… towards the joint struggle for narrowing informality!

The informal economy is important to the formal economy because if its size is formalized year after year, this would potentially affect economic growth, but it would also increase government budget revenues and as a result improve social welfare.

In an open small market in development like Albania, the informal sector constitutes about 1/3 of the gross domestic product (GDP), compared to about 18 percent of GDP in developed economies[1]. The large size makes informality a potential firot of government policies on business and citizens’ livelihoods, as it has the same effect as firot on production.

The complex nature of informality is reflected in its connection with every aspect of our daily lives, ranging from informal employment, the informal market, the informal sector, informal businesses and informal transactions.

Starting from the informality difference of up to 8% more with the surrounding countries, it seems to keep Albania a step behind in the economic competition even though they may have a similar legal framework.

In this context, if we include as obstacles the economic and fiscal policies of the last two decades, which were at least rushed and mostly caught and which have created inequality in the competition between businesses, then the burdens of policies and administration have been added to the formal sector. weak. This has kept the Albanian economy a few steps behind compared to countries that do not impose such burdens on themselves as Albanian politics.

Meanwhile, when we also calculate the impacts of the foreign market, on which a part of the supplies for businesses and the consumption of the population depends, then Albania, which depends on them, is more damaged than similar countries, given that it does not have a strong and strong economy. prepared to withstand external shocks, or shocks from various geopolitical and economic conflicts and crises.

All these together, at least, have acted more strongly than the counteraction of policies and the organization of businesses, keeping the Albanian economy and social welfare steps away from regional countries, but also not leaving space for it to develop with all its potentials.

Despite the fact that there are natural resources in abundance in Albania, the fact that a good part of them have already been exhausted by misuse and waste seems not to have taken advantage of a qualitative, sustainable growth and in function of the increase in competition, to increase the value of work, of families and living as a whole.

Rapid digitization is also pushing the boundaries of the informal economy even further than a few years ago. The transformation of the informal economy through digital technology is found to be almost beyond monitoring and formalization.

Now if we return to the influence of the informal economy, it is clear that it sometimes expands by shrinking the formal economy and sometimes the opposite when anti-informality actions are taken. But, what is seen more clearly is that this affects politics outside of the real and unstable context or the inhibition of initiatives with a social character.

In all these years, which have turned into decades, it has been observed that the formal economy has not been able to support family incomes and consumer demand during crises or economic downturns and has not been able to serve as a safety net for the state budget. The informal economy in the cyclical way that continues to coexist with the formal economy has managed to adapt and function as a “helper” during the economy’s journey.

On the one hand, the economic growth of up to 4% is small to absorb the coexistence with the informal economy. On the other hand, it has been worth more for the government to have a “helper” for the social policies that it provides to help mainly low-income families.

However, the cyclical relationship between the informal and formal sectors is unclear, as the informal part is outside the control of the government, but also of the economy as a whole, as it has its own rules that sometimes clearly challenge public policies. The informal economy includes not only families and individuals for a little more income, but also individuals and criminal groups that are empowered more than all other groups by the informal economy.

Although the informal economy can absorb a large part of the labor force because of the greater facilities to employ people without much bureaucracy and additional costs, in reality it maintains a knowledge labor market for survival. It also implements a work culture outside of any acceptable standards for decent work and gender equality policies and education of the youngest.

Based on the economic reality of many years where informal businesses provide services, as well as final and intermediate goods, to formal businesses (unresolved coexistence between them), this relationship reinforces macroeconomic fluctuations.

This means that when the informal sector begins to have fluctuations and instability, then it unloads this uncertainty and volatility in the supplies to the formal sector, creating problems with the supply of labor, affecting the increase in prices, repayment of obligations in commercial banks. As a whole, there is an increase in the inhibitors of economic progress, as the impact is felt throughout the circulation chain of the joint operation of the informal and formal sectors.

In cases where the government remembers that informality must be attacked, this causes an increase in its costs, as the “tax” of corruption comes into operation and affects the price increases of protection from unclear and non-consequential policy.

Another impact comes from stopping informal activities that are powered by the dirty money of criminal individuals. These businesses that are blocked or fail to function further, due to non-consequential or even selective actions of public institutions, create gaps in the chain of supply and demand in the economy, causing a decrease in effectiveness as it could have worked.

A bigger problem is that informals, used to not paying obligations to the budget, cannot create formal behavior, but try to avoid the law in the future. This happens when government work is done with shares or task forces. Businesses with criminal sources of financing are part of the continuous opening of new small businesses, keeping the Albanian economy to continue to be an economy of small businesses. Meanwhile, the Albanian economy remains weak and does not have the potential to grow and become dynamic to enter a cycle of development, expansion and competition with the surrounding countries.

In the levels of weak economic growth or in the years of declines/stagnation of the economy, it seems that the informal sector and the part of informal production tends to grow. This argument is based on the increase in cash in circulation in recent years, as well as the increase in the purchasing power of the Lek, without the large economic growth that could have led to this strengthening. In fact, this is exactly what the informal economy has done, which, since it has been tolerated by the incompetence and corruption of the institutions (impropriety and cronyism[2]), has begun to go beyond the monitoring and response of the institutions.

For these situations, fiscal policy is not recommended, such as the one implemented by the government in recent years by reducing or exempting businesses from taxes and duties, but the opposite should be done. In order to achieve (real) fiscal consolidation, a complete administration with professional integrity is needed, a moratorium on not changing fiscal policies every year is needed, and a harmonized policy should be studied to tax everyone wherever and however they are, expanding tax bases. Fiscal policy and administration should be the main tax objective related to narrowing informality rather than the objective of maximizing revenue collection. Therefore, the mission and objectives in the approach to limiting tax evasion must be changed. Meanwhile, the policy of low taxes and fiscal ease is more electoral fiscal policy and has to date adversely affected the fight against informality by actually producing more corruption, less stable employment and more informal economy.

The economic and labor market situation in recent years has exposed the vulnerability faced by so many new and existing formal businesses as informality acts as an obstacle to a just transition and accelerated progress in sustainable development.

Creating a front against the informal economy is necessary. Politicians and the government are now obliged to express themselves with joint actions and on a front with all the social and economic groups interested in combating informality.

On the other hand, the fiscal institutions must do their tasks and change the objectives in the function of the fight against informality by coordinating and aiming for an administration model without the problems mentioned above.

The coexistence of the formal and informal economy creates a dynamic where the formal economy is competing and conflicting for reasons of vulnerability, as a result of interdependence for market dominance between formal and informal actors.

The divergence of interests between politicians and between economic actors must be directed towards the common struggle for the narrowing of informality, since the continuation will worsen the challenges related to the economy and social welfare.

[1] https://thedocs.worldbank.org/en/doc/37511318c092e6fd4ca3c60f0af0bea3-0350012021/related/Informal-economy-Chapter-3.pdf

[2] appointing friends and associates to leadership positions, regardless of their qualifications. Nepotism is favoring only relatives, friends and friends in all leadership positions, but cronyism is much more advanced as it is the patronage by the ruling political party in appointing their friends and relatives (including opposition) to high positions and not only in lower positions.