From an economic perspective, different countries have been hit by Covid-19 in different ways.
Though many countries in Europe and Central Asia region have their differences, one thing they share is a large informal work sector. According to an OECD report, the IMF estimates the size of the informal economies in the Eastern Partner region to range from around 30 percent of GDP in Belarus to 50 percent of GDP in Georgia. In the Western Balkans, the Albanian informal sector is the largest in Europe, accounting for around 36 percent of the country’s GDP.
Why is this significant? Because large amounts of informal economic activity might worsen the socio-economic impact of the COVID-19 crisis and complicate efforts to mitigate it.
But what if we could come up with a measure that can tackle two problems at once –contain the economic or social impact of the pandemic and, at the same time, nudge people to change their behavior in a macroeconomically desired direction?
My initial inspiration here comes from discussions at the National Economic Council of the Czech Government, of which I am member. This body of experts was established during a critical phase of the COVID-19 crisis to help the government find a way out of the economic mess the pandemic has caused.
In one discussion, we proposed delivering vouchers to pensioners – people aged 65 and up, to stimulate the domestic tourism sector. However, in order to get assistance, a pensioner would have to set up a Citizen Digital Account; otherwise they would not be eligible.
In normal times it might be much more difficult to incentivize people to “go digital”. However, during a crisis, people are more likely to be more cooperative and open to get out of their comfort zone. We can apply this thinking to the Covid-19 crisis as well.
Many informal workers in the countries where UNDP works - often young people, women or minorities - are facing significant socio-economic distress because of Covid-19. We have a responsibility to help those in need. At same time, the crisis may be seen as an opportunity to provide their businesses with incentives to move from the informal sector to the formal one. The assistance we deliver to support people in need could be such an incentive.
An informal business that is currently feeling economic pressure due to the pandemic may be more willing than in “normal” times to formally register as a business entity, because in doing so they can receive assistance which would enable them to survive the crisis. If given the choice, many businesses will prefer to go formal and start to pay taxes in full, even if it means having a lower profit, if the alternative is to stay informal and go bankrupt. A properly designed scheme would help vulnerable groups and, at the same time, encourage their businesses to formalize, tackling two problems at once.
Recent economic research offers some hints as how to help governments do this.