MONGOLIA'S INFORMAL SECTOR Overview 2

# **What Does It Mean to be "Informal" in Mongolia?**

_5._ There are at least as many ways of defining the informal sector as there are countries where it has been studied - every country has unique features and circumstances that make a universally accepted definition impossible? And as the informal sector, _per se,_ has never been studied in Mongolia, it would have been a mistake to impose an objective definition _a priori_ for the Mongolian situation. Indeed, one purpose of this study was to shed light on the specific character of Mongolia's informal sector. Thus the working definition of the informal sector used at the outset of this research was chosen broadly: _The informal sector consists of small scale, usuallyfamily-based, economic activities that may be undercounted by official statistics, and may not be subject, in practice, to the same set of regulations and taxation as formal enterprises._ As it is extremely difficult to distinguish this concept of the informal sector from general micro-enterprise, the two were considered to be nearly interchangeable.

6. Seven hundred and seventy micro-entrepreneurs that seemed to fit this working definition were surveyed by the author in the first half of 1997. The sample included taxicab drivers, kiosks proprietors, boot repairmen, newspaper vendors, and many others. Table 1 illustrates how a selection of these occupations measure up to some popular criteria for judging informality, such as the degree to which they are subject to, and comply with, official registrations, laws, and taxes; the effective incomes of participants; the division between capital and labor; the sophistication of record-keeping; the relative ease with which the occupation could be incorporated into national accounts statistics; the "permnanence" of the place of business; and participation in social and health insurance schemes.<sup>4</sup> 7. Table 1 highlights the diversity of experience of Mongolia's micro-entrepreneurs. By most of the criteria, all of the activities listed have the characteristics of informality. They are all over-whelmingly family-owned concerns, many are not covered by social or health insurance, most (with the exception of kiosks) do not keep written records, and very few even consider themselves "employed." They are not currently reflected in national accounts statistics in any explicit way, owing to the very nature of the activities and the general lack of formal financial statements? They have few if any enforceable rights over their places of doing business, none are currently required to register as economic entities distinguishable from their owners, and all are required to pay flat monthly taxes rather than the incomebased tax outlined in the _Economic Entities Income Tax Law._ This last criterion is perhaps the most useful objective yardstick by which to measure informality in Mongolia. The explosion of microenterprise in the early 1990s led the _Ih Hural,_ in 1993, to pass the _Income Tax Law of the Citizen 's Who Individually Engage in Business Activities and Services Whose Income Cannot Be Determined Every Time._ All of the activities described in this report are subject to this law which specifies 32 activities, ranging from taxicab driving to traditional medical healing to shoe shining, for which small scale and unsophisticated record keeping make it difficult to calculate income. This law is the single best objective identifier of informality, and it is also the single most important piece of legislation governing the lives of Mongolian informals. We will refer to this law frequently in the course of this report, and for the sake of brevity we will refer to it as the _Informal Sector Income Tax Law._