Confronting the Challenges to Democracy in the 21st Century
Second World Assembly
November 12-15, 2000
São Paulo, Brazil
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President of Brazil
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Barriers to Participation: The Informal Sector in Emerging Democracies
Organizer:
Center for International Private Enterprise (CIPE, U.S.)
Rapporteur:
Catherine Kuchta-Helbling (U.S.)
Center for International Private Enterprise (CIPE, U.S.)
Moderators:
Laszlo Kallay (Hungary)
Institute for Small Business Development
John Sullivan (U.S.)
Center for International Private Enterprise (CIPE, U.S.)
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Presenters:
Lee K. Benham (U.S.)
Washington University
Roberto Cavalho (Brazil)
Instituto Atlantico
Chris Darroll (South Africa)
Small Business Project
Petar Ivanovic (Montenegro)
Center for Entrepreneurship
Ozdem Sanberk (Turkey)
Turkish Economic and Social Studies Foundation
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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, which is 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 formal political and economic system is that the institutional structures or "rules of the game" are badly designed and decision making to create them is undemocratic. This contributes to prohibitively expensive costs of doing business and erects barriers to participation that 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 the obstacles that prevent citizens from routinely participating in national and local decision making. Such obstacles foster unresponsive policies, such as exorbitantly high costs of doing business, and 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, and stable set of political and economic institutions that fosters democracy and market-based economic activity that levels the playing field for all citizens.
Policy Recommendations:
- The degree of public participation and transparency in the policy-making and legislative processes should be increased by instituting transparent, inclusive decision-making procedures and by providing regular opportunities for the public to comment on existing and proposed laws and regulations.
- Legal and regulatory codes should be clarified and streamlined by eliminating duplicative, superfluous laws that increase the cost of doing business and that invite corruption.
- Private property rights should be accessible to all citizens, clearly defined, and strongly enforced.
- Requirements to obtain business permits and licenses should be simplified and made inexpensive so that becoming "formal" is within reach of the entrepreneur of modest means.
- Taxation systems should be reformed so that they are easy to comply with and encourage profitable economic activity.
- Labor laws should be reformed to allow for more flexibility.
- Concerted efforts should be made to reform economic systems to create open markets in place of crony capitalist systems through improved corporate governance legislation. Such reform should institute internationally accepted accounting principles, standards of disclosure, anti-conflict-of-interest laws, anti-trust laws, prohibition of insider trading, and sensible bankruptcy laws.
- Excessively bureaucratic government agencies should be reformed in order to strengthen their administrative and enforcement capacities 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, are readily available to all citizens.
- High-quality, efficient, and cost-effective infrastructure (such as telecommunications and transportation systems) is essential for a democratic, market-based system and should be provided so that entrepreneurs can benefit from becoming formal.
Recommended Initiatives:
- Members of business associations and reform-oriented think tanks should develop a national business agenda that uniformly articulates the concerns of entrepreneurs, and disseminate this agenda to the public, policy makers, and legislators. This will contribute to informed, responsive policy making, thereby strengthening democracy and creating efficient laws and regulations for market-based activity.
- A revised version of the CIPE workshop background paper should be 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. The paper should be used as an advocacy tool to raise awareness about the informal sector and to devise strategies to reduce barriers to political and economic participation. The Web site section should 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 case studies; it should also provide an opportunity for entrepreneurs to share information and best practices proven to reduce the cost of doing business, and should have links to Web sites of other associations, think tanks, and concerned institutions involved in reducing barriers to formality.
The CIPE Web site includes a section on the Informal Sector.
- Labor and other NGOs should work to increase the supply of micro-credit and business consulting services to the informal sector.
- CIPE and other organizations should work with informal sector experts and with members of CIPE's business association networks to develop a "transaction costs index" that can be used to measure the costs of doing business in different countries. The index would be used to identify sources of high transaction costs and to develop projects that will reduce them.
Follow-up:
CIPE has created a section of its Web site devoted to the Informal Sector.
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