EXPLORING THE BENEFITS (IF ANY) OF FORMALIZATION DRIVE FOR INFORMAL FIRMS IN A DEVELOPING COUNTRY SETTING

1. Introduction

Informal sector constitutes a large part of a developing economy. It seems that the informal firms take a rational decision to exit from the formal domain by comparing the costs and benefits of formalization. (Suresh De Mel, David McKenzie, and Christopher Woodruff, 2013). De Mel and others found that formalization has a very limited impact on the profitability of the firms who exit the informal sector and join the formal one. Given this, we want to find out if the push for formalization of informal firms in a developing country is of any benefit. Here, I want to argue that any push for formalization in the developing countries will act as a double-edged sword. In other words, it is an act that has both favorable and unfavorable consequences. Still, I believe that the favorable consequences of formalization outweigh its unfordable outcomes.

2. The unfavorable consequences of formalization drive

2.1 Government might waste its budget on firms that cannot stand in the competing world of formal sector.

Firms which are in the informal sector can easily compete with formal sector firms and even have an edge over them due to lower wages, non-existence of taxes and other types of costs that are related to activity in the formal sector. In the informal sector, they can survive even if they do not make a profit. This is what makes activity in the informal sector favorable to informal firms.

The firms that can survive in the informal sector might not survive once they enter the formal sector unless there is enough financial support from the government. If we assume that the government will support them with subsidies, then there will not be much room to argue that formalization is good because it adds to the income of the government. If subsidies or financial amounts are paid to induce informal firms to become formal, then one would argue that letting informal firms in the informal sector is better because they will not be a burden on the budget of the government. If we argue that incentives should be paid only for a short time, then one would counter us that the firms might return to the informal sector as soon as the government cut its financial support. Therefore, we can say that one unfavorable consequence of push for formalization through financial incentives is that government might waste its budget on firms that cannot stand in the competing world of formal sector.

2.2 A large section of people might not be able to survive.

Another somewhat obvious consequence of push for formalization is that a lot of firms might completely die out and disappear after a while when they enter the formal sector without any financial support from the government. Of course, here we are assuming that the government is using force to turn the informal sector formal. This means that a large part of people who could previously survive working in the informal sector now even might not be able to survive.

3. The favorable consequences of formalization drive

3.1 Tax and efficient allocation of resources

Research has shown that informality and lower tax collection are related – a phenomenon that reduces the ability of the government to finance public services (Levy, 2008). Hence, one favorable consequence of formalization is higher tax collection that will enable the government to better finance public services and even invest in the development projects. However, taking our discussions in the previous paragraph into consideration, we should cautiously optimistic about this consequence of formalization.

The coexistence of formal and informal firms leads to an inefficient allocation of resources in the economy through the different marginal production costs (Chang-Tai Hsieh and Peter J. Klenow, 2009). Therefore, formalization will lead to efficient allocation of resources which is another favorable consequence.

3.2 Profitability for the firms and contribution to economic growth and development

In addition to the above, another favorable consequence of formalization is access to formal business infrastructure including credit, technological support and access to more markets which ultimately lead to higher productivity and output of the firms. This favorable consequence can be viewed from the perspective of firms, because firms which are active in the informal sector have no or very limited access to what we just pointed out. Similarly, the firms will no longer be subject to harassments and bullying of government authorities asking for bribes.

We said that formalization opens access to formal business infrastructure including credit, technological support and access to more markets which ultimately lead to higher productivity and output of the firms. Higher productivity means, for the firm, higher profits and for the entire economy higher growth. Through this channel, formalization helps an economy with its growth and development.

3.3 Impacts on the quality of life of laborers

Apart from the above, I believe formalization will have positive impacts on the quality of life of labor force. When informal firms are formalized, they are required to follow labor laws set by relevant authorities. Wages of laborers will increase and some form of protection will be provided to employees/laborers. This is while in the informal sector, firm owner is restricted by no law and he/she can set any wages and can hire/fire on the spot. Of course the problems that informal sector laborers are facing are not limited to wage and instant firing. Inhumane working conditions are another big issue.

4. Conclusion and my take 

As discussed above, in the case of financially incentivizing informal firms to join the formal sector, the government might waste its budget on firms that cannot stand in the competing world of formal sector. However, there are chances that the firms stand on their own feet and become competitive profit-maximizing firms. If governments, backed by the use of force, coerce informal firms to go formal, there is a risk that a large section of people might not be able to survive when the informal sector disappears. This is firstly impossible. Even if we assume its possibility, due to inefficient and ineffective outcomes, it is not recommended.

Apart from the above undesired possible outcomes under certain conditions, I believe that formalization drive for informal firms in a developing country setting has various benefits. It can improve the quality of life of laborers employed by the informal sector, it can make survivalist firms profit-maximizing which contribute to the economic growth and development, it can improve the allocation of resources throughout the economy, and finally it adds to the income of the government. Hence, as stated at the opening paragraph of this writing, I believe the favorable consequences of formalization outweigh its unfordable outcomes.

References

Chang-Tai Hsieh and Peter J. Klenow. (2009). Misallocation and Manufacturing TFP In China and India . Quarterly Jouranl of Economics.

Levy, S. (2008). Good Intentions, Bad Outcomes: Social Policy, Informality and Economic Growth in Mexico. Brookings Institution Press.

Suresh De Mel, David McKenzie, and Christopher Woodruff. (2013). The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka. American Economic Journal: Applied Economics.

  

What can be an ideal relationship between religion and law?

 Introduction

Religion and law can be related to each other in different forms. It can be the main source where rules and regulations emanate. Religion can be a sub – but still, a major - source of legislation, or the legal system of a country can be completely independent of religion. We might be able to identify other forms of relations, too. But, for our purpose, the above categorization suffices. And what one might define as an ideal relationship between the two can vary based on his/her general world view. One can view the world from the lens of religion, secularism, or any other lens that he or she might deem appropriate. In this writing, I want to base my analysis of the ideal relationship between religion and law on ethical grounds. In other words, I want to use some tools of ethics to reach some conclusions: I assume that “violation of the rights of minorities or the minorities being deprived of their basic human rights is ethically unjustified”. By making this assumption, I am clarifying what the word ideal means to me: ethically justified.

Base on the above assumption and with the help of examples from South Asian legal systems, as well as examples from legal systems in some of the middle east states, I want to I argue that complete independence of the legal system from religion is what I see as an ideal relationship between the two. In order for me to reach such a conclusion, I should first be able to show that any other possible relationship between religion and law can be deemed not ideal on ethical grounds.

 

Religion as the main and only source of legislation

Religion can be the main source of rules and regulations. An extreme example of this sort of relationship between law and religion can be found in Afghanistan if we go back two decades in history. The Islamic Emirate of the Taliban implemented its own fundamental interpretation of Sharia and it was the only and the main source of any rules and regulations. Under the Sharia rule of the Taliban regime, no kind of rights was reserved for other minority groups. Basic freedoms, such as freedom of thought, freedom of speech, and freedom of religion did not exist as they were thought to be non-religious or anti-religion. Even Muslim minorities such as Shia Muslims were deprived of their basic religious rights. If we move out of the South Asian context, we can find Saudi Arabia where the legal system is tightly married to religion, and again minorities are deprived of their various rights. The state is accused of violation of human rights that it carries out on the basis of religion. Using a political interpretation of Sharia, the Saudi government is oppressing its political opponents and dissidents. From these two examples, we see that once religion dominates legal systems, then there will be violations of human rights for groups that are considered as minorities, and people will be deprived of some rights they would otherwise have. On this basis, I reject such systems as unethical.

 

Religion as one – but influential - asource of legislation

A second form of the relation between religion and law can be that religion is considered one of the several sources of legislation. In Islamic countries where there is some form of democracy and where a functioning parliament exists, religion is not the sole source of legislation. A big portion of rules come from parliament that is not religious in nature, although they are not and cannot be against religious principles, either. The current legal systems installed in Afghanistan, Pakistan, Iran and Iraq are of this nature. This form of the relationship once again is problematic when it comes to the issue of human rights and the rights of the minority groups. Freedom of thought, freedom of speech and freedom of religion are clearly violated in such systems, as thoughts that are thought to be against principles of religion cannot be expressed and groups that are religious minorities are facing bulks of discriminations which are legal. In March 2006, an Afghan citizen who converted into Christianity was facing death penalty under the legal system of Afghanistan, but with the pressure of international donors on the government of Kabul, he was released. He had to leave Afghanistan and reside in a European country because of the lack of freedom of religion under Afghanistan’s legal system. In Iran the followers of Baháʼí Faith are facing huge legal discriminations. The Iranian regime does not show any mercy against its dissidents and beside national security, religious rules are exploited to sue its opponents. Hence, this type of relationship between the two produces unethical results and therefore cannot be deemed ideal.

 

Legal Systems Independent of Religion

Legal systems can be independent of religion. We may not be wrong if we call such systems secular legal systems. In political setups where the religious sphere is distinguished from the government sphere, and where state does not intervene in religious affairs, following state’s footsteps, rules and regulations take a secular form. In South Asian, the legal system of India, Sri Lanka, Nepal and Bhutan are deemed to be secular. It is no doubt that some influence of Hindu Law is traceable in all these systems. But, as far as this influence does not result in discrimination on the basis of religious believes and identities, we cannot conclude that they are unethical and therefore non-ideal. Under legal systems that are independent of religion, many rights such as freedom of thought, freedom of religion and freedom of speech can be guaranteed. In addition, such systems can be more effective in preventing discriminations that occur on the basis of gender, sex, race, color and religious identity. This is while in almost all religious systems of law, some form of discrimination on the basis of the above-mentioned factors is traceable.

 

Conclusion

On the basis of the above discussions, we can conclude that it is ideal if the legal system of a country is completely independent of religion. This way, religion and religious rules will not be exploited by authorities in power to justify injustice against certain groups of people. With religion effectively out of the realm of legislation, many basic freedoms will be guaranteed for a given society, and many forms of discrimination that can take place on the basis of religious identity or any other basis but motivated by religion, can be prevented. The intervention of religion in legislation can cause various violations of rights and liberties. Thus, on ethical grounds, we cannot accept the dependence of legal systems on religion as a source of legislation as ideal. However, it should be noted here at the conclusion that by no means I am saying that religion in itself is unethical. What I want to be clear about is that when religion is formally brought into the realm of legislation and when religious sources are formally accepted as the sources for legislation, it becomes prone to misuses that produce unethical results. Once the legal system is laid down on religion, it is very difficult to avoid misuses that produce ethically unjustified results. Hence, it is optimal and ideal to keep legal systems secular and independent of religion

SYSTEMATIC SEX SELECTION AND THE LONG-TERM PATTERN OF DEVELOPMENT

• Introduction:

As research has shown, systematic sex selection is a prevalent phenomenon in South Asian countries, which are predominantly underdeveloped. In this writing, we want to know whether or not it has any impact on the long term pattern of development in these countries. Hence, it is necessary to explore the types of possible relationships that systematic sex selection and the long term pattern of development could have.

• What are the possible and thinkable relationships between systematic sex selection and the long term pattern of development?

We can think of several types of relationships between systematic sex selection and the long term pattern of development. One can be that the former might causally affect the latter, and the effect might be negative. In other words, systematic sex selection might act as a barrier for long term development to happen. It could also be possible that the development process itself might cause systematic sex selection to reduce. Another thinkable relationship is that the two might be interrelated in the sense that each one might affect each other – systematic sex selection might affect the long term pattern of development and vice versa. One even might argue that they are not related to each other at all. In the coming paragraphs, we will try to open up these points and discuss them in more detail.

• A negative causal relationship between systematic sex selection and the long term pattern of development?

If we define sex selection as “an act that ‘should’ result in the death of a female fetus or female baby”, then for such a narrow definition of sex selection, systematic or non-systematic, I don’t see any obvious direct causal relationship between sex selection and long term patter of development when development is defined mainly as growth in GDP and incomes. We might find some indirect relation through the social consequences of systematic sex selection. However, if we define development in a broader sense that includes progression in human rights fronts, social inclusion, equality, and economic justice, then of course systematic sex selection is a high barrier blocking long-term development.

Similarly, if we define systematic sex selection as a process that “might” (not should) result in the death of a female fetus or female baby but “include post-natal sex discrimination as an inevitable part of this process”, then, no matter what the definition of development be, systematic sex selection avoids development. For development to happen, it is necessary that all the sections of society are included in the process. Any discrimination against any section will result either in partial and exclusive development (development for a certain section of society) or in underdevelopment. In a society where systematic sex/gender discrimination is unleashed against women, a big chunk of society – women – will be deprived of their rights, liberties, and not sufficiently educated. Liberated and equally (to men) educated women can make a huge contribution to production, income (through female labor force participation), and hence the welfare of society. This is while deprived, underrepresented, non-educated, and oppressed women would much probably be a burden for a developing economy. In other words, systematic post-natal sex selection, when thought of as an umbrella for systematic sex discrimination, can have a negative effect on the long-term pattern of development.

•  Development as a process that curbs systematic sex selection

Looking into the facts from the perspective of economies that are called “developed”, we might conclude that the development process curbs systematic sex selection. The point I want to make here is that systematic sex selection can be seen as a characteristic of underdeveloped/developing economies, and once development occurs and economies become fully mature in terms of development, the systematic sex selection will disappear. In other words, we can look at it in the same way we look at poverty rather than trying to see it as a barrier to a long-term pattern of development. We see high levels of poverty as a characteristic of developing economies. Once an economy matures in terms of development, poverty reduces sharply. The delicate point I want to communicate is that the development process should be seen as a solution to systematic sex selection in developing countries. Communicated differently, from what we see in the developed world we might be correct to say that some form of causality is running from the development process to the disappearance of systematic sex selection. Now, one might ask about the elements inside the “development process” toolbox that curb systematic sex selection. My answer is strong institutions, rule of law, good governance, educated and well-informed society.

• Interrelation in the sense that each one might affect one another?

Following the above line argument, we can state that it seems there exists an interrelation between systematic sex selection and the long term pattern of development. It means they might have mutual effects on one another. The impact of systematic sex selection on the long term pattern of development, as discussed above, seems to be negative. Similarly, the impact of the development process on systematic sex selection, as suggested by the status of developed countries and the experience of Japan, appears to be negative. According to Amartya Sen “in the censuses of 1899 and 1908 Japan had a clear and substantial deficit of women, but by 1940 the numbers of men and women were nearly equal, and in the postwar decades, as Japan became a rich and highly industrialized country, it moved firmly in the direction of a large surplus, rather than a deficit, of women” (Sen, 1990).

• No relationship between the two?

One might even argue that there exists no relationship between systematic sex selection and long term pattern of development. Statistics from China suggest that systematic sex selection is very prevalent in China. This is while the country is moving very fast towards development. In other words, the statistics suggest that even fast-paced development can happen despite the existence of systematic sex selection. However, one might counter this point saying that the development taken place in China is not a long-term pattern. Also, it can be countered arguing that the prevalent type of sex selection in China is of the pre-natal sort. Hence, it does not affect the economic growth and development of the country. As discussed above, post-natal systematic sex selection cannot be separated from systematic sex discrimination, and it is, in fact, systematic sex discrimination that stands as a barrier against development.

• Conclusion 

Several types of relationships between systematic sex selection and the long term pattern of development are thinkable. However, it seems that an inverse mutual relationship between the two is strong and more plausible. Systematic sex selection stands a barrier against development when development is defined in a broad sense that includes various rights, liberties, equality, and economic justice. Development as a process, through strong institutions, rule of law, good governance and education curbs systematic sex selection. From this conclusion, we can make a keynote and it is the fact that even if systematic sex selection stands in the way of a long-term pattern of development, we might not be able to do anything effective about it unless we reach some certain level of development where institutions, government and rule of law are strong and capable of countering systematic sex selection.

Reference

Sen, A. (1990). More Than 100 Million Women Are Missing. The New York Review of Books.