## 6. The Malagasy informal sector is characterized by a relatively high female participation. ## Source details **Canonical URL:** [6. The Malagasy informal sector is characterized by a relatively high female participation.](https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023036.pdf) ## Other formats - [Markdown version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023036.pdf.md) - [Structured JSON version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023036.pdf.json) --- ### Female participation and composition of informal employment - 52 percent of the jobs in the informal sector are held by women. - 58 percent of self-employed workers are women. - 53 percent of family helpers in informal sector production units are women. - Women occupy lowest paid or most vulnerable positions including domestic services to households and other categories of family aid. - Female labor supply outside agriculture: 21 percent of female jobs versus 14 percent of male jobs. - Informal agricultural enterprises mobilize much more male labor than informal non-agricultural enterprises. ### Work conditions and labor regulation compliance - 8 out of 10 employed individuals are affected by inadequate employment situations. - 3 percent of the workers benefit from a written contract. - 27 percent have oral contract. - Nearly 70 percent have no contracts at all. - Paid leave among dependent workers: 0.8 percent. - Paid leave among employees: 2.5 percent. - About 97 percent of workers are excluded from the existing contributory social security system. - There is no employment protection. - Four out of ten dependent (paid and non paid workers and family helpers) jobs are non-permanent. - One third of salaried jobs are non-permanent. ### Assets, working hours, and investment in IPUs - 53 percent of workers in the informal sector do not work more than 35 hours per week. - Average amount of physical capital per unit: MGA 956,600. - Physical capital composition: premises 54 percent; vehicles 33 percent; machineries and tools 12 percent. - Nearly 60 percent of this capital is purchased on the second-hand market; 34 percent is newly acquired; 6 percent self-built. - Ownership of physical capital: personal properties 65 percent; shared with other IPUs 23 percent; rented 11 percent. - Investment per IPU: about MGA 380,200. - Investment use: premises 48 percent; rolling stock 33 percent. - 44 percent of the IPUs report having invested during the year of the survey. - Reported investment is estimated at 8 percent of their value added. ### Access to finance - 3.4 percent of the IPUs affirm having recourse to borrowing over the reporting period. - Sources of loans: family and friends 48 percent; microfinance institutions 21 precent; suppliers 15 percent. - Loans are used essentially to finance the acquisition of raw materials. - Investment financing: individual savings for almost 97 percent of its nominal value. - Banking and microfinance services are hardly used for investment financing. ### Access to public services, administrative recognition, and motives for noncompliance - More than 8 out of 10 IPUs are housed in makeshift facilities. - Access to services (overall IPUs): water 10.2 percent; phone communication 8.8 percent; electricity 8.4 percent. - Rural IPUs access: water 9.8 percent; electricity 4.6 percent; phone services 6.4 percent. - Urban IPUs access: water 17.7 percent; electricity 17.7 percent; phone services 14.5 percent. - Nearly 9 out of 10 IPUs are completely unknown to the administrative services. - Administrative status: 11 percent have a statistical identification number; 9 percent pay the patent (professional tax); 9 percent have professional license; 3 percent are registered at the “Trade registry”. - Affiliation to the social security system: 0.2 percent. - Main reasons for noncompliance: unfamiliarity with procedures 40 percent; lack of awareness on companies’ obligations 33 percent. - 8 percent consider procedures complicated. - 7 percent affirm formal registering is expensive. - 6 percent report being informal to circumvent current legislation or avoid taxes/licenses/contributions. ### Willingness to formalize and motivations for formalization - More than 40 percent of respondents stand ready to administratively register their companies. - 61 percent confirm their willingness to pay taxes. - Main motivations for formalizing: access to market location 25 percent; higher credit access 14 percent. - 6 percent of the IPUs have already launched registration but could not finalize due to complexity and high cost of procedures. - Nearly 67 percent consider that taxes should be paid to the local administration to: build infrastructure 44 percent; invest in health and education 30 percent; establish a fund to support micro-enterprises 18 percent. ### Motives for operating in the informal sector - Main motives to create informal enterprises: to get better income 46 percent; to be independent 18 percent; family tradition 13 percent. - Less than a quarter mention difficulties finding salaried jobs in small and large companies as a reason. - In urban areas, creation of non-agricultural informal units to compensate for failure to find salaried employment is higher than in rural areas. ### Contribution to growth, sector linkages, and productivity - Informal sector accounted for 43 percent of GDP in 2012. - Excluding agricultural activities, the informal sector contributed 36 percent to non-agricultural GDP, the equivalent of 24 percent of total GDP. - Informal trade businesses: 69 percent of the informal sector total turnover; 45 percent of total production; 46 percent of overall added value. - Manufacturing within informality: 15 percent of total turnover; 28 percent of the production of goods and services; 29 percent of informal sector value added. - 71.7 percent of formal firms are competing against unregistered or informal firms (2013 World Bank Enterprise Survey). - 19 percent of firms identify practices of competitors in the informal sector as a major constraint. ### Empirical relationships between informal and formal GDP; causality and cointegration - Panel cointegration tests on 40 SSA countries for 1993-2018 using multiple indicators multiple causes estimates found cointegration between informal nominal GDP and formal nominal GDP. - Kao and Westerlund tests support cointegration; Pedroni also used. - In panel Granger causality assuming no cross-sectional dependence: informal nominal GDP does Granger cause formal GDP and the inverse is also true. - When controlling for cross-sectional dependence in the Granger causality test, the Granger causality disappears in both directions. - Single regressions for Madagascar (1993-2018) confirm long-term positive relation between informal and formal economy. - Relation stronger when controlling for political crises of 2002 and 2009. - Both formal and informal GDP series are integrated with order one; Johansen cointegration tests conclusive; the residual is stationnary at 10 percent. ### TFP dynamics and sectoral contributions - Assumptions and method: - Informal sector assumed to use only labor and employ 95 percent of the country’s labor force. - TFP computed using a linear Cobb-Douglas function. - Formal sector’s TFP computed assuming economy TFP is the weighted average of both sectors’ TFP with time-variant weights corresponding to sectoral GDP shares. - Findings: - The informal sector’s TFP growth is more stable and higher on average than the formal sector’s TFP growth. - TFP growth in the informal sector is more stable and is close to zero. - Historical evidence: growth in the informal sector was mostly extensive with little job creation or capital accumulation (Grimm and Lay 2011). - Small informal firms show higher labor productivity than small formal firms in some evidence, attributed to high costs of formalization (Byiers and Iacovone 2011). ### Policy recommendations and strategic directions - Reference framework: ILO recommendation R204 on the transition from the informal to the formal economy with three approaches: - (i) creation of decent jobs and sustainable businesses in the formal economy; - (ii) transition of workers and enterprises from the informal to the formal economy; - (iii) prevention of jobs informalization. - Align formalization with Madagascar's Emergence Plan (Velirano 8: Decent employment for all) across inclusive growth, tax policy, employment, trade, education, and health. - Suggested priority shifts: - Adopt a less tax-oriented and a much more social protection-oriented strategic approach to stimulate formalization. - Use timely and reliable results from the 2021/2022 informal survey (National Institute of Statistics) to inform policy. - Support the National Employment and Training Office and the General Directorate of Employment to strengthen the Public Employment Service for orientation, training, placement, and follow-up services. - Legal and institutional reforms: - Streamline labor regulations and strengthen institutional coordination. - Current Labor Code: Law No. 2003-044 of July 28, 2004; the informal economy is not considered in this law. - ILO-supported revisions to articles 1, 2 and 3 to better consider rights of informal workers; new Labor Code expected to be submitted during the next parliamentary session. - Authorities could: (i) promote creation of formal employment by supporting youth entrepreneurship and existing projects (FIHARIANA, etc.); (ii) reform legal and regulatory standards to conform to ratified international instruments; (iii) enact legislation to facilitate transition from informal to formal economy by reducing administrative formalities and proposing incentives for IPUs to formalize; (iv) broaden the social protection system by extending social security coverage to workers in the informal economy (at the level of the CNaPS and other related services). - Social protection priorities: - Promote social security to reduce inequalities and vulnerabilities, extending health coverage and retirement pension access to rural and self-employed workers. - Rural workers constitute 82 percent of Malagasy workers. - Current Social Security Code: Decree No. 69-145 of April 8, 1969; coverage is limited and requires an overhaul. - Government has requested ILO support to revise the Social Security Code; a roadmap is being developed for the new code to be available around 2024. - Meanwhile, explore mechanisms to allow all workers to benefit from social protection and improve safety and occupational health at enterprise level, including in the informal and agricultural sectors. *Source: sipea2023036 - 6. The Malagasy informal sector is characterized by a relatively high female participation.* ### 26. Raising public awareness about tax law and procedures is also key, in parallel with ### Public awareness, tax administration quality, and formalization - Raising public awareness about tax law and procedures is key, in parallel with enhancing the quality of the tax administration services and reducing the cost of formality and compliance by adopting an adequate legislative framework with micro-and-small enterprises to support the process of formalization. - Stabilizing the system and avoiding conflictual signaling—by unduly questioning the eligibility to the regime and using excessive tax controls after the formalization of the units—are key elements to build trust in the taxation system and facilitate the formalization process. ### Designing a simplified tax system for the informal sector - Design a simplified tax system that accounts for the characteristics of the informal sector and the capacity of the tax administration. - The informal sector has a non neglible tax potential to contribute to fiscal revenues. - Tax policy should be specific to the IPUs while ensuring viability via maximization of gains and maintaining taxation costs at an optimal level for the tax administration. - Progress in digitalization offers new opportunities for taxing the informal sector. ### Box 1 — Taxation of Micro-Enterprises in Madagascar (key points and statistics) - A simple tax system and reduced compliance costs are needed to foster formalization. - Current regime: - A single combined tax (Impôt synthétique, IS) applies to business or individuals with a turnover lower than MGA 200 million per year. - The tax represents 5 percent of the businesses’ turnover with a minimum tax of MGA 16 000. - 2 percent of the amount of purchases of goods and services can be deduced from the tax if the business can provide invoices in line with the model established by the tax authorities. - Personnel costs can be deducted as long as they are subject to the personal income tax (IRSA, Impôt sur les Revenus Salariaux et Assimilés). - The Impôt Synthétique Intermittent (ISI) targets the informal sector: registered persons or businesses purchasing goods or services from the informal sector are required to withhold 5 percent of the amount paid (the rate climbs to 10 percent when the transaction implies non-residents). - Issues and policy considerations: - A tax rate of 5 percent of turnover can be significant for businesses with relatively low profit margins. - IS rate reducible to 3 percent based on registered purchases, but benefiting from this deduction increases administrative burden for micro-businesses. - Authorities could envisage lowering the IS rate while keeping the minimum of perception. - Ensure that the IS rate is lower than the ISI rate to efficiently promote formalization. - Recent efforts to simplify registration and IS payment procedures, including digitalizing declaration and payments, are welcome. ### Alleviating financial constraints and access to finance - Alleviate financial constraints and reduce the cost of financial services to support higher investment. - Possible measures: - (i) set up a national guarantee fund with subsidized rates and a start-up fund to help companies to be compliant with regulation; - (ii) design and implement effective regulations that reconcile financial stability and the opening of new financing channels for businesses; - (iii) encourage investors’ participation; - (iv) support the private sector through setting up a development bank and bringing more resources to formal financial intermediation at lower costs. ### Informal sector key characteristics (selected figure data) - IPUs main interest to register their business (In percent of total): - Access to credit: 13% - Access to a better market location: 31% - Sales to big companies: 7% - Better exposure: 9% - Others: 15% - No interest at all: 25% *Source: sipea2023036 - 26. Raising public awareness about tax law and procedures is also key, in parallel with (IMF PDF).* ### 6. The Malagasy informal sector is characterized by a relatively high female participation. ### 6. The Malagasy informal sector is characterized by a relatively high female participation. ### Female participation and composition of informal employment - Half of the jobs (52 percent) in the informal sector are held by women. - Most self-employed workers are women (58 percent). - Most family helpers in the informal sector production units are women (53 percent). - Women occupy the lowest paid or most vulnerable positions including domestic services to households and other categories of family aid. - There is a strong female presence outside agriculture: female labor supply represents 21 percent of female jobs against 14 percent of male jobs. - Informal agricultural enterprises mobilize much more male labor than informal non-agricultural enterprises. ### Work conditions and labor regulation compliance - Eight out of ten employed individuals are affected by inadequate employment situations. - Only 3 percent of the workers benefit from a written contract. - 27 percent have oral contract and nearly 70 percent have no contracts at all. - Paid leave is almost non-existent among dependent workers (0.8 percent) and very low among employees (2.5 percent). - Informal employees’ access to social protection services is very low, with about 97 percent of workers being excluded from the existing contributory social security system. - There is no employment protection. - Four out of ten dependent (paid and non paid workers and family helpers) jobs and one third of salaried jobs are non-permanent. ### Assets, working hours, and investment in IPUs - Majority of workers in the informal sector not working for more than 35 hours per week (53 percent). - Average amount of physical capital per unit: MGA 956,600. - Physical capital composition: premises 54 percent; vehicles 33 percent; machineries and tools 12 percent. - Nearly 60 percent of this capital is purchased on the second-hand market; 34 percent is newly acquired; 6 percent self-built. - Ownership of physical capital: personal properties 65 percent; shared with other IPUs 23 percent; rented 11 percent. - Investment per IPU: about MGA 380,200. - Investment use: premises 48 percent; rolling stock 33 percent. - Only 44 percent of the IPUs report having invested during the year of the survey. - Reported investment is estimated at 8 percent of their value added. ### Access to finance - Over the reporting period, only 3.4 percent of the IPUs affirm having recourse to borrowing. - Sources of loans: family and friends 48 percent; microfinance institutions 21 precent; suppliers 15 percent. - Loans are used essentially to finance the acquisition of raw materials. - Investment financing: individual savings for almost 97 percent of its nominal value; banking and microfinance services hardly used. ### Access to public services, administrative recognition, and motives for noncompliance - More than eight out of ten IPUs are housed in makeshift facilities. - Access to services (overall IPUs): water 10.2 percent; phone communication 8.8 percent; electricity 8.4 percent. - Rural IPUs access: water 9.8 percent; electricity 4.6 percent; phone services 6.4 percent. - Urban IPUs access: water 17.7 percent; electricity 17.7 percent; phone services 14.5 percent. - Nearly nine out of ten IPUs are completely unknown to the administrative services. - Administrative status: 11 percent have a statistical identification number; 9 percent pay the patent (professional tax); 9 percent have professional license; 3 percent are registered at the “Trade registry”. - Affiliation to the social security system: 0.2 percent. - Main reasons for noncompliance: unfamiliarity with procedures 40 percent; lack of awareness on companies’ obligations 33 percent. - Only 8 percent consider procedures complicated; 7 percent affirm formal registering is expensive. - Only 6 percent report being informal to circumvent current legislation or avoid taxes/licenses/contributions. ### Willingness to formalize and motivations for formalization - More than 40 percent of respondents stand ready to administratively register their companies. - 61 percent confirm their willingness to pay taxes. - Main motivations for formalizing: better access to market location 25 percent; higher credit access 14 percent. - Some 6 percent of the IPUs have already launched registration but could not finalize due to complexity and high cost of procedures. - Nearly 67 percent consider that taxes should be paid to the local administration to: build infrastructure (44 percent); invest in health and education (30 percent); establish a fund to support micro-enterprises (18 percent). ### Motives for operating in the informal sector - Main motives to create informal enterprises: to get better income 46 percent; to be independent 18 percent; family tradition 13 percent. - Less than a quarter mention difficulties finding salaried jobs in small and large companies as a reason. - In urban areas, creation of non-agricultural informal units to compensate for failure to find salaried employment is higher than in rural areas. ### Contribution to growth, sector linkages, and productivity - Informal sector accounted for 43 percent of GDP in 2012. - Excluding agricultural activities, the informal sector contributed 36 percent to non-agricultural GDP, the equivalent of 24 percent of total GDP. - Informal trade businesses: 69 percent of the informal sector total turnover; 45 percent of total production; 46 percent of overall added value. - Manufacturing sector within informality: 15 percent of total turnover; 28 percent of the production of goods and services; 29 percent of informal sector value added. - 71.7 percent of formal firms are competing against unregistered or informal firms (2013 World Bank Enterprise Survey). - 19 percent of firms identify practices of competitors in the informal sector as a major constraint. ### Empirical relationships between informal and formal GDP; causality and cointegration - Panel cointegration tests on 40 SSA countries for 1993-2018 using multiple indicators multiple causes estimates found cointegration between informal nominal GDP and formal nominal GDP. - Kao and Westerlund tests support cointegration; Pedroni also used. - In panel Granger causality assuming no cross-sectional dependence: informal nominal GDP does Granger cause formal GDP and the inverse is also true. - When controlling for cross-sectional dependence in the Granger causality test, the Granger causality disappears in both directions. - Single regressions for Madagascar (1993-2018) confirm long-term positive relation between informal and formal economy. - Relation stronger when controlling for political crises of 2002 and 2009. - Both formal and informal GDP series are integrated with order one; Johansen cointegration tests conclusive; the residual is stationnary at 10 percent. ### TFP dynamics and sectoral contributions - TFP estimation approach: - Informal sector assumed to use only labor and employ 95 percent of the country’s labor force. - TFP computed using a linear Cobb-Douglas function. - Formal sector’s TFP computed assuming economy TFP is the weighted average of both sectors’ TFP with time-variant weights corresponding to sectoral GDP shares. - Findings: - The informal sector’s TFP growth is more stable and higher on average than the formal sector’s TFP growth. - TFP growth in the informal sector is more stable and is close to zero. - Historical evidence: growth in the informal sector was mostly extensive with little job creation or capital accumulation (Grimm and Lay 2011). - Small informal firms show higher labor productivity than small formal firms in some evidence, attributed to high costs of formalization (Byiers and Iacovone 2011). ### Policy recommendations and strategic directions - Reference framework: ILO recommendation R204 on the transition from the informal to the formal economy: three approaches: - (i) creation of decent jobs and sustainable businesses in the formal economy; - (ii) transition of workers and enterprises from the informal to the formal economy; - (iii) prevention of jobs informalization. - Formalization aligns with Madagascar's Emergence Plan (Velirano 8: Decent employment for all), affecting policies in inclusive growth, tax policy, employment, trade, education, and health. - Suggested priority shifts: - Adopt a less tax-oriented and a much more social protection-oriented strategic approach to stimulate formalization. - Use timely and reliable results from the 2021/2022 informal survey (National Institute of Statistics) to inform policy. - Support the National Employment and Training Office and the General Directorate of Employment to strengthen the Public Employment Service for orientation, training, placement, and follow-up services. - Legal and institutional reforms: - Streamline labor regulations and strengthen institutional coordination. - Current Labor Code: Law No. 2003-044 of July 28, 2004; the informal economy is not considered in this law. - ILO-supported revisions to articles 1, 2 and 3 to better consider rights of informal workers; new Labor Code expected to be submitted during the next parliamentary session. - Authorities could: (i) promote creation of formal employment by supporting youth entrepreneurship and existing projects (FIHARIANA, etc.); (ii) reform legal and regulatory standards to conform to ratified international instruments; (iii) enact legislation to facilitate transition from informal to formal economy by reducing administrative formalities and proposing incentives for IPUs to formalize; (iv) broaden the social protection system by extending social security coverage to workers in the informal economy (at the level of the CNaPS and other related services). - Social protection priorities: - Promote social security to reduce inequalities and vulnerabilities, extending health coverage and retirement pension access to rural and self-employed workers. - Rural workers constitute 82 percent of Malagasy workers. - Current Social Security Code: Decree No. 69-145 of April 8, 1969; coverage is limited and requires an overhaul. - Government has requested ILO support to revise the Social Security Code; a roadmap is being developed for the new code to be available around 2024. - Meanwhile, explore mechanisms to allow all workers to benefit from social protection and improve safety and occupational health at enterprise level, including in the informal and agricultural sectors. *Source: sipea2023036 - 6. The Malagasy informal sector is characterized by a relatively high female participation.* ### 26. Raising public awareness about tax law and procedures is also key, in parallel with ### 26. Raising public awareness about tax law and procedures is also key, in parallel with ### Public awareness, tax administration quality, and formalization - Raising public awareness about tax law and procedures is key, in parallel with enhancing the quality of the tax administration services and reducing the cost of formality and compliance by adopting an adequate legislative framework with micro-and-small enterprises to support the process of formalization. - Stabilizing the system and avoiding conflictual signaling—by unduly questioning the eligibility to the regime and using excessive tax controls after the formalization of the units—are key elements to build trust in the taxation system and facilitate the formalization process. ### Designing a simplified tax system for the informal sector - Designing a simplified tax system that accounts for both the characteristics of the informal sector as well as the capacity of the tax administration is equally important. - The informal sector has a non neglible tax potential that could contribute to the country's efforts to mobilize fiscal revenues. - Tax policy should be specific to the IPUs while ensuring viability via mainly the maximization of the gains while maintening the taxation costs at an optimal level for the tax administration. - Progress in the field of digitalization offers new opportunities for taxing the informal sector. ### Box 1 — Taxation of Micro-Enterprises in Madagascar (key points and statistics) - Fostering formalization requires a simple tax system and reduced compliance costs. While Madagascar has recently made significant efforts to reduce administrative compliance costs, the main tax applying to micro-businesses could be further simplified. - Current regime: - A single combined tax (Impôt synthétique, IS) of both income tax and VAT applies to business or individuals with a turnover lower than MGA 200 million (about USD 50 000) per year. - The tax represents 5 percent of the businesses’ turnover with a minimum tax of MGA 16 000. - 2 percent of the amount of purchases of goods and services can be deduced from the tax as long as the business can provide invoices in line with the model established by the tax authorities. - Personnel costs can be deducted as long as they are subject to the personal income tax (IRSA, Impôt sur les Revenus Salariaux et Assimilés). - The Impôt Synthétique Intermittent (ISI) specifically targets the informal sector: registered persons or businesses purchasing goods or services from the informal sector are required to withhold 5 percent of the amount paid (the rate climb to 10 percent when the transaction implies non-residents). - Issues and policy considerations: - A tax rate of 5 percent of turnover can be significant for businesses with relatively low profit margins. - Although the IS rate can be reduced to 3 percent based on registered purchases of goods and services, benefiting from this deduction significantly increases administrative burden for micro-businesses which may not have the capacities to carefully account for all their operations. - Authorities could envisage lowering the IS rate while keeping the minimum of perception. - It would be important to ensure that the IS rate is lower than the ISI rate to efficiently promote formalization. - Recent efforts to simplify procedures for registration and IS payment, including by digitalizing the declaration and payments processes, are welcome. ### Alleviating financial constraints and access to finance - Alleviating financial constraints to increase and facilitate access and reducing the cost of financial services would support higher investment. - To facilitate access to financing, the authorities could: - (i) set up a national guarantee fund with subsidized rates and a start-up fund to help companies to be compliant with regulation; - (ii) design and implement effective regulations that reconcile financial stability and the opening of new financing channels for businesses; - (iii) encourage investors’ participation; and - (iv) support the private sector through setting up a development bank and bringing more resources to formal financial intermediation at lower costs. ### Informal sector key characteristics (selected figure data) - IPUs main interest to register their business (In percent of total): - Access to credit: 13% - Access to a better market location: 31% - Sales to big companies: 7% - Better exposure: 9% - Others: 15% - No interest at all: 25% *Source: sipea2023036 - 26. Raising public awareness about tax law and procedures is also key, in parallel with (IMF PDF).* --- _Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023036.pdf_