**MONGOLIA'S INFORMAL SECTOR** -

**Notes**

**54**

# Notes

I."Micro Enterprise Development in Mongolia," Centre for Social Development, 1996, contains the most comprehensive treatment of the issues surrounding micro-enterprise to date. Earlier references are few. The ILO, 1994, reported "The emergence of an informal sector in Mongolia is a fairly recent development. No infornation is available as to the extent and quality of informal sector employment." p.12. And although it lacked an in-depth analysis of the informal sector, an earlier ILO report made the following argument that still rings true today: "the time is ripe for a more constructive attitude towards what may be seen as an emerging informal sector. Without condoning truly unacceptable behavior, the city should recognize the economic and social merits of street markets and promote them accordingly." ILO, 1992. p.<sup>30</sup> .

2.The type of phenomena known as "the informal sector" is a close cousin of other areas of study, notably that of the "hidden economy." (Also referred to, sometimes with a slightly different spin, as the "underground economy," the "shadow economy," the "subterranean economy," or the "irregular economy.") The latter is usually used to refer to economic activities of any size that are hidden from authorities, especially for the purposes of evading taxes or regulations, while the informal sector is usually associated with a small scale of operation and low level of organization (as outlined below). There is certainly a connection between the informal economy and the types of regulations and taxes faced by formals, a major area of research in many countries, but the size of the operation and level of organization are defining characteristics of the informal sector, while they are not in the case of the hidden economy. This study will focus on the informal sector, addressing the hidden economy only briefly in various parts of this report.

3.Mead and Morrisson (1996) quote Hemando de Soto: "The informal sector is like an elephant: we may not be able to defne it precisely, but we know it when we see it." Mead and Morrisson use data on small enterprises in seven countries to examine, empirically, how much consistency there is across countries when attempting to apply a single universal definition of the "informal sector." They find considerable "variability across countries in patterns of informality." (p. 1617).

ILO, 1993, also makes this point: "There is no general agreement on the exact meaning of 'informal sector.' The term is used in different contexts with different meanings and users of statistics may wish to define the sector for different analytical purposes.... This broadness is essential to an international statistical definition of the informal sector, which has to encompass the different ways in which the informal sector manifests itself in different countries and provide flexibility in the adoption of more specific definitions at the national level." p. 25.

4.The literature on the informal sector does provide a catalogue of features that are frequently associated with informality. Some defining characteristics used in empirical research by different scholars are: (i) the scale of operations, usually classifying enterprises with less than ten employees as informal; (ii) the use of self- or family labor; (iii) irregular and unstable income; (iv) the physical appearance of the enterprise structure, access to electricity; (v) the nature of the good or service being produced; (vi) the level of competition faced by enterprises; (vii) the level of technology, the labor-intensity of production, or the level of skills necessary for production; (viii) whether the participants have coverage under the social security system; (ix) whether the participants adhere to tax, health, labor, and other regulations. See Ahmad (1990) and Lubell (1991) for reviews of empirical studies.

5.None of the activities are reflected explicitly in national accounts statistics. An _ad hoc_ adjustment for taxicabs is included in statistics on the transport sector, simply by assuming every vehicle is a taxicab for 100 km per year and multiplying by the average price per kilometer. The estimates of value added derived in this report are much higher than those obtained through this _ad hoc_ adjustment. Informal activity, in general, may be reflected in official statistics to some degree, as official statistics are based, in part, on the expenditure side of the SSO Household Survey of Income and Expenditure. To the degree that households spend money in the informal sector, and to the degree that this is reflected in the household survey, some informal activity is reflected in the aggregates.