Informality and Transformation in MENA

Given the widespread and persistent nature of informality in the MENA region, combined with increasing exposure to global and regional shocks, the ILO, OECD, and UNDP have united to promote forward-thinking policies. These policies aim to encourage the gradual formalization of businesses and jobs, while simultaneously building resilience to absorb future shocks, fostering the creation of decent jobs, and driving sustainable economic growth. The ultimate goal is to ensure broader social and labor protection, improve labor income through fairer wages, create a more equitable tax system, and unlock higher growth potential.

This joint ILO-OECD-UNDP report highlights the collaborative efforts undertaken so far. It includes initial policy recommendations to address informality in an era of prolonged economic shocks. Central to the report is a Framework developed by the ILO, OECD, and UNDP to assess how economic and social policies affect informality. This practical tool allows policymakers to predict the impact of different policies on the informal economy early in the decision-making process. It contributes to the growing body of literature on informality and complements recent studies, such as the World Bank's June 2023 report.

The Framework evaluates both the direct and indirect impacts of social and economic policies on informal employment and business, regardless of their primary objectives. It was developed through desk research and consultations with experts and policymakers from the MENA region. Its accuracy is strengthened by relying on meta-analyses that have previously tested the effects of various policies on informality.

The Framework was piloted in Egypt, Iraq, and Jordan, with a focus on policy initiatives adopted since the COVID-19 pandemic in the specific context of the MENA region. Policies related to education, training, and the social solidarity economy were beyond the scope of this Framework. The pilot study identified several policy measures that positively impacted formalization and facilitated the transition to formality for existing informal businesses and workers. These measures include:

• Making social insurance more affordable and accessible for all workers, both in terms of cost and procedural simplicity.
• Implementing active labor market policies, such as training and temporary wage subsidies, to create precedents for hiring underrepresented groups like women and youth.
• Simplifying business registration processes and improving access to inclusive financial services.
• Ensuring fair and consistent law enforcement that applies uniformly.

The most effective policy actions generally combine incentives and law enforcement, offering greater benefits for formal activities while enforcing regulations in a fair and consistent manner.

Beyond the focus on formalization, the report emphasizes the urgent need to improve working conditions for those employed in the informal economy.

A critical aspect of using the Framework effectively is multi-stakeholder dialogue. Policymaking should involve open consultations with policymakers and interested parties from the target countries. Social dialogue should also play a key role in implementing the recommendations, engaging relevant actors in each country to ensure local contexts are considered, and that all stakeholders are aligned.

Lastly, the report underscores the importance of improving data collection on the informal economy to enhance policy analysis and design. Accurate data is essential for making informed decisions that address informality effectively.