The Informal and Illegal Segments of the Algerian Economy: Measures, Costs and Processes of Transition

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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. Empirical research on the size and development of the global informal economy has made great progress over the past ten 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: (1) first eliminate the access routes to informality; and (2) fostering the integration of the informal segment into the formal economy. This article will address all these issues internationally and in the context of Algeria.

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

Item 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 evade: (1) taxation and payment of social security contributions; (2) administrative bureaucracy; and (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), the absence 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.

Item 2: Statistic data. 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: (i) the size of the informal economy of 62 countries is below this average; (ii) 55 countries have informal sectors whose size varies between 31-40% of GDP; and (iii) 41 other countries have an informal sector which is in the range of 4-65% 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).

Item 3: The global costs of informality: include under-recording of growth, fiscal 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

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 IMF study provides the data following:

Item 1: The informal sector weighed 36 billion dollars at the end of 2020. (1) on average, its weight was estimated at 30.86% of GDP during 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; and (3) in value, it increases from $15.9 billion in 1991 to $39.8 billion in 2015 and $36 billion in 2020. Sectors of informal activity include agriculture, manufacturing, construction, transport and services (including distribution and microfinance).

Item 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 France (cigarettes due to price differentials – 1.4 euros per pack in Algeria for 8 euros in France); Morocco (clandestine emigration, small arms, counterfeit pharmaceuticals, cocaine and psychotropics); Tunisia (gasoline, automotive spare parts, electronics, copper and livestock); Libya (trafficking in human beings, petrol and weapons) and Mali (cigarettes, drugs, small arms and fuel). Two points to note: (1) Algeria is a transit country for the trafficking of hard drugs transported from other parts of Africa to Europe and the Middle East; on the other hand, there is a growing internal market for illicit drugs, in particular cannabis consumed by youth, and (2) the smuggling of fuels is favored by subsidies on prices at the pump practiced in Algeria.

Item 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, macroeconomic and structural dysfunctions which open entry points (unemployment, obsolescence of the banking system, bureaucratic rigidities which stifle economic initiative, corruption and a crippling business environment).

Item 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.

Item 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 revenue in terms of tax revenue (2.5 billion dollars) and social exclusion for 1/10 of the country’s population.

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

In addition to a security response to combat smuggling, the transition involves the following reform strategy:

Part 1: Macroeconomic measures to clean up the ecosystem and reduce the dysfunctions that favor the informal and the illegal. To do so, 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; and (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;

Part 2: Structural and sectoral measures to anchor a process of integration of the informal sector: six measures should be considered to: (1) strengthen the governance of the banking system; (2) reform housing policy and the automobile sector, particularly with regard to 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 broader access to formal financial (or banking) services; and (6) increasing incentives and reducing 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 enterprises businesses to grow in the formal sector).

Part 3: The fight against smuggling: it requires regional cooperation in terms of security 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; and (3) a reform of the subsidy system that promotes cross-border trade in fuel and food products.Dr Abdelrahmi Bessaha

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