Barriers to Participation: The Informal Sector in Emerging Democracies
Presented at the Second Global Assembly of the World Movement for Democracy: Confronting the Challenges to Democracy in the 21st Century (for more information see: www.wmd.org).
Sao Paulo, Brazil, November 13, 2000

Forty-one individuals from twenty-four countries participated in the workshop.

Background:

The recent trend toward democratization and market-based systems has improved the lives of millions worldwide. Many countries have increased political participation, achieved macro-economic stabilization and restored growth. Despite these achievements, millions of people in emerging democracies are excluded from the political and economic system and live in poverty. A glaring symptom of this exclusion is the growing number of entrepreneurs who are engaged in low-income, low-growth business activities outside the formal sector. These entrepreneurs, referred to as the informal sector, produce legitimate products without proper permits or legal status because they lack the resources to comply with burdensome and excessive rules and regulations necessary to become part of the formal economy. Hence, they operate outside of it.

The underlying reason why many citizens in emerging democratic, market-based systems do not participate in the political and economic system is because institutional structures or the "rules of the game" are ill-designed and decision making is undemocratic. This contributes to prohibitively expensive costs of doing business and erects barriers to participation.

These barriers exist despite democratic elections for public offices. Holding free and fair elections is the first essential step towards a participatory political system. The next step is to remove impediments preventing routine, daily participation in national and local decision-making which foster unresponsive policies, such as exorbitantly high costs of doing business. These obstacles politically and economically disenfranchise citizens, jeopardize the consolidation of political and economic reform and threaten exclusion from global markets.

What is needed is a well-designed, clearly delineated, stable set of political and economic institutions that foster democracy and market-based economic activity and that level the playing field for all citizens.

Specific needs include:

• The degree of public participation and transparency in the policy making and legislative process needs to be increased by instituting transparent, inclusive decision-making procedures and providing regular opportunities for the public to comment on existing and proposed laws and regulations.
• Legal and regulatory codes need to be clarified and streamlined by eliminating duplicative, superfluous laws that increase the cost of doing business and invite corruption.
• Private property rights needed to be accessible to all citizens, clearly defined and strongly enforced.
• Requirements to obtain business permits and licenses need to be simplified and inexpensive so that becoming formal is within reach for the entrepreneur of modest means.
• Taxation systems need to be reformed so that they are easy to comply with and encourage profitable economic activity.
• Labor laws need to be reformed to allow for more flexibility.
• Concerted efforts need to be made to reform economic systems to create open markets in place of crony capitalist systems through improved corporate governance legislation. These include requirements for: internationally accepted accounting principles, standards of disclosure, anti-conflict of interest, anti-trust, prohibition of insider trading, and reforms of bankruptcy laws.
• Efforts are needed to reform excessively bureaucratic government agencies and to strengthen their administrative and enforcement capacity so that laws and regulations are administered and enforced efficiently, effectively and inexpensively.
• It is essential that relevant business-related information and training such as how to obtain a license or permit, how to start a business, how to form commercial entities such as joint ventures and incorporated companies and how to run a business is readily accessible to all citizens.
• Quality, efficient, cost-effective infrastructure essential for a democratic, market-based system (such as telecommunication and transport systems) need to be provided so that entrepreneurs benefit from becoming formal

Proposed initiatives:

1. The workshop participants urged that members of business associations and reform-oriented think tanks in each country collaborate to develop a national business agenda which uniformly articulates the concerns of entrepreneurs, and disseminate this agenda to the public, policy makers and legislators. This will contribute to informed, responsive policymaking thereby strengthening democracy and creating efficient laws and regulations for market-based activity.
   
   
2. CIPE will have the revised version of the background paper translated into different languages and posted on the CIPE Web site in a section devoted to the informal sector and the cost of doing business. CIPE will use this paper as an advocacy tool to raise awareness about exorbitant costs of doing business exacerbating informality and the pernicious impacts on political and economic reform of a large and growing informal sector, and to devise strategies to reduce barriers to political and economic participation. The Web site section will also contain useful examples of CIPE-sponsored projects that have been instrumental in lowering the costs of doing business in the formal sector, relevant articles and cases studies; moreover, it will provide an opportunity for entrepreneurs to share information and best practices proven to reduce the cost of doing business and will have links to Web sites of other associations, think tanks and concerned institutions involved in reducing barriers to formality.
   
   
3. Labor and other NGOs proposed working to increase the supply of micro-credit and business consulting services to the informal sector. CIPE concurs and will seek to cooperate in such initiatives.
   
   
4. Many workshop participants supported the idea of developing a transaction costs index to measure the cost of doing business in different countries. CIPE commends this suggestion and hopes that it will be acted upon by research centers worldwide.