The Informal Economy: Unveiling And Policy Improvement

(MENAFN- Jordan Times) To begin, let us acknowledge an important fact: Until now, no official body in Jordan, particularly the Department of Statistics, which is responsible for calculating and estimating the size of the Economy in Jordan, has conducted a comprehensive survey using a precise global methodology to measure the size of the informal economy in Jordan. All studies conducted were by local and non-local entities and were based on statistical and mathematical estimates, or were individual local initiatives in the form of academic statistical studies.

Two weeks ago, the Department of Statistics held a meeting at its headquarters with a number of specialists, academics, researchers and opinion leaders, including the author of this column, to inform them about its new project. This project aims to develop Jordan's national accounts statistics to improve the comprehensiveness and detail of GDP estimates and their correlation with other economic statistics and indicators. This will help meet the growing needs of data users to benefit from reliable, high-quality evidence for economic policy-making. Among the department's upcoming efforts, for the first time in its history as far as I know, will be the estimation of the size of the informal economy in Jordan using three global methodologies and by economic sectors. Therefore, we eagerly anticipate the results of these official surveys on this aspect of the economy.

The informal economy is a significant part of the Jordanian economy, having direct and indirect effects on economic growth, employment and social justice. Many international and local private entities and some academics have estimated the size of the informal economy in Jordan. The World Bank and the International Monetary Fund, for example, estimated the size of the informal economy in Jordan using different methods and concluded that its size ranges between 25-30 per cent of GDP. Internal studies conducted by researchers in the Research Department of the Central Bank of Jordan showed that the size of the informal economy in Jordan averaged about 23.8 per cent during the period 2002-2020 according to the Currency Demand Approach, and about 22.4 per cent according to the Multiple Indicators Multiple Causes methodology. When combining the two methods, the size of the informal economy in Jordan averaged 26.5 per cent of GDP, which is equivalent to about JD9.5 billion. The study noted that the informal economy includes a wide range of unregistered economic activities, including trade, services, and agriculture. Adding this figure to the formal economy, which is estimated at JD36 billion in 2024, brings the total size of the Jordanian economy to approximately JD45.5 billion.

The informal economy is a reality in every country in the world, as no economy is devoid of a number of unorganised economic activities operating without obtaining licenses from official authorities. The term "illegal" does not mean that these activities are unlawful, but rather they are legitimate activities not criminalised by law, yet they are not recorded in the official accounts of the state.

The informal economy is an important source of employment opportunities, especially given the high unemployment rates and the insufficiency of formal jobs. It provides greater flexibility for individuals to choose economic activities and work in environments less constrained by laws and regulations. This sector encourages innovation and entrepreneurship, as individuals can easily start their own businesses.

On the other hand, the informal economy lacks transparency, leading to the inability to accurately track economic activities. The non-registration of economic activities results in the state losing significant tax revenues, impacting the public budget. Workers in the informal sector often lack social protection and health insurance. So, what can be done?

Some of the key policies that can be pursued include improving the business environment by simplifying registration procedures and reducing the costs associated with starting businesses. Encouraging workers in the informal economy to register by offering incentives such as temporary tax exemptions. Enhancing social protection by providing social safety nets for workers in the informal sector to increase their sense of security and stability. Additionally, raising awareness about the benefits of transitioning to the formal economy through educational campaigns is crucial.

As for the main benefits of the informal economy from a treasury perspective, reducing support programs is noteworthy, as the informal economy can reduce pressure on social support programmes by providing job opportunities. This can reduce costs on the National Aid Fund by decreasing the number of people needing direct financial support. However, the main disadvantages of having an informal sector in the economy, as mentioned above, include the loss of tax revenues, as the non-registration of informal sectors leads to significant revenue losses. Additionally, the lack of transparency and accountability can lead to long-term economic problems.

The informal economy is an important part of the Jordanian economy, but it comes with its own challenges and benefits. It is wise for the Jordanian government authorities to implement balanced regulatory policies to transform informal activities into the formal economy, which will contribute to enhancing economic growth and increasing tax revenues, while maintaining the provision of job opportunities and social protection for workers in this sector.

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