THE recent call by the member for Lae Open, Loujaya Kouza, to rename the informal sector of the economy is not new.
For a number of years now, the Consultative Implementation and Monitoring Council (through its Informal Economy Sectoral Committee) has been calling for the renaming of the sector.
However, the reasons calling for the name change seem to differ in terms of their intent.
While Ms Kouza wants the name change to elevate the status of the informal economy into the small-medium enterprise sector, the Informal Economy Sectoral Committee recognises that the term “informal sector” does not do justice to its size in terms of the number of people employed and the output it produces.
Furthermore, the term itself has provoked negative views from both the public and the government and it has been one of the reasons why the informal sector has not been given due consideration by government.
Therefore, it is hoped that by changing the name to “informal economy” (instead of sector) it will change the government and public view from negative to positive.
While Ms Kouza is calling for the informal sector to be recognised as part of “SME cottage industry” and the Informal Economy Sectoral Committee wants a name change to “informal economy”, the end goal for both is to establish an economy that is led by Papua New Guineans.
However, Ms Kouza also needs to give ample recognition to the importance of the informal economy in laying the platform to stimulate cottage industries within the SME sector.
Logically, there cannot be an SME sector let alone a cottage industry if there is no informal economy.
The informal economy, being the base, provides the elementary skills and training to better equip entrepreneurs if they decide to take the next step to upscale their activities.
The majority of the population of PNG is located in the informal economy. A recent 2014 Asian Development Bank Report recognises this fact and has, called upon the government to protect informal sector workers.
This is supported by the National Informal Economy Policy which recognises that the informal sector makes up the larger part of the PNG’s socio-economic system.
The concerns of both parties seem to be similar in the sense that both call for the name change to remove the negative perception that is attached to “informal sector” in PNG. It is generally accepted that when one talks about informal sector, one thinks of betel nut and cigarette selling, which is totally misleading.
Informal economy businesses are quite different from SMEs. They need a completely different set of policy measures to prosper. They should not be treated as if they were just smaller versions (or a ‘little brother’) of small businesses within the SME sector.
They are different in terms of their culture, structure and operational methods. Governments should administer microenterprises quite separately from small businesses. For instance, there are people within the rural economy who are engaged in production in the “pre-market” stage. They may produce surpluses but it is primarily for their own consumption.
For them the level of monetisation is almost non–existent as they live in a subsistence economy. Trading of food is primarily facilitated through a barter system given poor or absent infrastructure which isolates their participation in the broader economy.
In PNG this group of people is declining given the increased monetisation of the economy. Nevertheless, there are those who still undertake barter trade complemented by trade using “modern money”.
Secondly, there are people who produce and are also engaged in some level of commercialisation but with no real commitment to cash-cropping (for example selling the occasional bucket of coffee ‘cherry’ at the height of the flush).
These are people who need to be brought into the informal economy by understanding the constraints (infrastructural, financial, informational and societal) together with corrective action to address these them.
Thirdly there is a group of people that aim to produce a marketable surplus on a semi-commercial basis but are limited by inadequate capital and limited technical assistance. They have a real commitment to commercialise their activities but have over the years suffered from the breakdown in law and order and important government services such as agriculture extension training.
This group is genuinely looking for an opportunity to link up with the rural informal economy. If properly assisted, they can enter the informal economy as commercial smallholders
In the urban economy, informal economic activities are forced upon many households as a result of lack of job opportunities within the formal sector or inadequate income to sustain their lives.
This group has multiple sources of income (both formal and informal) generated through legal and illegal activities. They usually comprise long time city dwellers and migrants who live in settlements occupying traditional and government owned land.
They are often constrained in their attempts to diversify and increase their income by financial, informational and regulatory barriers. Policy must aim to remove such obstacles.
Being unregulated, without any formal system in place, the informal economy operates under its own rules based on social contracts established among participants.
While it is a welcoming call concerning the informal economy, it is also surprising to note that Ms Kouza, who is the former Minister for Community Development, Youth and Religion, did not mention the need for linkages to be established between the informal economy and the SME sector.
Her former Department had been the lead implementing agency responsible for the National Informal Economy Policy. Therefore, one would assume that Ms Kouza had adequate knowledge of issues surrounding the informal economy and the strategies in place to address these issues.
It is interesting to note that, during her tenure as Minister, there was no mention of linking up the informal economy with the SME sector in the public domain. Even when the euphoria surrounding SMEs was at its peak, there was no attempt by her to strategically position her Department to work with the Department of Trade, Commerce and Industry.
While her focus to elevate informal economic enterprises into cottage businesses within the SME sector is commendable, it is important for Ms Kouza to understand that achieving specialisation within an economy is not only driven by resource endowment but is primarily driven by the generation and accumulation of capital.
Lack of capital will impact on the level of productivity and subsequently on the level of specialisation. In this case the formalisation of informal economy is essential to generating capital but it must be accommodated by an enabling and friendly legal environment.
Therefore, before she advocates the idea of SMEs in her electorate, it is important for her to re-visit the National Informal Economy Policy to understand the definition of informal economy and the strategies to grow the sector.
It is also important that she notes that the conversion from the informal economy into the SME sector depends on having appropriate laws that don’t “force informal sector entrepreneurs into being regulated” but “encourage voluntary regulation”.
Simply, the law must create incentives that encourage informal sector participants to aspire to be regulated and not one that forces them into hiding.
It is therefore important that those laws be driven by the intended beneficiaries and not borrowed from outside. Otherwise we may be faced with the old Hobbesian problem of laws that are created not according to the wishes of the people being very expensive to administer compared to ones that reflect the wishes of the people.
The informal economy is in desperate need of serious government intervention if we are going to see these activities become SMEs as expressed by Ms Kouza. Currently, the informal economy is greatly neglected and, while the government is pushing to stimulate the SME sector, the informal economy, being its foundation, is at present unrecognised, neglected, suppressed and under siege.
While betel nut and cigarette selling do not represent a true reflection of the informal economy these activities do provide a glimpse of the ingenuity and determination that our people have if provided with the right opportunities and incentives.
Even though we aspire to see our people engage in more meaningful and value adding activities such as garments, clothing, fresh produce and so forth, the reality is that there are factors within our market driven economy that influence the types of economic activities our people take up.
For instance, while most of us are against the idea of promoting the sale and consumption of betel nut for hygiene and health reasons, it is known that it is one of the only few agricultural crops that is able to generate large revenues for sellers given that it has a huge domestic market.
In addition, it’s easy to grow with very little labour or capital input and has quite an advanced supply chain linking producer to middle men, retailers and eventually consumers. Its multiplier effects includes the transportation and housing industries where vehicle owners (taxi and PMVs) are hired to transport betel nut while houses are turned into warehouses to store and trade betel nut bags.
Thus, It is really not a case of collectivised economic policies versus individualised but it is essentially about how we are able to create an environment where our informal economy participants can transit into the SME sector.
The informal economy in PNG is currently riddled with so many problems that it is more logical and worthwhile for the government to focus its efforts on addressing these as a way of stimulating the SME sector.
A PNG economy that is led by active participation of its indigenous population needs both the informal economy and SMEs to be strong.
There are already signs that the informal economy is under threat from foreign exploitation and competition. Smaller trade store/tucker shops are now being taken over by foreigners while small micro-enterprises such as the sale of meri blouses are under threat from cheap foreign produced imports from Asia.
In addition, stringent banking requirements to open accounts, the lack of a “savings culture” and poor financial literacy are factors that limit our people from expanding and having the competencies and resources to move up the ladder into the SME sector.
Challenges like these pose huge problems in graduating more Papua New Guineans into the sector and subsequently increasing our people’s participation in the economy.
The informal sector needs a name change but not one that does not recognise its important role in PNG’s socio-economic development.
Instead the informal sector needs a name change to paint a picture of an aspect of the economy that represents the heartbeat and lifeline of PNG’s economy.
It is a sleeping giant that, if befriended, will spin the wheel of economic revolution to take PNG into the cauldron of economic power.