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Virus Lockdowns Confront Billions Working in the Shadow Economy

Samy Adghirni, Iain Marlow and Souhail Karam
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Virus Lockdowns Confront Billions Working in the Shadow Economy

(Bloomberg) -- How do governments control activity in an economy they never really controlled in the first place? That’s an urgent question being asked for those who run the $35 trillion developing world as the coronavirus takes hold.

From the slums of Manila to remote villages in Colombia, some 2 billion people ply their trades in a barely-regulated and untaxed informal economy. The effort to contain the spread of a disease that’s so far infected around a million people may soon hinge on places hamstrung by weak institutions, constrained resources, and corruption.

“How can I make a living if everything stops?” asked Caetano Sousa do Nascimento, 50, who makes about $11 on a good day selling home-made coconut candies on the outskirts of Brasilia, eking out a living in the informal economy like some 40 million other Brazilians. “People need to go back to their lives. Shutting down everything is not the solution.”

Emerging nations, home to more than 90% of the world’s informal employment, are increasingly shutting the lights on a vital hive of activity that’s disproportionately vulnerable to the disease, least prepared to survive a long cutoff and, crucially, for the most part out of reach of government support programs. An International Monetary Fund working paper estimated the average size of the shadow economy for 158 countries during 1991-2015 at 31.9% of official output. If this ratio held up in 2019, it would mean informal sectors accounted for nearly $30 trillion.

Emerging Threat

Across the developing world, the plight of informal workers is made worse by a combination of crowded slums, large families living together in small dwellings, and an absence of testing.

New hotspots for the coronavirus are appearing in places like Guayaquil, a tropical city in Ecuador that was taken over by the army last week. The intensifying economic emergency that portends prompted the Group of 20 nations this week to switch to the need to assist developing nations. During a virtual meeting Tuesday, G-20 finance ministers and central bankers said they’d look to address debt vulnerabilities in emerging economies, allowing them to focus their efforts on coping with the threat.

Lacking a financial safety net and with little access to health care, the quandary facing India’s informal workforce of 450 million people is one of the starkest examples of how social inequality threatens to undermine global efforts to contain the virus.

Most of these men and women work for, on average, as little as $2 a day. They don’t have the option to work from home, take time off or avoid public transportation to practice social distancing.

Yet India’s informal sector -- from roadside food vendors and migrant workers on construction sites to landless laborers working in agriculture or running small shops in the countryside -- contributes half of its almost $3 trillion gross domestic product. It employs more than 90% of the total workforce, according to a government estimate.

With train and bus services largely suspended, migrant workers have begun walking hundreds of kilometers to get back to their villages, while police and vigilantes at roadblocks have been beating people who venture out in violation of the curfew.

Small traders in Nigeria were bracing this week for a lockdown on its two biggest cities, Lagos and Abuja. Africa’s most populous nation surpassed India as the country with the largest number of people living in extreme poverty in 2018, and the size of its informal sector is estimated at as high as 65% of the economy.

Usman Saleh, a trader at Abuja’s Wuse market, had just taken delivery of two truckloads of fresh strawberries worth $5,100 when he heard the government would close all businesses. The fruit will probably go to waste, he said, and losing the money could end up ruining his business.

“What am I going to do now?” he asked. “I can’t store this much in my freezer, I simply don’t have the capacity.”

Seeking Relief

Organizations representing millions of informal workers have begun to advocate for a share of the massive stimulus packages being rolled out.

A collection of 10 organizations in South Africa, representing nearly 5 million workers, have called on the government to establish a “living cash grant” that would allow informal workers to be able to self-isolate without suffering economic hardship. The groups also called for the mass provisioning of masks and gloves, as well as soap and hand sanitizer in public places with lots of informal work.

Much of the Indonesian government’s early initiatives to deal with the pandemic have been targeted to relieve the stress on the informal sector. It provides for 56% of people with jobs -- about 70 million -- with little or no safety net, leaving them severely exposed in an economic crisis.

Hard to Target

But unlike more advanced economies that are better able to target and compensate workers for lost wages, developing countries will struggle to throw informal workers a lifeline, according to Priyanka Kishore, head of India and Southeast Asia at Oxford Economics in Singapore.

“If it’s a large informal sector, I’m very concerned about a prolonged lockdown,” Kishore said.

“Clearly, the challenge is targeted measures -- because you need to target the most vulnerable now,” she said. “The larger the share of that part in your economy, the more social pain you’ll see in terms of malnutrition -- or deaths.”

Nowhere is the challenge greater than in Africa, where the informal economy accounts for more than 85% of employment, according to an International Labor Organization report. The president of Benin, which depends almost entirely on smuggling goods to and from neighboring Nigeria, said this weekend that it can’t even afford a lockdown.

Getting Pushback

Benin is an exception. Most governments are moving to tighten the screws -- even though locking down parts of the economy usually hidden from view may trigger defiance and backfire.

South Africa, the country with the highest inequality in the world, last week deployed the army to enforce a national 21-day lockdown. Aid for the informal sector has been slow to come, with the government rolling out a stimulus package that largely ignored the hundreds of thousands of people who earn their incomes as hair dressers, street hawkers or food sellers.

“Many African governments have taken a copy-and-paste model from Spain and Italy and applied it here, but if you carry on with a lockdown for more than 21 days the impact will be too severe and people will end up ignoring it,” said GG Alcock, a South African who’s written several books about the informal sector.

“The relief measures that are being considered are ignoring a whole part of our economy,” he said.

Violence, Tensions

Hundreds of Moroccans protested the enforcement of emergency measures, marching and belting out religious chants a day after a lockdown was implemented in Fes, Tetouan and Tangier.

The North African kingdom, where 60% of the workforce has no health insurance, is enforcing tight restrictions on movements in public areas that emptied out the traditionally bustling souks and streets. Anger erupted even after authorities promised small stipends to informal breadwinners in a country where the shadow economy is estimated at over a third of GDP.

“The lockdown creates a tough situation for the whole North Africa region because occupying the street is the main feature of a heavy informal economy,” said Rachid Aourraz, an economist at Rabat-based MIPA think tank.

Hard to Afford

Across the world in Colombia, the government is trying to enforce a lockdown until mid-April, but it’s meeting resistance from workers who live hand-to-mouth.

The nation’s vast informal labor force has been swollen in recent years by nearly 2 million migrants fleeing Venezuela’s economic collapse. Most are undocumented, and the mass shutting of restaurants, hair salons and other businesses leaves many of them penniless and facing eviction.

In some parts of rural Colombia the state barely exists, and the rules are set by private armies financed by cocaine.

“In countries with large informal economies, a complete lockdown may just force you into closer proximity with someone who could infect you,” said Kishore of Oxford Economics. “And if cases are not coming under control despite these lockdowns, then the lockdown will continue, compounding the economic and social pain.”

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