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3 measures for the transition

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The informal economy takes a preponderant place in Algeria. The money generated by this sector is spiraling out of control. In order to integrate it into the banking circuit, the Head of State launched a final appeal to the barons of the informal so that they deposit in the banks the money which they hide with the taxman. However, this sector is not specific to Algeria. the Dr. Abdelrahmi Bessaha, economist at the IMF, takes stock of this economy in a contribution published in the daily El Watan. He also proposed measures to overcome this economy.

“The fragmentation between official, informal and illegal activities is a characteristic feature of many economies in the world with, however, different relative weights and varied underlying factors. By nature, the informal economy is difficult to measure, because the operators involved in these activities take care not to be identified.

However, for policymakers, controlling the unofficial production of goods and services is key to articulating appropriate macroeconomic and structural policies. To do this, the size of the informal economy is essential data for estimating the extent of tax evasion, capital flight and the degree of social security coverage and taking measures to mitigate their impact on the economy. rate of growth”, explains Abdelrahmi Bessaha from the outset.

For this doctor, “empirical research on the size and development of the global informal economy has made great progress over the past 10 years and has enabled the establishment of analytical methodologies and credible measurement tools.

In the case of Algeria, the economy is fragmented into three segments (official, informal and illegal). The latter two are the product of many structural dysfunctions. Consequently, only coherent public policies in the medium and long term are able to deal with it”. It is a question of “first eliminating the access routes to informality” and “promoting the integration of the informal segment into the official economy”.

Features, data and statistics on the informal economy across the world

In this contribution, Abdelrahmi Bessaha has dealt with the subject by addressing all these questions on the international level and in the context of Algeria. To understand the ramifications of this economy, it is important to understand how it works on a global level. That is to say internationally. A reality treated by this expert in 3 points. To know :

1. Features of the informal economy

If the informal economy can be a place of inventiveness and community entrepreneurial activity, it remains driven by an illicit approach to escape:

  1. taxation and payment of social security contributions;
  2. administrative bureaucracy;
  3. institutional standards for good practice, competition and transparency.

Operating at the margins of the law, the informal economy is dominated by micro and/or family businesses, with low productivity and low return operations. This structure reflects difficulties in accessing inputs (services and finance), lack of state support (vocational training and business development) and difficulties in expanding its markets. Moreover, the added value of informal operators is often captured by other stakeholders in the production chain. For its part, human capital is very poorly remunerated and does not benefit from social protection.

2. Statistical data on the informal market in the world

Based on statistical data covering 25 years (1990-2015) and using a sophisticated integrated model (which crosses various economic indicators), the IMF recently conducted a study to measure the size of the informal economy in 158 countries , including Algeria. The conclusions are as follows:

  1. The average size of the informal economy for the 158 countries is 31.9% of GDP;
  2. In a more nuanced way:
    1. the size of the informal economy of 62 countries is below this average;
    2. 55 countries have informal sectors whose size varies between 31 and 40% of GDP;
    3. 41 other countries have an informal sector which is in the range of 40-65% of GDP;
  3. The weakest informal sectors are those of Switzerland (7.26% of GDP), the United States (8.36% of GDP) and Austria (8.93% of GDP). Conversely, the highest are in Zimbabwe (60.6% of GDP), Bolivia (62.3% of GDP) and Georgia (64.9% of GDP).

3. The aggregate costs of informality

They include under-registration of growth, tax losses (estimated between 2-4 percentage points of GDP) as well as social and financial exclusion for millions of workers around the world.

The informal and illegal economy in Algeria

In the second part of this contribution, the doctor returns to the situation in Algeria. “While the official economy is 144 billion dollars at the end of 2020 and remains strongly dominated by cash (the weight of currency in circulation compared to the money supply is 46%)”, the doctor relies on an IMF study that provides the following data:

1. The informal sector weighs 36 billion dollars at the end of 2020

    1. – On average, its weight was estimated at 30.86% of GDP over the period 1990-2015.
    2. – In annual data, this weight increases from 34.9% of GDP in 1991 to 23.98% of GDP in 2015. For 2020, it is estimated at approximately 25% of GDP.
    3. – In value, it goes from 15.9 billion dollars in 1991 to 39.8 billion dollars in 2015 and 36 billion dollars in 2020. Sectors of informal activity include agriculture, manufacturing, construction, transport and services (including distribution and microfinance).

2. The illegal economy (linked to smuggling) is estimated at around $11 billion

It is facilitated by vast borders (6511 km), including 3762 km in desert area. Cross-border smuggling operations affect:

  1. France (cigarettes due to price differentials – 1.4 euros per pack in Algeria for 8 euros in France);
  2. Morocco (clandestine emigration, small arms, counterfeit pharmaceuticals, cocaine and psychotropics);
  3. Tunisia (gasoline, automotive spare parts, electronics, copper and livestock); Libya (trafficking in human beings, petrol and weapons);
  4. Mali (cigarettes, drugs, small arms and fuel).

Two points to note:

  1. Algeria is a transit country for the trafficking of hard drugs sent from other parts of Africa to Europe and the Middle East; on the other hand, there is a growing domestic market for illicit drugs, particularly cannabis used by youth.
  2. fuel smuggling is favored by subsidies on prices at the pump practiced in Algeria.

3. Explanatory factors of informality and illegality

The informal and illegal economy in Algeria can be explained by a multiplicity of factors, including the weakness of state institutions, the macroeconomic and structural dysfunctions that open entry points (unemployment, obsolescence of the banking system, bureaucratic rigidities that stifle economic initiative, corruption and a crippling business environment).

4. Sources of financing informality and smuggling.

Illicit revenues from poor economic governance are manifold and include those from corruption (about $3 billion for the public investment sector), tax fraud and evasion (about $1.5 billion), flight from capital (about $10 billion between 2010 and 2019, or about $6 billion in and $4 billion out), the parallel foreign exchange market (with a depth of about $10 billion) and tax benefits ($7.5 billion).

Let us add two other channels fueled by the misuse of loans from employment and investment support schemes and high hoarding (about 20 billion dollars). All these illicit resources largely finance speculative bubbles (real estate and automobiles) as well as the informal economy.

5. The cost of informality and economic illegality

For the country, the cost is measured in an under-recording of growth (36 billion dollars), a loss of income in terms of tax revenue (2.5 billion dollars) and social exclusion for 1/10 of the population of the country.

A transition to official based on a three-pronged medium-term strategy

To move from the informal to the official, the doctor recommends a medium-term strategy. In addition to a security response to combat smuggling, the transition involves the following reform strategy:

1. Macroeconomic measures to clean up the ecosystem and reduce the dysfunctions that favor the informal and the illegal

To achieve this, reforms should aim to:

  1. stabilize the economy and reform public finances;
  2. improve the monetary policy transmission channel and minimize the use of cash as a transactional medium;
  3. fundamentally reform the operation of the foreign exchange market to reduce the gap between the official rate and the parallel rate and eventually unify these two markets;

2. Structural and sectoral measures to anchor a process of integration of the informal sector

Six measures should be considered for:

  1. strengthen the governance of the banking system;
  2. reform housing policy and the automobile sector, particularly in terms of payment;
  3. improve access and quality of education;
  4. design a tax system that reduces incentives for individuals and businesses to stay in the informal sector;
  5. improve financial inclusion by promoting wider access to formal financial (or banking) services;
  6. increase incentives and reduce the cost of formalization (simplification of labor regulations, wider competition for entry of small businesses in certain sectors, reduction of bureaucratic requirements, digital platforms to help small and medium-sized businesses to grow in the formal sector).

3. The fight against smuggling

It requires regional security cooperation because the Maghreb has become a crossroads of transnational organized crime, terrorism and trafficking networks, which poses serious problems for international security and regional economic progress. International efforts with direct financial support from the UN are needed to implement concrete economic development around three key objectives:

  1. inclusive and effective governance;
  2. capacity building to counter cross-border threats;
  3. a reform of the subsidy system that promotes cross-border trade in fuel and food products.



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