# **The rise of self-employment**

In the Southern republics of the CIS including the CIS-7, the great reallocation of labor during the 1990s has occurred from enterprises to self-employment or, in other words, from wage employment to non-wage employment (table 4.1). On average, between 1991 and 1996, the share of selfemployment in total employment has increased from 16% to 35% in the CIS-7 and from 6% to 14% in other CIS countries. This is a trend that was somehow expected during the deep recession. However, self-employment continued to increase very significantly during the growth period and in some cases even more rapidly than during the recession. Between 1996 and 2002, the average share of self-employment for the CIS-7 increased from 35% to 49% while it increased only marginally for the other CIS countries from 14% to 16%. We have countries like Moldova and Azerbaijan that doubled or tripled the share of the self-employed during the growth period. This phenomenon is the cornerstone to comprehend labor market changes in the CIS-7.

**Table 4.1 Self-employment (% of total employment)**

||**1991**|**1996**|**2002**|
|---|---|---|---|
|Armenia|20|42|50|
|Azerbaijan|16|29|68|
|Georgia|12|46|57|
|Moldova|13|12|41|
|Kyrgiz Republic|13|50|61|
|Tajikistan|19|34|43|
|Uzbekistan|17|30|25|
|**CIS-7**|**16**|**35**|**49**|
|**Other CIS**|**6**|**14**|**17**|

Source: CIS-Stat (1998, 2003) The rise of self-employment may be explained essentially by three factors. The first factor relates to privatization. In urban areas, small-scale privatization has implied the sale of commercial activities such as retail trade and transport vehicles to the public splitting large state activities into small household businesses. In rural areas, privatization of large _Kolkhoz_ and _Sovkhoz_ entailed the creation of a large number of households farms where, depending from the country considered, the head of the household became formally registered as a self-employed individual or remained vaguely classified as farmer without formal tax or social security status. We saw that privatization in some countries has been delayed due to conflict or slow reforms, particularly in rural areas with late implementation of land reforms. This is an aspect that may contribute to explain the persistence of self-employment growth during the output growth period.

The second factor relates to the general economic conditions. Self-employment in urban areas may have become an attractive formal status for semi-informal activities given the lower tax rate and the lower administrative barriers present to enter this sector. Rural areas instead may have become an escape from urban poverty for many of those formally state employees that could not find opportunities in the new emerging private sector, partly for lack of jobs and partly for lack of skills. Subsistence agriculture for many could have been a forced option to escape extreme urban poverty and unemployment.

The third factor may be an healthy growth of self-employment explained by a gold rush to enter a sector that may be perceived by workers as a potential springboard for SMEs creation. While the first factor is simply a structural development and the second factor is a negative turn in economic fortunes, this third factor would be a very positive indication of labor market developments, provided we can observe some form of initial transition of workers from self-employment to SMEs.

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