income generation. According to the World Development Report 2011, the
informal economy in Nepal contributes to about 37.5 per cent of the GDP, a size higher than
in other countries of South Asia. Further, there are trends suggesting that employment in the
non-agriculture informal sector is likely to increase in the coming years. Between 1998 and
2008, employment in the informal sector increased by 29.3 percentage points resulting in an
overwhelming proportion of Nepali workers, 96.2 per cent, working in the informal sector
(both agricultural and non-agricultural) in 2008.
Given the significance of informal sector, this paper seeks to draw out the main features of
informal economy in Nepal, the reasons for their pervasiveness, the challenges as they would
pertain especially for labour movements and trade unions in Nepal. Notably, the data
presented in this report is primarily based on the Nepal Labour Force Survey 2008. This is
because more recent data that would allow for a more thorough analysis of this sector is not
yet available.
2. What is Informal Economy
Informal economy is generally understood as a broad term that includes employment in the
informal sector as well as informal employment outside the informal sector. In particular, the
ILO defines the informal economy as: “all economic activities by workers or economic units
that are - in law or in practice – not covered or insufficiently covered by formal arrangements.
Their activities are not included in the law which means that they are operating outside the
formal reach of the law or they are not covered in practice which means that although they are
operating within the formal reach of the law, the law is not applied or enforced; or the law
discourages compliance because it is inappropriate, burdensome or imposes excessive costs.”1
Due to the complex nature of informal economy, informal employment and informal sector,
the 17th International Conference of Labour Statistician2 has emphasized the need to delineate
between: (i) employment in the informal economy, (ii) informal employment, (iii)
employment in the informal sector, and (iv) informal employment outside the informal sector.
Notwithstanding these different nomenclatures, the key differences between formal and
informal economy is presented in Table 1.
1
http://www.ilo.org/inform/online-information-resources/research-guides/informal-economy/lang-en/index.htm
2
Final report of the 17th International Conference of Labour Statisticians, available at
http://www.ilo.org/wcmsp5/groups/public/---dgreports/---stat/documents/meetingdocument/wcms_087568.pdf
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Table 1: Key differences between the formal and informal economy
Formal
Informal
Formal Contract & Letter of Appointment
Verbal Contract and no Appointment
Regularity of Employment
Irregular employment
Fixed wage rate
Uncertain wage rates – Low income
Fixed working Hours
Long & uncertain Working hours
Legal Provisions of Protection
Non existence or poor level of legal Protection
Source: ILO, Social Protection for People in the Informal Economy of Nepal, 2004
Some general features that are typically (but not always) associated with jobs in the informal
economy include: (i) Labour intensive; (ii) Use of simple techniques and technologies; (iii)
require little qualification, if any; (iv) generally, involve small and micro-enterprises,
especially run by families; (v) entails processing of mostly local raw materials; (vi) lack of
social security; and (vii) comparatively low payment and poor working conditions.3
Despite these general features, it is important to note that the formal and informal sectors are
highly interdependent due to the backward and forward linkages that exist in formal
enterprises through contract of labour and services.4 In this regard, some have even argued
that instead of the terms “informal,” or “unorganized,” it would be more apt to use
“unprotected” when describing the informal sector particularly because of the difficulty in
defining the term “informal.”5 The point of departure in this paper is that the informal
economy includes not only self-employed workers but all those who are not directly
employed with a formal sector firm, and work that takes place not only in rural but also in
urban areas, and the agriculture as well as non-agriculture sectors. Further, while the terms
“informal economy” and “informal sector” are used almost interchangeably throughout the
report, it is important to note that “informal economy” needs to be recognized as a wider
term, which includes the narrower term informal sector, and encompasses all economic
activities by workers and economic units that are, in law or in practice, not covered or
insufficiently covered by formal arrangements
3
Florian Sigmund, "Nepal's Informal Economy," AWO International e.V, Regional Office South Asia.
Available at http://www.awosouthasia.org/fileadmin/websites/nepal/South_Asia_pdf/Nepal_s_Informal_Economy.pdf
4
Bishnu Rimal. “Informal Sector and Labour Rights” in Issue of the World of Work in Nepal.
5
Sarath Davala, “Unprotected Labour in India (Issues and Concern),” 1994, cited in Bishnu Rimal. “Informal
Sector and Labour Rights” in Issue of the World of Work in Nepal, pg. 150.
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3. Informal Economy in Nepal
While it is difficult to estimate the precise size of the informal sector, existing sources of
information indicate that the informal economy in Nepal is quite large. ILO (2004) specifies
the following fields as being part of the informal economy in Nepal (See Table 2).6
Table 2: Various Types of Occupations in the Informal Sector
Farm and farm related:
Self-employed, very small land holders, landless farm workers, tillers, cattle herders,
former Kamaiyas, Haliyas, daily wage workers, exchange laborers under parma
tradition, and workers engaged in non-registered economic activities related to
livestock, poultry, kitchen-gardening, dairy, fisheries, sericulture, and bee farming
Trading:
Street vendors, hawkers
Craft-workers:
Artisans working with materials like clay, metal, bamboo and wood.
Construction:
Daily wage workers related to building, wood work, road, stone quarrying, brick kiln.
Transport:
Porters, cleaners, Khalasis, loaders, rickshaw pullers, auto-mechanics and helpers.
Micro enterprises:
Family-based enterprises workers in various types of production and services.
Other services:
Barbers, cobblers, tailors, blacksmiths, traditional entertainers.
Source: ILO, Social Protection for People in the Informal Economy of Nepal, 2004
According to the classifications described above, reports from the Nepal Labour Force
Survey 2008 (NLFS 2008) suggest that if both the agricultural and non-agricultural informal
sectors are combined, more than 96 percent of workers in Nepal are engaged in the informal
sector (CBS 2008). More specifically, approximately 90 percent of workers in the agricultural
sector and 60 percent of the workers in the non-agricultural sector are outside the formal
sector (See Figure 1).
Figure 1: Employment in Formal and Informal Sectors in Nepal
Total
Male
Female
18%
4%
12%
25%
8%
13%
62%
74%
Agriculture
Non-agriculture, formal sector
Non-agriculture, informal sector
84%
Agriculture
Non-agriculture, formal sector
Non-agriculture, informal sector
Agriculture
Non-agriculture, formal sector
Non-agriculture, informal sector
Source: Author’s calculations based on Central Bureau of Statistics. Report on the Nepal Labour Force Survey,
2008.
6
ILO, Social Protection for People in the Informal Economy of Nepal, 2004.
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If we were to exclude agricultural sector (since most employed in the agricultural sector are
informally employed7), in 2008, approximately 70 percent of the total population aged 15 and
over were employed in the informal sector outside the agricultural sector, an increase of 29.3
percent from the previous labour force survey taken in 1998/99. Additionally, most informal
sector jobs are in rural areas (68.3 per cent compared to 31.6 percent in urban areas). This
means that those already disadvantaged in terms of the rural-urban divide are also the ones
subjected to the uncertainties of the informal sectors, putting them at risk of falling into the
poverty trap.8
In terms of age distribution, as shown in Table 3, people in the age group 30-44 constitute the
largest proportion of those currently employed (33.7 per cent) and they also make up the
largest share of the people employed in the informal, non-agriculture sector (33.7 per cent).
But, perhaps, more importantly, a vast majority of those between 15 and 19 years and above
the age of 60, are employed either in the informal sector or in agriculture meaning that only
3.9 per cent of all those currently employed between the ages of 15-19 and 1.1 per cent of all
currently employed over the age of 60 are engaged in the formal, non-agriculture sector, thus
indicating the vulnerability of these groups that are otherwise considered dependant
populations in other contexts.
The informal sector is also highly gendered. Among those employed, a much higher
percentage of women (77.5 percent)9 in comparison to men (66 percent) are found working in
the informal sector. Further, the percentage of females in non-agricultural employment in the
informal sector is also higher than among their male counterpart of the same age groups. For
example, of the females aged 15-19 in that sector, 83.1 per cent are engaged in the informal
sector compared to only 75.4 per cent of males. These statistics indicate that it is particularly
the youth and women who face higher constraints while seeking to access jobs in the formal
sector. 10
7
Among the employed working in the Agriculture/Fishing industries, 99.7 percent were informally employed.
Bandita Sijapati, Enhancing Employment-Centric Growth in Nepal, ILO, April 2014.
9
In absolute terms, approximately 984,000 women have jobs outside agriculture and about 763,000 of these are
in the informal sector.
10
Bandita Sijapati, Enhancing Employment-Centric Growth in Nepal, ILO, April 2014.
8
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Table 3: Currently Employed Population Aged 15 and over, by Sex, Age and Sector of Employment (in thousands)
Sex/ Sector
Total
Agriculture
Non-agriculture, formal sector
Non-agriculture, informal sector
Male
Agriculture
Non-agriculture, formal sector
Non-agriculture, informal sector
Female
Agriculture
Non-agriculture, formal sector
Non-agriculture, informal sector
Total
11,779
8705
932
2142
5519
3429
711
1379
6259
5275
221
763
(%)
73.9
7.9
18.2
62.1
12.9
25.0
84.3
3.5
12.2
15-19
1700
1391
66
243
755
576
44
135
945
815
22
108
(%)
81.8
3.9
14.3
76.3
5.8
17.9
86.2
2.3
11.5
20-24
1529
1064
157
307
605
335
99
171
924
729
58
136
(%)
69.6
10.3
20.1
55.4
16.4
28.2
78.9
6.4
14.7
25-29
1373
896
154
324
585
275
112
198
788
621
42
125
(%)
65.2
11.2
23.6
47.0
19.1
33.9
78.8
5.3
15.9
30-44
3565
2462
381
722
1603
828
305
470
1961
1634
76
252
(%)
69.0
10.7
20.3
51.7
19.0
29.3
83.3
3.9
12.8
45-59
2443
1885
161
397
1275
837
140
297
1168
1047
21
100
(%)
77.2
6.6
16.2
65.7
11.0
23.3
89.6
1.8
8.6
60+
1169
1007
13
150
696
578
11
107
473
429
2
42
(%)
86.1
1.1
12.8
83.0
1.6
15.4
90.7
0.4
8.9
Source: Central Bureau of Statistics. Report on the Nepal Labour Force Survey, 2008.
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In terms of informal employment, as shown in Table 4, with the exception of “Clerks,” large
proportion of jobs requiring low skill levels are in the informal sector. Of the five low-skills
occupation groups, “Service workers,” has the largest proportion (90.7 percent of jobs) in the
informal sector. It can also be observed that women have a large share of informal sector jobs
at the lower skill levels (up to 91.0 percent for “Craft workers”) while their share is low in the
higher skills level, “Professionals” (10.9 percent for both sexes) and “Technicians” (21.0
percent for both sexes). Notably, compared to the 1998/99 survey, the 2008 report indicates
that males employed in the non-agricultural informal sector increased by 31.1 percent and for
females by 26.1 percent.
Table 4: Persons aged 15 years and over currently employed in non-agricultural informal sectors
Occupation
Percentage in the Informal Sector
Total
Male
Female
Total
69.7
66
77.5
1. Legislators, senior officials
83.6
83.3
85
2. Professionals
10.9
12.2
7
3. Technicians
21
25.9
12.2
4. Clerks
8.3
7.4
12.4
5. Service workers
90.7
87.5
95.6
6. Agricultural workers
74.2
75.1
70.4
7. Craft & related trade workers
86.7
84.7
91
8. Plant & machine operators
52.1
52
53.5
9. Elementary occupations
67.5
61.8
78.5
2.2
2.3
0
10. Armed forces
Source: Central Bureau of Statistics. Report on the Nepal Labour Force Survey, 2008.
Besides the high proportion of people employed in the informal sector, the issue of informal
employment (both in the formal and informal sector) is also significant in the context of
Nepal. According to the NLFS 2008, the percentage of people informally employed is
approximately 96.2 percent (93.5 percent males and 98.5 percent females). If we were to only
consider the non-agricultural sector, of the total non-agricultural employment, approximately
86.4 percent of people are informally employed. Among male non-agricultural employed,
83.8 percent were informally employed and among female non-agricultural employed, 91.8
percent were informally employed (Table 5).
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Table 5: Percentage of people aged 15 years and over with informal employment
Sectors
People Employed with Informal
Employment (Percentage)
Both Sexes
Male
Female
All Sectors
96.2
93.5
98.5
Agriculture and forestry
99.7
99.5
99.8
Fishing
97.8
97.1
100
Sub-total excluding agriculture/fishing
86.4
83.8
91.8
Mining and quarrying
99.7
99.6
100
Manufacturing and recycling
93.2
91.1
96.3
Electricity, gas and water supply
91.2
79.4
97.9
Construction
96
95.9
96.5
Wholesale and retail trade
98.9
98.7
99.2
Hotels and restaurants
96.7
95.2
98.1
Transport, storage and communications
83.8
83.7
86.6
Financial intermediation
47.9
45.7
53
Real state, renting and business activity
94.4
94.1
95.3
Public administration and social security
21.9
19.9
36.8
Education
51.6
43.2
68
Health and social work
51.3
48.9
55.1
Other community, social and personal ser
88.1
88.4
87
Private households with employed persons
92.8
87.6
96.5
Extra-territorial organizations and boundary
85.5
87.4
77.2
Source: Central Bureau of Statistics. Report on the Nepal Labour Force Survey, 2008.
Of all the current non-agricultural employed people aged 15 years and above, 39.7 percent
were “paid employees with informal job conditions” (that is, they had no paid leave or no
social security contributions by the employer), 36.5 percent were “self-employed without
regular paid employees” and 19.8 percent were contributing family members. The balance of
non-agricultural informal employment was employers and others (4 percent) (See Figure 2).
Figure 2: Informally employed population aged 15 and over (only non-agricultural sector)
Informally Employed Popualtion
Total
Urban
Rural
Female
40.6%
Self-employed without
employees
9.1%
1.8%
5.1%
2.8%
6.4%
4.0%
Employers and others in
informal sector
20.0%
19.2%
19.8%
34.1%
37.7%
37.2%
35.0%
23.6%
36.5%
48.0%
39.9%
39.4%
39.7%
Employees without
formal conditions
Male
Contributing family
workers
Source: Central Bureau of Statistics. Report on the Nepal Labour Force Survey, 2008.
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4. Factors explaining the proliferation of informal economy in Nepal
Several factors can be attributed to the growth of the informal sector in Nepal. Some of the
major ones include:
Structural Transformation of the Economy: Nepal’s economy has been undergoing gradual
transformation with the contribution of agriculture to the GDP declining (approximately 35
percent in 2014/15) and service sector concurrently increasing (more than 50 percent in
2014/15). However, the fact that agriculture continues to provide jobs to more than 74
percent of the population, and the services sector has been rising rapidly (as opposed to
manufacturing) means that the percentage of people employed in informal sector has been
high and will continue to remain as such in the foreseeable future (see Figure 3 for the rate of
growth in the various sectors of the economy over the years). Notably, this trend seen in
Nepal, namely the proliferation of economic activities that are mostly informal and small in
nature, is common among many other countries in transition away from a predominantly
agriculture-driven economy to the services sector.
Figure 3: Growth Patterns of Various Sectors
Source: Ministry of Finance, Economic Survey, Various Years.
Overlap between Informality and Poverty. The prominence of the informal sector in Nepali
economy stems from the opportunities it offers to the most vulnerable populations such as the
poorest, women and youth. More specifically, in Nepal, though the poverty rates have been
declining (between 1996 and 2010/11, the poverty rate declined by 16.6 percentage points,
from 42 per cent to 25.4 per cent), the prevalence of poverty is still high and comparable to
other poor countries, and poverty rates vary across different groups and regions.11 Faced with
extreme poverty levels, it is thus not surprising that people opt for any job opportunities
11
Central Bureau of Statistics. Nepal Living Standards Survey I, 1995/96 and Nepal Living Standards Survey
III, 2010/11.
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availed to them. However, it should also be noted that even though the informal sector is an
opportunity for generating reasonable incomes for many people, most informal workers are
without secure income, employments benefits and social protection, thus creating a cycle
where poverty and informality feed into each other. This explains why informality often
overlaps with poverty.
Weak Employment Conditions: Besides high rates of poverty, informal economy is often also
associated with weak employment conditions. In the context of Nepal, the unemployment
rates are fairly low and has been decreasing—between 1998/99 and 2010/11, unemployment
rate decreased from 4.9 per cent to 2.2 per cent. Even though unemployment rates are low,
the rate of underemployment in Nepal is high (an average of approximately 8 percent
amongst the prime working age population, i.e., those between ages 20-44 years old).
Coupled with this is the lack of job opportunities in the formal economy primarily due to the
nature of growth patterns described in the section above. Thus, in the absence of decent job
opportunities, it is not surprising that people, especially youths who have some levels of
education and do not want to be engaged in the agricultural sector, opt for any type of job
available to them.
Low Education and Skills Level and Limited Access to Capital: Lack of skills, education and
training are also impediments to the formal sector in Nepal, particularly in terms of workers
being able to find employment opportunities in the formal sector. Limited access to capital is
an important constraint for operators working in the informal sector. Other factors include the
limited access to technology and poor infrastructure. What this means is that it is relatively
‘easy’ for many to find entry into the informal economy thus creating a vicious cycle that
sustains the growth of the informal economy.
Weak Institutional Mechanisms: Beyond poverty and social issues, the prevalence of informal
activities is closely related to the weak operating and institutional environment. In particular,
higher taxes, complicated fiscal process, and long requirements for registration as well as
licensing, are possible factors that prevent informal sector operators from formalizing their
activities. Again, the large size of the informal economy seen in Nepal is a common feature
of low-income countries12 and by investing through informal channels, entrepreneurs seek to
reduce costs related to wages, retirement pensions and other social benefits. For their part,
many employees might actively opt to work in the informal economy to avoid paying taxes
and complying with regulations, and perceive social insurance schemes and other public
services, of low quality.
5. Challenges Associated with Informal Economy in Nepal
While there are several factors that explain the growth of the informal economy, challenges
to organizing the sector and formalizing it are also equally significant. In this section, some
12
To the contrary, middle-income countries have smaller informal sectors but higher unemployment rates than
the poorest countries.
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of these challenges, particularly as they pertain to the trade unions and labour movements in
Nepal will be discussed.
Limited Knowledge. Despite its prevalence, little attention has been paid to the role of
informal sector in fostering growth and creating jobs in Nepal, as well as in understanding the
characteristic feature of the informal economy. This is further exacerbated by the fact that
quantifying the extent of the informal economy is extremely complex—there is no database
that measures informal economic activity comprehensively for the entire country not only in
Nepal but also in other countries. Thus, identification of informal sector workers is a major
problem.
Transient nature of informal sector. Informal sector is very mobile with respect to place of
work, and their operations are highly seasonable. They lack recognizable features for
identification, and workers as well as employers engaged in this sector are usually reluctant
to share information. Further, trade unions in Nepal also face difficulties identifying informal
employment relationship. According to Trade Union Act 1992, a worker cannot be eligible
for trade union membership unless he/she is identified as employee of any employer. This
legal restriction is one of the major challenges confronting trade unions while seeking to
mobilize informal sector workers or those in informal employment.
Significant overlaps between formal and informal sector. The line of demarcation between
formal and informal employment is blurring, and it appears that this trend is likely to
continue in the foreseeable future. Throughout the world, trade unions have been typically
defining their membership as employees working for a particular employer or set of
employers within an industry, or what can be called a “wage culture.”13 In order to
incorporate informal economy workers, there is a need for trade unions to develop new
approaches for including non-standard and informal economy workers. Likewise, many
informal workers need approaches (cooperatives, insurance, access to capital, and business
skills) to address their needs which would require most traditional unions to transcend their
comfort zone.14
“Informalization from above” Due to globalization, jobs are increasingly being externalized
through subcontracting, privatization, or some other form of intermediary contracting
arrangement in order to reduce labor costs and avoid regulations associated with formal
employment. This type of informalization results in “a layer of workers ostensibly located in
the formal economy to whom labor standards increasingly do not apply.” These irregular
forms of employment hinder union membership, which requires regular payment of union
ILO. “Trade unions in the informal sector: Finding their bearings,” Labour Education 1999/3
No.116, available at http://www.ilo.org/wcmsp5/groups/public/---ed_dialogue/--actrav/documents/publication/wcms_111494.pdf
14
Ibid.
13
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dues, and also make it difficult for the union to recruit or gather workers together at a single
time because informal laborers are scattered everywhere. 15
Heterogeneity of the Informal Sector Workers: Informal sector workers do not represent a
single uniform group and may have obvious differences of interests among themselves.
Further, their interests might not always be congruent with the majority of current trade union
members—in general, informal workers tend to be focused on day-to-day struggles for
survival and, therefore, are less inclined to join in collective action. The highly precarious
nature of their work coupled with fear of union membership could further mean that their
fears of losing their job would be high, there would be legal barriers preventing organizing
workers (both formal as well as informal), and it would be difficult for unions to retain their
members because of the scattered and transient nature of informal sector work.
Social Protection of Workers. Nepal faces the challenge of extending social security benefits
to all workers operating in the informal economy, which accounts for approximately 96
percent of the total labour force. Those workers who do not fall within the “regular” laborrelation do not have any form of social security except the daily wage. In fact, the existing
social protection systems often exclude this section of the population and cater to the needs of
the workers in the formal economy, which is limited. In fact, the absence of social protection
to workers in the informal sector is one of the reasons for frequent labour disputes, which
mostly revolve around issues like permanent or temporary position, contract or daily wage,
hire and fire, and no-work-no-pay.
Resistance from the private sector Employer organizations like FNCCI and CNI are skeptical
about the social security of informal sector workers. Instead, they argue that the state should
take the overall responsibility of supporting informal sector workers with social protection
programmes, and that the employers cannot contribute toward the social security fund
because of low earnings as well as seasonal nature of the jobs in the informal sector.
Gendered Nature of Informal Sector. Informalization has a disproportionate impact on
women in all countries and regions. As described above, a majority of the precarious and
informal sectors in Nepal are populated by women. This “gendered” aspect of the informal
economy is bound to be particularly challenging for trade unions in Nepal particularly since
the proportion of female representation in union activity is already low to begin with.
6. Conclusion
The issues presented in this paper clearly suggest that the informal economy plays a very
significant role in Nepali society and economy. At the same time, organizing as well as
formalizing the informal sector is bound to be very challenging. Yet, organizing informal
sector workers needs to be a priority for the trade union movement in Nepal for several
Solidarity Centre, “Trade Unions Organizing Workers “Informalized From Above:” Case Studies from
Cambodia, Colombia, South Africa, and Tunisia,” The Transformation of Work: Challenges and Strategies,
2013.
15
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reasons, including those that have been highlighted for international trade union movement.16
First, recent indications suggest that the informal economy is here to stay. The current growth
trends in Nepal suggests that the transition away from the agriculture sector has leapfrogged
the manufacturing sector which would have otherwise served as a major source of growth as
well as employment. The shift mainly from agriculture directly to services sector means that
employment in informal sector will not only remain high but also continue to increase.
Second, the current trends also indicate that amidst the growth of the informal economy, the
formal sector is has been declining, including in terms of organizational potential. Third, the
growth of the informal economy and the decline of ‘formal sector’ is likely to be irreversible
in the short and medium term. Consequently, the stabilization of the formal sector
organizations and building trade union strength depend on the organization of the informal
sector. And finally, and perhaps most importantly, organizing the informal sector serves the
interests of the majority of workers in Nepal, as well as worldwide.
Solidarity Centre, “Trade Unions Organizing Workers “Informalized From Above:” Case Studies from
Cambodia, Colombia, South Africa, and Tunisia,” The Transformation of Work: Challenges and Strategies,
2013.
16
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