MONGOLIA'S INFORMAL SECTOR Reasons for Growth 25

> actual income levels, the informnal income taxes are imposed on participants in that activity _regardless of their level of income._ Many kiosk proprietors, for example, earn much less than the average level of

> income depicted in Figure 4, but they pay the tax depicted in Figure _5_ nevertheless.

<!-- Start of picture text --> Monthly Incomes ... ... and Monthly Income Taxes<br>* Informal: Taxi w Informal: Taxi<br>Informal: Bus Informal: Bus<br>Formal: PresidentofMongolia . f Formal: President of Mongolia<br>* Informal: PreparingandSelling Food * lnformal: PreprwingandSellingFood<br>* Informal: Kiosk Wormal: Kiosk.nf*<br>Informal: Boor/LeatherRepair Informal: Boot'easherRepair<br>Formal: Memberof Parliament Formal: MemberofParliament<br>Formal: Judge on the Supreme Court Formal: Judge on the Supreme Court<br>Informal: Barber Informal: Barber<br>* Informal: VendorofUsedAutoPrts * Informal: Vendor of Used Auto Parts<br>Formal: High-Ranking Doctor Formal: High-RankingDoctor<br>Formal: Hiigh-Ranking Teacher Formal: High-Ranking Teacher<br>Formal: Cabinet Minister Formal: Cabinet Miister<br>Formal: High-Ranking Officer _ Formal: High-Ranking Officer<br>Informal: Child Watcher : = Informal: Child Watcher<br>Informal: Launderer Informal: Launderer<br>Infornal: Carpenter Infornal- Carpenter<br>Informal: Newspaper Vendor * Informal: Newspaper Vendor<br>Formal: Entry-Level Officer Formal: Entry-Level Officer<br>Informal: Shoe Shine * Informal: Shoe Shine<br>Informal: Housekeeper m Informal: Housekeeper<br>Formal: Cleaner . Formal: Cleaner<br>Informal: Shopper . Infonnal: Shopper<br>Informal: Watchman Informal: Watchman<br>0 50 100 150 200 0 2 4 6 8<br>th.Tg th.Tg<br>Fl|Base Salary Leave, HolidaysBenefits IFormal flInformal<br><!-- End of picture text -->

**Figure 4**

_Source:_ Incomes marked by asterisks are based on the author's informal sector surveys, described in Appendix B. Estimates of other incomes were provided by the Ulaanbaatar City Administration. All incomes are in 3/97 togrogs.

**Figure** 5

> _Source:_ Author's calculations based on the incomes in the preceding figure, and the schedules of rates in the

> _Citizen's Income Tax Law,_ and the _Informal Sector Income Tax Law._

# **-** Summary Ease of Entry is Driving Informality

66. This section has outlined four classes of reasons for the explosion of informal activity in Mongolia since 1990. (i) The crisis of the early and mid 1990s caused the release of large pools of labor which were forced to seek informal employment or none at all; (ii) Migration from rural areas to cities are contributing to the growth of informal labor; (iii) The "market" is reallocating its resources toward areas that were neglected under the old system, namely services such as distribution and transportation; (iv) entry is easier for informals. While all of these factors are contributing to the growth of the informal sector, none of the first three can explain the explosion of informality without the last, ease of entry. Even if large pools of labor were released from formal sector enterprises (they were), and even if migrants to the cities are providing labor (they are), and even if the market is reallocating its resources toward other sectors (it is), the question remains why formal enterprises haven't absorbed the labor and