MONGOLIA'S INFORMAL SECTOR Reasons for Growth 17

# 3. Why So Big, So Fast?

39. Many of the studies of other countries' informal sectors have focused on the root causes of informal sector growth. By and large, they arrive at conclusions based on the inadequacy of formal sector institutions, excessive regulation and taxation of formnal enterprises. (Indeed, some scholars use adherence to institutions as the defining characteristic of the informal sector.) This section of the report will present some factors that are driving the growth of Mongolia's informal sector. Four broad, overlapping, categories of reasons will be explored. First, there is the possibility that the explosion of the informal sector is a response to the crisis that befell the Mongolian economy in the first half of the 1 990s. The contraction of the f-ormal economy released large pools of labor, adding to the supply of labor available for the informal sector. Second, we will consider the impact that rural-urban migration is having on the informal sector in Ulaanbaatar, another factor that may be contributing to supply. Third, we will consider whether the informal sector is expanding to meet the demand for goods and services that were under-provided pirior to the transition, and are currently under-provided by the formal sector. High demand for informal provision of such goods and services leads to relatively high productivity and high income prospects for entrants. Lastly, and most importantly, we will evaluate the ease of entry afforded informals relative to their formal counterparts. Informals make their own labor arrangements, have easier access to premises, fewver registration requirements, less need for formal finance, and simpler (if sometimes higher) taxation. A summary will argue that while all of these supply and demand factors have some effect, it is the ease of entry afforded the informals that has the greatest implications for policy makers and will likely drive informal sector growth in the next decade.

## A Response to Criisis - Supplying **Labor** to **the Informal Sector**

40. The contraction of the Mongolian economy during the early and mid 1 990s caused the release of - large numbers of workers from formal sector employers a survey of privatized Mongolian enterprises conducted by Georges Korsun and Peter Murrell, together with the author, found that between 1990 and 1995 employment fell by 50% for the average privatized enterprise, slightly more for the privatized sector as a whole.<sup>48</sup> Those released from formal employment, combined with the large proportion of schoolleavers inherent in a young population, produced a steady flow of workers, many of whom had to chose between informal employment or abject poverty4<sup>9</sup> At the same time, declining real wages in the formal sector have led many formal sector employees to supplement their income by moonlighting in the informal sector.

41. The informal sector surveys conducted by the author support "response-to-crisis" as a factor contributing to the growth of the informal sector. Over half of the taxicabs surveyed said the reason they give the _duureg_ for being unemployed is that they have lost formal employment due to lay-offs or bankruptcy, or that they can not find a job to match their skills. (Taxicab drivers are generally welleducated and highly skilled.) Anecdotally, the researchers who surveyed street boot repairmen found that they were largely skilled leather workers laid-off from Ulaanbaatar's boot manufacturing and leather processing enterprises.