The Size and Nature of Informal Entrepreneurship in Pakistan and How to Tackle It by Dr. Muhammad Shehryar Shahid , University of Central Punjab, Lahore

The Size and Nature of Informal Entrepreneurship

andHow to Tackle it?

M Shehryar Shahid, PhDDirector, Centre for Entrepreneurship and SMEs (CESME)University of Central Punjab

Presentation Track

• Definition & Research Questions • What we did? • How we did it?• What will we do?• When will we do it?• What we found out?

Defining Informal Entrepreneurship(ILO, 2011)

Q1: What is the size of informal entrepreneurship in Pakistan?

I. What percentage of small businesses are operating in the informal sector?

II. How does their percentage vary by sector?

III. Do all such businesses practice the same level of informality, or does it vary across different enterprises and sectors?

Q2: What are the motives for Pakistani entrepreneurs to operate in the informal economy?

I. Are they all doing so out of necessity? Is it a survival practice in the absence of alternatives? Or are they doing so more out of choice?

II. Is it always an ‘economic motive’ that motivates small Pakistan entrepreneurs to engage in informal work?

III. Are there any social/cultural factors that influence the likelihood of entrepreneurs to participate in informal business practices?

IV. How do their motives vary across different sectors?

Q3: What policy measures can be used to tackle informal entrepreneurship in Pakistan?

I. What are the barriers to formalization faced by informal entrepreneurs in Pakistan?

II. How do the barriers to formalization vary across different sectors?

III. What should be done to formalise the informal sector – deterrence or enabling option?

What we did?

Sampling Frame

15 7

6

3

4

2

Manu. Retail Restaurant45 15 15

Manu. Retail Restaurant25 10 15

Manu. Retail Restaurant10 20 20

Manu. Retail Restaurant0 15 15

Manu. Retail Restaurant10 10 10

Manu. Retail Restaurant10 05 05

Manu. Retail Restaurant0 25 20

12

345

67

How we did it?

Questionnaire

i. Demographics ii. Business Introduction iii. Size of Informalityiv. Motives of Informality v. Ease of Doing Business vi. Risk Detection and Tax Morality vii. Employment and Workersviii. Business Environment

i. Competitive ii. Regulatory

ix. Problems and Prospectsx. Financing and Support Structures xi. Policy Recommendations

Total questions:

75

Pilot Field Survey

• Three research teams • Convenience sampling • 10 face-to-face interviews in EACH sector

• Outcomes: – Respondents were quite honest and forthcoming– Development of shared language – Elimination of a few personal questions – Re-ordering of questions

Quantitative Field Survey

• Three teams of researchers • Two research associates • Time span: 3.5 months • 312 face-to-face interviews at business premises • Average interview time: 25-30mins• Excellent response rate!

– (312 out of 330 responses)

• Weekly submissions and random follow-up calls (approx. 30 calls)

Qualitative Field Survey

• Research Team (PI & RA) • 15 face-to-face in-depth interviews – Five in each sector

• Time span: 1.5 months • Average interview time: 60mins

Survey Administration

• Weekly meetings with the PI and questionnaires submission

• Follow-up calls to the respondents (approx. 30 calls)

• Random visits of a research associate

What we got?

22,000 data points&

500 open comments!

What will we do?

Data Analysis: A mixed method approach

Cross TabulationsQ No. Description Q No. Description

B Age Versus 2.4 Legal status

I Income Versus 3.1 Number of registrations

D Sector type Versus 2.4/3.1 Legal status/number of registrations

2.8 Start-up motivations Versus 3.1 Number of registrations

2.4 Legal status Versus 3.7 Type of account keeping

3.1 Number of registrations Versus 3.10 Tax morality

D Sector type Versus 3.4 Informality motives

3.4 Social/cultural motives Versus 2.4/3.1 Number of registrations/legal status

3.4 Economic motives Versus 2.4/3.1 Number of registrations/legal status

3.9 Ease of registration Versus 3.1 Number of registrations

Statistical Model

Level of informality

Subcontracting

Age Income Education

Sector

Ease of registration

Ease of doing business

Corruption

Risk of detection

Awareness

Competitiveness

Tax level

Tax morality

Resistance towards government

Inability to enter formal economy

Individual level Institutional level

Structural level

Decision Matrix for the Level of Informality

Legal status Tax registration Book keeping

Formal Enterprise 5 Limited Liability

Company Yes 4 Formal Account Keeping

Informal Enterprise

1 Own-account Worker

Yes/No

1 No written accounts

2 Sole Proprietorship2

Informal records for

personal use3 Ordinary Partnership

3Simplified accounting

formats4 Registered Partnership

6 Unregistered with Employees 5 Others

When will we do it?

Future Direction

ACTIVITTY TENTATIVE DEADLINE

1 Submission of interim report 28 Feb 2013

2 Data analysis (quantitative and qualitative) 31st May 2013

3 Policy survey• Lahore (03-05 interviews) • Karachi (03 interviews) • Islamabad (03-05 interviews)

30th June 2013

4 Review of international policy literature 15th June 2013

5 Policy seminar in UCP(subject to the availability of speakers)

May 2013

6 Compilation of policy survey results 15th July 2013

7 Final report 30th August 2013

8 Application for grant extension

What we found out?

DemographicsEducation No education Primary Secondary Diploma University

2%13%48%16%21%

Formal Job Yes No

4%96%

Main Earner Yes No

76%24%

Employment Status Employer Own account worker

41%59%

Age 15-24 25-35 40-64 65 and More

3%54%42%1%

Household Income Less than 20,000 20,000 – 30,000 30,000 – 40,000 40,000 – 50,000 More than 50,000

17.71%36.46%26.04% 8.33%11.46%

Business Type

Business Introduction

Life Span of Business

Less than 5 years 5-10 Years 10-20 years More than 20years

35% 26% 28% 11%

Size of Informal Entrepreneurship

31

43

4

2

20

Legal Status

Own-account business Sole Proprietorship Ordinary partnership

Registered partnership Unregistered with employees

Size of Informal Entrepreneurship (cont.)

Ease of Doing Business

Ease of Doing Business

LDA

Labor

Tax

Food

Custom

Other

0 5 10 15 20 25 30 35 40

Problems with Government Departments

Percentage

Ease of Doing Business

Tax morality and risk detection

15%

26%

57%

2%

Riskiness

very riskysomewhat riskynot riskyDo not know

50%

32%

18%

Acceptability

Highly acceptableSomewhat acceptableNot acceptable

Tax morality …..

Should the government register businesses like you

YesNo

Reasons to remain informalMotives Percentage

Do not need/want to register my business 70%

All the similar businesses are not registered 40%

Non-registration is a common practice in my country 29%

The state does not do anything for the people so why should we obey the law

23%

Other 19%

Registration system is corrupt 10%

Taxes are too high 8%

Qualitative Remarks

“The law is too complicated and the people who implement it also have a “price” and then they will help the bribing person to abuse the law”

“The Labour Department gave me a challan because I do not close the shop on any day of the week … It restricts my business freedom”

“The law saves only the powerful and the rich, they know how to use the loop holes”

“A simple submission of traffic challan takes 4 steps, which is more frustrating than the fine itself, let alone filling tax return”

“I have heard from other shop owners that getting NTN is very complicated, so I did not try”

If we give the bill with tax inclusive, the customers demand to make a “kacha” bill without tax”

Departments force regulations only for few days, then no follow ups. I out the tax number on display but means nothing after few days”

Thank You