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Measuring informal economy and digitalization - an immediate need against evasion in Albania!

Measuring informality is not a new problem. The news is about using innovation and technology to help with this major challenge.

How can Albania and other economies of the Balkans can profit by using new technologies?

Thinking about this new approach, the advised action could be very close to the strategy how to create incentives for formalization. This requires reforms in various areas, for example taxation, labor law, product markets, and improving the business climate.

In fact, more accurate estimates of the informal economy can help make policies more effective and better targeted. In Western Balkans, for example, since a large part of the economy is untaxed, different changes to tax policies, did not significantly have affected income distribution.

When we focus on the redistribution of incomes by fiscal burden tool it can be said that the tax burden shows little impact in the redistribution of income by geographic areas and segments of employees by economic sectors, as the development of economic sectors and areas geographical, historical, economic, cultural, educational and environmental differences. But demographic movements along with the change of average age are factors that change the equity of income. Meanwhile, government transfers in the last 5 years, eg. in Albania have maintained the same level of 11.8% of GDP.[1].

If economic growth is not accompanied by equitable income distribution or an equal rise in employment levels, we see an increase in the growth of the informal economy, given its low barriers to entry.

Statistics on the activities in the informal economy, in employment, productivity and even the regions where the activities are prevalent are critical for designing dedicated policies to support them in a specific manner.

 Formalization of informal activities is not only and just for tax collection or law enforcement purposes. The dimensions of informal economy are so much more changing, and are growing with the rise of the shared economy. In some neighbor countries, for example, the informal sector is estimated to be the same size as the formal one, just for the sake of informality in the virtual market that represents many services that are not part of the market dimensions we know.

As seen by the latest report from World Bank, poverty levels among people in informal employment are, on average, twice as high as that of people in formal employment.

Why?

Because of low productivity, low incomes, poverty, and limited access to government budget and benefits and slower economic growth. On the other side, it provides employment and income to people who would otherwise not find employment, or it supplements their insufficient income from employment in the formal/regulated sector.

If we cannot measure informality, we cannot evaluate how inclusive economic growth really is. So, we may not be able to determine whether policies are working as they are intended.

If the government will not measure the informality, there has not sense the fight against evasion, because is a battle without knowledge and proper information to know in real time the potential of the “enemy”.

Bringing the informal sector into the formal economy is probably one of the most significant policy-making challenges for Albania and the whole region of Balkan.

In this regard, new models for deploying technology, along with new payment flows are key to expansion of territory of formalization. Mobile and digital technologies can be used to better bring Informal’s together and to connect service providers to them in new and innovative ways. This reduces the cost of delivering solutions and improves the effectiveness of providing essential services to Informal’s and microentrepreneurs trapped in a cash economy. 

Government and NGOs have the capability to reach and deliver services to the last mile, while policymakers are critical in creating supportive regulations that can incentivize consumers and small businesses to adopt electronic payments. However, the private sector (including non-traditional stakeholders across key sectors such as telecommunications and consumer goods) must be part of these broader digitization efforts, as these actors are critical to drive innovation, scale and usage of services.

While the informal economy will never be completely eliminated, we can certainly reduce the cash it generates by harnessing the power of technology and partnerships. This will not only help unlock the informal economy’s massive economic potential, but will subsequently move hundreds of millions of people across the country, but even in the Balkans towards long-term prosperity.

Turning cash into digital transactions is all about designing relevant solutions that fully address the needs and desires of people and businesses, which can vary by geography, individual preference and community. Time and resources are needed to gain a full understanding of their world, and how technologies fit – or don’t fit – into it.

 

[1] Tax Burden in Albania, Kosovo and Western Balkans 2019, ALTAX