• World Bank Chief Economist for South Asia sees potential for new approaches to social welfare and growth

The evolution of the digital economy or gig economy driven by companies such as Uber, Airbnb, and fintech industries such as cryptocurrencies and blockchain provide opportunities for policy makers to organise the informal sector, so they experience benefits such as social welfare and also support growth.

World Bank’s Chief Economist for South Asia Hans Timmer, delivering a public lecture on Tuesday, observed that most countries in the region have very large informal sectors, with as much as 80% of the workforce engaged in informal work. He observed that by supporting technology-driven sectors, Governments can find new ways to foster economic growth and also give more security to workers. 

Referring to high levels of protectionism that result in South Asian countries, including Sri Lanka, having smaller formal sectors and larger informal sectors, he argued that one of the consequences of this was having lower female labour force participation. Traditionally, the informal sector is encouraged to be drawn into the formal sector, but the advancement of technology has created the possibility for new approaches to organise the informal sector.            

“Perhaps the problem is in the formal sector, and not in the informal sector. Because the formal sector has established a set of perks that can never be expanded into the rest of the economy, and ultimately it has been detrimental for overall economic performance. The reason why all South Asian countries are underperforming in global markets might actually be a result of the way the formal sector is organised. A World Bank report has shown that exports from South Asia is only one third of what they potentially could be, given the experience of all countries.” 

“Of course there are reasons of regional integration, border problems, political and geo-political tensions that are difficult to address, but South Asian countries are not just underperforming in markets of their neighbours, they are underperforming in all markets in the world,” he said, adding, “This could well be the result of many companies in the formal sector having created their shielded position. The informal sector does not have the capacity to enter export markets. These are just some of my observations. I see fascinating challenges and opportunities for South Asia.” 

He argued that large tracts of youth have already evolved to engage with tech industries with many having temporary or multiple contracts, and many were self-employed. These new technologies can be appealing to countries with large informal sectors, because they do not require economies of scale, or demand that labour be centralised in cities, Timmerman said.  

“Many people in South Asia already know these companies and are more open to connection. These new technologies fit into the characteristics of South Asian economies, with less regulation. So now policymakers must think of how they can organise the informal sector around these new sectors, and create social safety nets, not by replicating what has been done in the formal sector but from scratch. There is an opportunity to jump to new models of growth.”

Reform best path to growth: WB Chief Economist