**MONGOLIAS INFORMAL SECTOR** -

**Overview**

**6**

8. Now that we have introduced what it means to be informal in Mongolia, some other clarifications are in order. This study of the informal sector will address only activities that are, in and of themselves, legal. No attempt will be made to examine purely illegal activities, such as prostitution or gambling. This report will focus on monetized transactions. Household production for the purpose of consumption within the household will be excluded from the analysis. Although the infornal sector for Mongolia as a whole will be discussed, the primary focus of the study will be the urban informal sector. Similarly, animal husbandry will not be addressed. This is certainly an important topic for Mongolia, and despite the coincidence of characteristics between the informal sector, as outlined above, and herding, the concurrent uniqueness of herding suggests a different form of analysis.

# **Sources of Information**

9. Our eclectic approach to studying Mongolia's informal sector will make use of diverse sources of information: (i) Qualitative interviews were conducted with official statisticians, local tax officials, licensing officials, staff of unemployment agencies, academics, NGOs, and most importantly, participants in the informal economy. (ii) In order to provide some hard data on the informal sector, 770 informals were surveyed.<sup>6</sup> The sample included kiosks, taxicabs, "street informals" from different parts of Ulaanbaatar, and informals from three of the city's most popular outdoor markets, the "Black" Market, the Technical Market, and the _Harhorin_ Market. These occupations provide contrast in terms of capital intensity, nature of competition, levels of income, and the degree to which the activity is suitable for moonlighting. Kiosks and taxicabs, chosen for their visibility and as representatives of two sectors in which there seemed to be much informal activity, were included in numbers large enough to estimate contribution to aggregate value added. (iii) Current sample surveys can tell much about the informal sector as it exists now, but tell little about the trends over time, or the aggregate impact of all informal activity. In an attempt to understand these issues, data compiled by the State Statistical Office (SSO), particularly employment statistics and the monthly household survey of income and expenditure, were analyzed. (iv) It is impossible to study the informal sector without addressing the legal environment faced by informals, and that faced by their formal counterparts? Of particular interest to this study are the laws and regulations pertaining to taxation, to labor, and to social insurance.

# **Outline of the Report**

10. In Section 2 we take up the question of the size of the informal sector and how it has grown in the 1990s. Mongolia's employment statistics reveal trends that can only plausibly be explained by expansion of the informal sector. At the same time, the SSO's Household Survey demonstrates the decline of the importance of formal income in the aggregate and for the average household. Monetary aggregates tell a complementary story of expansion of the segment of the economy transacting in currency rather than commercial banks, a segment that is described in the literature as the "hidden" economy. Each of these approaches and bodies of data, together with the informal sector surveys conducted by the author, will be used to generate estimates of the size of the informal sector. Despite the diversity of approaches, the estimates are surprisingly consistent, each suggesting that 30-35% of economic activity and/or employment resides in the informal sector. In Section 3 we will endeavor to explain the reasons for informal sector growth. Several contributors will be addressed, including the release of labor by traditional formal employers, the impact of rural-urban migration, the market's reallocation of labor to the service sector, and the relative ease of entry afforded informal activities. The greater ease of entry enjoyed by informals is generated by lower non-wage costs of labor, easier access to premises, simpler