Formalization key to shared prosperity with workers in Bangladesh’s informal sector

Md Bilal Hussain, 73, learned weaving from his father as a part of his growing up. Born in a family of weavers, he had seen all male members of his family weaving clothes in a traditional facility. He believed weaving was in his blood inherited from his ancestors. His last employer confirms that Bilal is the best weaver he ever had. He is excellent at weaving silk sarees and salwar Kamij, the long tunic and loose trousers commonly worn in Bangladesh. 

Bilal worked for 57 years - 42 with his last employer and 15 years with another. At retirement, he earned BDT 6,200 a month on average, being paid BDT 1,400 for each piece of clothing he made. Bilal retired in November 2023. His failing eyesight and aching body compelled him to stop although he did not want to. His low earnings never permitted him to save anything. He is not getting any retirement benefits as his employment was informal. Devoid of benefits, he is now at the mercy of his sons for the rest of his life and believes Allah will provide for him. 

Ferdous Munsi, the owner (Malik) of the small saree-making cottage enterprise where Bilal worked explained the business. He spends BDT 2,000 on raw materials, mostly imported, for each saree and pays workers like Bilal BDT 1,400 to make the saree. This then retails at BDT 4,000. His gross profit does not even cover the rent of the space and the holding cost of inventory for the off-season. He is critically aware of the low wages his workers are getting but can do nothing about it.

This is the reality in the informal sector. The Bangladesh Labour Force Survey 2022 shows that close to 6 crore (60 million) people, 84.9% of total working population in Bangladesh, are in informal employment. It is noteworthy that out of the total employed women in Bangladesh, 96.6 percent are in informal employment. Similarly, 92.7 percent of youth aged 15-27 are employed informally.  Informal employment can be both in formally registered businesses as well as in the unregistered ones. 

Economists opine that some level of informality is expected in a growing economy like Bangladesh where an effective business governance system and procedures are yet to be established. There are several reasons for the widespread informality in Bangladesh. Studies have suggested that the ineffectiveness of public services like registration, licensing and tax processing of businesses are among the main reasons.  On the other hand, lack of clear incentives to formalize, limited understanding of the process of formalization, and limited employment opportunities are other impediments. 

The consequences of the high informality are severe: low tax to GDP ratio, widening inequality, stagnant industrial competitiveness in sectors other than the readymade garments and low labour productivity, and low product and service quality. Informality also hinders the potential of the industrial sector to participate and benefit from growing international value chains and export market opportunities. These are extremely critical as the country prepares to graduate from LDC status and enters the global market on the basis of competitiveness and productivity. 

While the prioritization of formalization in the Industrial Policy 2023 is a welcome step, there is a dearth of studies on the potential positive impact of formalization and Bangladesh’s capacity to formalize to inform policymaking. Furthering the formalization agenda is imperative for the country if it is to achieve the ambition of economic diversification and modernization of the private sector to become competitive globally. The implementation of the policy requires an integrated effort from the whole of the government, the private sector, and workers’ organizations. The success of ongoing labour sector and social protection reforms are also key to addressing informality. 

The informal sector, which comprises cottage, micro, small and medium enterprises, not only operates closest to local communities, but plays a crucial role in creating local jobs, especially for women and youth in Bangladesh. As we commemorate the MSME Day today, we recognise that it is a vital sector at the heart of our societies with tremendous potential to accelerate decent jobs creation and achievement of the SDG goals. 

To fully harness its potential, a transition to formalization is necessary to ensure the millions of workers in the sector do not end up like Bilal – destitute after a fully productive working life.

By Gunjan Dallakoti, ILO Small and Medium Enterprise Development Specialist

This opinion piece was first published by The Daiy Star of Bangladesh on 27 June 2024.