Developing a Moral Compass for Pakistan’s Informal Sector

04.16.2012 | Emad Sohail
Karachi's Empress Market, where many businesses are unregistered.

The long-running question in Pakistan remains how to formalize the informal sector?

Pakistan’s informal sector, comprised of thousands of small-scale entrepreneurs ranging from street vendors to restaurants to electricians, plumbers, and even doctors and lawyers, has made great contributions to the economy. In fact, the overwhelming majority of people in Pakistan work in informal enterprises of one kind or another. They represent millions of people facing many challenges as they work to support themselves and their loved ones.

More than 70% of Pakistan’s GDP comes from Karachi. Being the largest city in Pakistan, it also has a huge concentration of informal businesses. According to Dr Kaiser Bengali, a well known economist, “Sindh [Province] is facing another demographic change that would define its future politics.”

The explosion of political and ethnic turmoil in and around Karachi causes more than $100 million a day in lost in business revenue. Most of the informal sector in Karachi is now moving into producing cheap consumer goods for the poorer sections of the population. The law and order crisis has now become the biggest challenge for informal sector, especially for the many businesses which get by on a day-to-day basis.

The informal sector faces many problems in Pakistan: corruption, lack of property rights, tax burdens, price distortions, monetary stability, privatization, high barriers to entry for entrepreneurs, and the political role of government. At the same time, there is a dire need to build up the moral compass of informal sector based on business ethics, morals, values and “how to do governance for the informal sector.”

As informal enterprises are brought into the formal sector, where they can grow, hire employees, and access credit, this formula will eventually help to build better, more sustainable future companies. By adapting good business practices now, they will know to do the right things in when they are ready to formalize. Once formalized, companies will be less likely to succumb to the inequities of corruption, for as Warren Buffet said “There is seldom just one cockroach in the kitchen.”