LAST WEEK, a report undertaken by an international research body put the size of the informal economy at $155,904 million, accounting for 43.35 per cent of Gross Domestic Product (GDP). Interestingly, while this new study employs a new methodology that focuses on four indirect measures that can gauge output, it generally supports an earlier study done at the University of the West Indies that had estimated the sector's contribution to GDP as high as 60 per cent in several periods leading up to the 1990s.
This latest study employed a working definition of the sector as 'market based' production of Goods and Services, whether legal or illegal, that escapes detection in the official estimates of GDP. Despite this relatively broad definition of the sector, the study quite noticeably did not deal specifically with the illegal economy, which is arguably the most important driver of the informal economy in Jamaica.
Commenting on the results of the study, Finance Minister Davies said that its results had wide-ranging implications for all aspects of macroeconomic affairs and would affect all economic ratios that were linked to the GDP. He inferred that had the informal economy been taken into account the economy's performance would be more impressive.
In our view this new report demands detailed examination by our local economists/financial analysts to determine its relevance for the Jamaican economy. In the meantime, however, its general conclusion that the informal sector is substantial is a timely reminder of the critical issue that our monetary and fiscal strategies are aimed at the formal economy and could be having questionable impact on the informal sector.
Additionally, our technocrats must come to grips with the issue of how we can convince those business and individuals who opt to operate on the periphery of the formal economy that they should formalise their operations. This is especially critical given the inability of the economy to generate jobs at the pace required and the obvious expansion in self-employment in recent times.
On this score we welcome the appointment of Junior Minister Deika Morrison and her specific responsibility of trying to bring this group into the informal economy. For this to occur the approach should be one of "dangling the carrot" and making it clear that there are tangible benefits for businesses that become incorporated into the formal economy. We therefore recommend a review of current policies relating to firms incorporating their business. There needs to be a special focus on the costs associated with meeting the different regulatory requirements - some of which are dictated by the new global environment but which are particularly onerous for small businesses.
We commend the government for undertaking this latest study and regard it as a critical first step. However, there is a lot more groundwork that must be undertaken now.
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