How can the private sector contribute to reducing informality?

Cesar Reyna Ugarriza
34 min readMay 10, 2024

By César Reyna Ugarriza, consultant on economic, political and social issues. Email: cesarreyna78@gmail.com

1. INTRODUCTION. –

Informality stands as the main problem of the country, as its ramifications affect all spheres of Peruvian society. This phenomenon, rooted in culture and also of economic, political, social and institutional nature, has a significant negative impact on the normative and legal sphere, progressively eroding the country’s politics and institutions.

Contrary to the conventional notion, the real antonym of informality is not simply formality, but rather greater institutionality. Formality emerges as a direct consequence of robust and stable institutionality, which must be established and consolidated so that it can effectively support formality. Public institutionality encompasses a set of norms, rules, principles and practices that guarantee legal stability guide the actions of the public administration and promote social and economic well-being.

Addressing informality requires, above all, strengthening and expanding institutionality. It must extend throughout the territory and be efficient, proactive and functional, anticipating problems rather than reacting to them. Only a solid institutionality can effectively reduce or eradicate informality.

It is crucial to understand that informality goes beyond the economic sphere, also involving political, social and cultural aspects. Business and labor informality, which constitutes the majority of studies on the subject, is just one manifestation of a deeper and more widespread problem.

For example, illegal mining and informal employment are tangible examples of this economic informality, characterized by tax evasion, the lack of official permits and the absence of occupational safety measures.

It is important to note that business formality is not limited to registration or tax matters, but also encompasses ethical and legal practices and behaviors. The existence of hybrid agents, operating on the border between legality and informality, further complicates the panorama.

2. THEORETICAL FRAMEWORK: GENERAL THEORY OF INFORMALITY (GTI). -

In the intricate panorama of Peru’s economy, informality stands as a ubiquitous phenomenon, deeply entrenched in the social, cultural, institutional, political, and economic fabric of the nation. In this vein, the General Theory of Informality (GTI) (Reyna, 2019)[1] seeks to grasp the complexities of this systemic problem and multifaceted issue that affects various aspects of society. This comprehensive framework delves into the roots of informality, tracing its historical trajectory from the colonial era to the present day, while offering a unique theoretical perspective that seamlessly integrates ideas from structuralist, legalist, and holistic approaches.

According to the GTI, informality is closely related to cultural, economic, political, social, and institutional factors, which are detailed below:

i. Cultural factors: Informality tends to be ingrained in the cultural norms, attitudes, and behaviors of a society. These cultural factors influence how individuals and businesses perceive and interact with formal institutions and regulations. For example, informal practices such as bribery and corruption may be normalized in certain cultural contexts, undermining formal governance structures.

ii. Economic factors: Economic conditions, such as poverty, lack of access to formal employment, and economic inequality, can lead individuals and businesses to engage in informal activities as a means of survival. Informal employment may offer flexibility and immediate income opportunities that are not available in the formal sector, especially in regions with limited economic opportunities.

iii. Political factors: Weak governance, ineffective enforcement of laws and regulations, and corruption in political institutions can perpetuate informality by creating an environment where informal practices thrive. Political instability and conflicts may further exacerbate informality by undermining the rule of law and institutional integrity.

iv. Social factors: Social exclusion, discrimination, and lack of social protection can push marginalized groups, such as women, youth, and minorities, into informal activities with limited legal and social rights. Informality can perpetuate social inequalities by depriving individuals of access to formal employment, education, healthcare, and social security.

v. Institutional factors: Weak institutional capacity, bureaucratic inefficiencies, and regulatory barriers can hinder formalization efforts and perpetuate informality. Informal businesses may face challenges in accessing credit, markets, and public services due to their lack of legal recognition and compliance. Strengthening formal institutions and streamlining bureaucratic processes is essential for reducing informality and promoting inclusive growth.

Understanding the cultural, economic, political, social, and institutional factors is fundamental for developing effective strategies to address informality and promote more inclusive and sustainable development.

3. DIAGNOSIS. –

Informality is the main problem of the country because all the others derive from it. And it is, first and foremost, a phenomenon of cultural root and nature, but also economic, political, social and institutional. It has a negative impact on the normative or legal (legal) level by having a determining influence on politics and institutions, contributing to their progressive deterioration. Informality corrodes.

The opposite of informality, the true antonym, is not precisely formality, but rather greater institutionality. Formality is a direct consequence of institutionality, so the latter must first be established and consolidated for the former to nest and be truly effective. Public institutionality implies a system, structure and organization that allows the functioning of the State and society in optimal terms by addressing needs and generating well-being. Public institutionality is made up of norms, rules, principles, criteria, standards, parameters, processes, procedures, measures, practices, etc., that allow the predictability of the actions and behaviors of the public administration and officials, ensure legal or legal stability, provide guidance to citizens, facilitate the development of different economic or non-economic activities, offer clear guidelines, help the economy to grow, combat illegal and informal practices, generate clear incentives to act within the established legality, are truly inclusive, operate under objective criteria to avoid subjectivities, take into account all the interests that a diverse society harbors, seek sustainable development, etc.

Informality is combated with greater and better institutionality. This must be present instead of absent in different parts of the territory. Institutionality must not only be present but must also be efficient, effective and proactive. It must anticipate problems and not be merely reactive. It must be consolidated and have a scope to generate positive impacts. But above all, it must be functional, that is, the institutions must be capable of fulfilling the mission and objectives for which they were created in the first instance. The functionality of the institution determines its impact on reality. Only then will it be able to reduce or eliminate informality.

Thus, greater institutionality leads to less informality. Therefore, better and more political, economic and social institutions are required, not just legal ones.

The informality that is measured or studied is, in general, business and labor informality, that is, of an economic or productive nature. Examples include illegal mining and the percentage of the economically active population (EAP) that belongs to the informal sector. Illegal mining operates without permits or licenses. Informal employment is that which lacks the benefits provided by law (not being on the payroll of companies or public entities, for example). Economic informality is generally characterized by not paying taxes (not declaring or paying the taxes corresponding to the activity carried out), carrying out productive activities without having an official permit, operating without protection or safety measures, among others.

However, there are hybrid agents in the market, which are those that are legal and informal at the same time. This implies that they present a visible or apparently formal (legal) face, but in their less exposed or less visible facet for the rest, they operate informally. This duality is quite common among many companies of all sizes.

So that business formality is not determined exclusively by having a legal entity (company registered in public records), declaring income for tax payment purposes, having and paying employee payrolls, having financial statements, keeping an accounting book, showing a tax address, having a structure or organization in which the functions and responsibilities of the management, management, administration, etc., personnel are evidenced, since companies can evade the payment of taxes, not contribute to social security or private pension funds of workers, may fail to comply with environmental and safety regulations, may pay public officials and servants to obtain licenses and permits (bribery), may avoid inspections and audits through undue offers (bribery), among other practices.

Formality does not necessarily depend on the registration record, having a taxpayer registration, declaring and paying a payroll, keeping an accounting book, exhibiting financial statements, having documentation on the business activities, having an administrative headquarters, or a legal representative such as a legal manager or accredited representatives, but rather on the practices and behaviors exhibited by economic agents, in this case, apparently formal companies. An example is the case of Intigold, a mining company that sells gold from another company without permission from the latter by invading its mining concession (it operates in areas that do not correspond to it and commits crimes). This act has been carried out for a long time and with total impunity and presumed complicity of various public entities.

A notable characteristic of informality is that it predisposes to crime, to commit illegal acts. The formal, to pass into illegality, has the option of informality before opting to commit crimes. In contrast, the informal does not have that alternative, since the step to illegality is much simpler or more feasible from the position in which it finds itself. Naturally, it could opt for formality, but this is elusive or difficult for various reasons and for the reason it has been operating informally. The informal is in a gray area between formality and illegality. In general, the transition to illegality is much easier than to formality due to having been accustomed to acting in an extralegal or paralegal limbo, as in the case of informal miners who belong to artisanal mining and small-scale mining (MAPE). One case is that of tax evasion and avoidance, which together cost more than 8% of Peru’s GDP annually. The tax administration seeks ways and mechanisms to reduce and combat them as they deprive the treasury of resources, which defunds the public budget and forces the State to borrow and not meet its fiscal deficit goals.

In the document reached by the Conscious Capitalism -Peru organization, it is considered that informality is the product of deficient public services (institutional argument), an oppressive regulatory regime because it persecutes the formal and does not combat informality (legal argument), of the weakness in the capacity of government supervision or inspection (institutional argument), due to the low educational level that generates less human capital in the market and society (socioeconomic or structural argument of the Peruvian economy), and by a primary structure of the economy oriented towards the exploitation of natural resources (socioeconomic or structural argument of the Peruvian economy).

Additionally, during a meeting of the aforementioned group, it was mentioned that the existing overregulation that often makes it difficult for the businessperson or entrepreneur (cumbersome procedures and complicated administrative processes) is the responsibility of the State, which is true. But the real cause is rather that overregulation is a reaction of the State or authority to prevent informal agents from entering the market, that is, that knowing in advance that Peruvian society is openly informal, culturally speaking, what the official or legislator seeks is to prevent informal actors from carrying out activities under the mantle or protection of legality so that they do not harm third parties. In such a way that the demand for various requirements obeys the establishment of a filter with which this objective is pursued.

4. THE PRIVATE SECTOR AND INFORMALITY. –

The role of the private sector in addressing informality is crucial. Private businesses often interact with informal economies either directly or indirectly, and their actions can significantly affect the extent of informality within a society. Here are some key points regarding the relationship between the private sector and informality:

4.1 The cultural argument.

In addition to the aforementioned arguments, the cultural argument must necessarily be added. Thus, informality is, above all, a system that promotes and reproduces certain behaviors and relationships, and has its own rules or principles (a kind of ordered chaos). Informality is also a differentiated identity within society. Those who belong to it recognize themselves as such. This identity is as strong as adherence to any religion. It was formed over time and characterizes Peruvians and Latin Americans in general with the particularities of each case or region. Informality is multidimensional and transversal (it crosses all dimensions of reality, namely: political, social, cultural, economic, institutional and legal). Its origin dates back to the time of the conquest and is one of the greatest contributions of the Spanish colonizers to the American continent, such as the Spanish language and the Christian religion. Therefore, that it has a wide historical presence.

Another characteristic is that informality operates inside and outside the State, since it has penetrated the spheres of political, administrative, governmental, regulatory, fiscal and legislative decision-making. In its latest evolutionary phase, it has captured politics, hence measures are dictated that favor the interests of informal or illegal economic power groups (such as state permissiveness in the face of informal-illegal mining, the authorization for the withdrawal of funds from private pensions to finance short-term spending or consumption, the entry of unqualified teachers into public education, etc.).

4.2 The economic argument.

In economic terms, informality turns capitalism into infracapitalism, an inferior, unnatural and dysfunctional form of capitalism that does not allow capitalism to truly settle in or fulfill its purposes. Capitalism cannot operate or progress as such in the absence of highly informal rules and practices. The framework it faces in countries like Peru is one of high political uncertainty and legal and social insecurity. The lack of institutionality (weak institutionality) is one of the causes of the predominance of informality over the economic sphere. Therefore, there is an economy that presents low investment, little savings capacity, reduced productivity and low profitability. Informality makes the market less attractive and less sophisticated. Highly informal countries fail to develop or grow at high rates that can be sustained over time; only when the prices of the raw materials they export rise, which is why they are or have quite primary economies. Infracapitalism is then the way in which capitalism manages to “adapt” or “function” in a highly informal economy like Peru’s, which makes it impossible for large sophisticated companies to exist, but rather for extremely small companies that disappear easily from the market due to their lack of competitiveness and poor management.

4.3 The advantages of informality.

Informality brings with it some “advantages” — unethical and illegal, of course — such as not paying taxes (not paying taxes), not paying payrolls (black hiring of workers without recognizing their labor rights), not complying with environmental or safety regulations that involve higher expenses, acquiring goods and services on the black market (smuggling), among others.

4.4 The failure of the State.

Informality has become a dead-end option for many in the face of the State’s manifest inability to provide quality or optimal public services in health, education, security and infrastructure. What does the State offer to the ordinary citizen, the worker or businessperson if it cannot guarantee the effective provision of essential basic services? Since public services are deficient, there are no incentives or apparently valid reasons to pay taxes to the treasury. In addition, many of the public resources obtained from individuals are allocated inefficiently and are totally lost due to the ingrained practices of corruption among public officials and third parties.

4.5 The lack of property rights and legal security.

The Peruvian State does not guarantee property rights, does not guarantee legal security, nor does it offer judicial and police protection to those who need it. Small and micro-entrepreneurs are subject to threats, intimidation, coercion, coercion and extortion by gangs and criminal organizations that operate with total freedom and impunity, since prosecutors do not formalize the respective complaints when members of these gangs are captured by the police. In addition, the Congress of the Republic is populist and undermines fiscal stability by authorizing higher expenditures that have no technical or legal basis.

4.6 Access to financing.

As for financing, informal agents have access to regular credit from both formal and informal banking. The informals created credit networks and lend money to each other in various ways. This is done among acquaintances, friends and family. In some cases, they grant guarantees such as the merchandise they commercialize or give valuable objects. In many cases, they obtain fast financing and without prior credit, qualification by loan shark organizations that often threaten them and charge more than is worth it (usury). Therefore, many access loans in quite unfavorable and even dangerous conditions due to the threats they receive. The penalties, rates and defaults are set arbitrarily by the drop-by-drop lender, without a contract in between, a modality that came from neighboring countries such as Colombia, Ecuador and Venezuela, where several international criminal networks operate that have activities in Peru.

4.7 The lack of competitiveness and economic growth.

Informality in itself is not competitive, as it does not allow it to grow at higher rates. This limits economic growth in the medium and long term. The GDP of countries affected by a high degree of economic informality does not take off, so they will not be able to achieve the development achieved by the countries that are part of the OECD. The economy never reaches its potential due to other factors, in addition to the incidence of informality itself, such as the lack of human capital in society and greater investment in research and development (R&D).

4.8 The cost-benefit analysis of informality.

The informal agent, like any person, carries out a cost-benefit analysis, before deciding to pass or remain in informality as a primary activity. In the Peruvian case, we cannot speak of pure or exclusive informal agents, since the same person can carry out a totally formal economic activity and another absolutely informal as in the case of a doctor who works on his own and attends in a private clinic where he receives income that he does not declare to the treasury and prescribes medications improperly to whoever requests it; but I work for a clinic or hospital where he attends under a strict schedule and his remuneration is subject to deductions for the payment of taxes. This is the case of a hybrid agent, which are presumably the majority of workers with income from various sources or types.

4.9 The reasons why informal agents choose informality.

The informal agent dispenses with the legality (institutionality) of the market and the State for economic reasons, in addition to cultural ones. When he voluntarily departs from the rules, it is because he has options, unlike the informals who are forced to work and produce to survive in the informal environment. Whoever has options rejects formality because it is expensive or onerous (it is expensive to be formal and stay in formality because you have to pay taxes, make expenses for accounting, legal, administrative services, among others. In addition, being formal consumes time and efforts of various kinds. Formality in countries like Peru has the problem of being unclear, incomprehensible or confusing for the common understanding of individuals who have not received adequate education. To this is added that formality is invasive in the sense that it enters or accesses personal and business information, which makes it less attractive for the individual to submit to demanding and regular supervision.

Another factor is that the Peruvian State does not offer real incentives to informal agents to formalize. The State does not enable mechanisms that facilitate contracting between the public and private sectors, for example. The procedures are cumbersome, complicated and there are legal loopholes that facilitate various interpretations. This is aggravated when it is discovered that there are bureaucratic hurdles or barriers and the existence of mafias or groups that win the contests, tenders and calls for positions, acquisition of goods and the contracting of services. Rigged or rigged contests prevent the State from having better public servants, which makes it more inefficient and promotes greater distrust in the public apparatus (lack of trust and credibility in public institutions). For these elements, it is difficult to contract with the State, which is also a bad payer by not complying on time with the payments that its suppliers expect which affects the payment chain in the economy and promotes the insolvency of many companies affected by unjustified delays in payments. The State also does not promote the generation of value chains.

4.10 The State as a bad example of legality, institutionality and formality.

The Peruvian State, of course, is not a good example of legality, institutionality or formality, given that the last presidents of the country have been convicted or prosecuted for crimes of corruption or serious human rights violations. This does not promote order, but rather unjustified and arbitrary repression, which is why hundreds of police officers and military personnel are prosecuted in different periods, including the current one. The Peruvian State does not show much respect for the law, since it is the first to transgress it. Its inefficiency, corruption and informality mark it as a problem rather than being part of the solution. This situation forces us to think about the total reform or refunding of the State in institutional terms. What it needs is a shock of institutionality to acquire the strength and capacity necessary to address the great challenges facing the country.

4.11 The need for new measurements of informality.

Informality is not only economic in terms of the informal EAP or the calculation of GDP of informal activities with that of the country’s GDP, so it needs to be measured in other ways such as the degree of institutionality of the country (to establish how functional public and private entities are), the State density index to measure its presence in the territory (through the effective provision of services), to know the approximate number of hybrid or dual agents that operate in both the formal and informal markets, to determine the impact of informality on institutions to specify their degree of deterioration, among other measurements.

4.12 The penetration of informality in the State and the emergence of populism.

Finally, at present two alarming factors are evident: the first is the penetration of informality into the State, particularly in the Executive Branch and the Legislative Branch through populism. Populism is nothing more than the political and social manifestation of informality, especially when it is disseminated and imposed on existing institutions with the purpose of first eroding them and then capturing them. This social phenomenon appears when traditional left, center or right-wing ideas or ideologies lack popular support, as well as the political parties that embody them, that is, when a large part of political and democratic institutions have been weakened naturally. Populism then emerges as a response or reaction against the established system or order (establishment) that has failed to address social needs -such as in matters of security and economic growth- to try to impose another “order” in which planning is not done, nor is a reason of State followed, but the slogans or clamor of the people to immediately address the postponed demands and needs of the so-called “people”. In addition, populists do not take into account the rules or official procedures of the system and seek to please the mass or crowd with benefits to continue receiving their support, which is conditioned to the gift, benefit and subsidies of all kinds under which the so-called clientelism is known.

4.13 The clash between traditional and emerging economic power.

The second factor is the clash or competition between traditional economic power and emerging power, the first constituted by the Creole and foreign business class, and the second by informal-illegal groups of peripheral or provincial origin. These agents dispute control of political power or the public apparatus, one to maintain the status quo or order of things (Constitution, economic model and lower-level norms) and the other to subvert it, impose conditions and benefit themselves at will with the capture of the State, since it considers the public budget as booty. This contest involves two clearly differentiated actors by their antagonistic interests. By way of example, the fight can be seen between medium and large-scale formal mining and informal and illegal mining, since they face each other socially and legally for mineral exploitation areas. In this case, illegal mining invades mining concessions in the name of formal companies to exploit without any control or supervision whatsoever, generating incalculable environmental liabilities, serious social problems and great economic distortions (illegal mining is responsible for 40% of gold production in Peru) that originate tax losses to the State, drive away private investment and call into question the governability and the rule of law in the country.

5. Recommendations for the private sector to reduce informality.

In accordance with the description, analysis and detail presented on the serious problem of informality: How can the private sector contribute to reducing informality in a country like Peru?

Now, highlighting the importance of having strong institutions to combat the problem, it is necessary to present some recommendations directed from the private sector to the public sector, in order to articulate and collaborate with it, and others specific or exclusive for the private sector with the purpose of trying to effectively combat informality, for which the following are suggested:

i. Proposal from the private sector to the State: Promote the training and qualification of public officials and servants through programs or careers that improve their skills, abilities and capacities, which should offer payment facilities or be free in certain cases. Investing in the training and professional development of public officials would undoubtedly improve the skills and experience of government employees, making them more effective in the performance of their duties. These could be offered from private higher education institutions or through agreements with public universities, and they would have the objective of strengthening the State at its different levels, especially in regions that administer resources from royalties and royalties for the exploitation of natural resources. What is sought is the standardization of knowledge and a certain degree of specialization within the Public Administration. It is considered that by raising the quality of public service, not only administrative inefficiency is reduced, but also informality in management and procedures is reduced. This would also help reduce corruption and ensure that all public entities offer fair and professional treatment.

ii. Proposal from the private sector to the State: Help implement a public sector reform through performance-based evaluations and merit-based promotions for public officials. This would help ensure that only the most qualified and competent people are promoted to positions of authority. What is intended with this proposal is to strengthen meritocracy so that those who access a position in the State do so based on their merits, experience and capacities. Today this proposal is carried out in the public education sector to ensure the entry of the best teachers, teachers and professors to public schools, institutes and universities a priority. The private sector could carry out the evaluations to avoid leaks of the exams, as well as provide courses to reinforce the knowledge of the applicants for the available positions.

iii. Exclusive proposal for the private sector: The private sector could provide certain basic services in highly vulnerable socioeconomic areas, where there are very large gaps in access to health, education and infrastructure, without neglecting the food of the population. This could be implemented through a mechanism and volunteer called “services for taxes” (SxI), through which participating companies would pay part of the Income Tax by providing some essential basic service. For this purpose, they could have the assistance of specialists, technicians and administrative personnel who would be responsible for effectively providing the service, while the participating company would only cover the payment of salaries, the acquisition of goods and services and the maintenance of infrastructure for its correct operation. Alternatively, the private company could only manage the public resources allocated by the State for providing better management of them with the aim of effectively providing the service. In this case, the company could finance or cover part of the required budget with resources from the “services for taxes” mechanism. This would incentivize a better provision of public services and involve companies in the solution of serious social problems. In these cases, it is about the direct or outsourced management of public service management by private companies.

iv. Proposal from the private sector to the State: Help strengthen public and private education to initiate a cultural change that begins with the younger generations of Peruvians so that they are fully aware of the adverse impacts of informality on various aspects of national reality. What it is about is promoting a social change among young people so that they reject informality because it is harmful to the growth and development of the country. Naturally, some will not be able to reject it because their precarious economic situation forces them to work at an early age on the streets, where they are exposed to various risks and dangers. However, it is necessary to incorporate the younger population so that they take charge of the matter in a decisive stage of their training as people and citizens. No possible solution can ignore the inclusion of young people in the reduction of informality. The important thing is that they know how to identify the different informal practices to know them in their real dimension and know that they affect their possibilities and perspectives in the medium and long term in the labor, professional and civic field. Hence the need to expand the scope of the courses that address national reality in schools.

v. Proposal from the private sector to the State: Promote voluntary service among workers who belong to the formal sector of the economy so that they contribute to improving the performance of certain public services that the State offers, such as the private sector. The proposal seeks that the most competent professionals who work in private companies dedicate part of their time to community service with the purpose of promoting greater awareness about the country’s problems, such as informality, but at the same time help improve education, health, among other areas. These workers can eventually become local referents and leaders, whose contribution would be significant to begin to build ties in society. An example of this occurred during the period of the last health emergency due to the incidence of Covid-19, when university students and young professionals from the district of Corani in Puno helped elementary and secondary school students with their homework and in the entrance exams to technical institutes and universities due to the impossibility of receiving face-to-face classes and the difficulties to access them virtually due to the lack of internet service.

vi. Proposal from the private sector to the State: Contribute to the creation of a specialized school for the training of better judges and prosecutors to guarantee the efficiency, suitability and impartiality of the Judiciary and the Public Prosecutor’s Office. This could have a significant impact on the administration of justice since in the future there would be better-prepared judges and prosecutors to assume the challenges demanded by the career. This may involve increasing the budget of the aforementioned entities, to which private companies could contribute with the donation of equipment and materials used in the judicial and prosecutorial offices. Part of the furniture that companies no longer use could be reassigned to the Judiciary or the Prosecutor’s Office through the signing of inter-institutional agreements. If a school of the magistracy can be installed, it could have among its teachers renowned jurists at the national and international level. With this, judges and prosecutors could be appointed through a more transparent and merit-based process, thus avoiding the provisional nature or lack of suitability of the magistrates who have been appointed. This would help a lot to consolidate legal stability.

It should be noted that at the level of the Legislative Power this proposal is already being discussed in order to try to ensure the competition of better judges and prosecutors. Although it presents significant challenges in logistical and budgetary matters, there are economic resources to solve it. The main obstacle lies in the will of the political decision-makers rather than the economic one. The main reason to support such an approach is that the Peruvian Foreign Ministry (Ministry of Foreign Affairs) and the Central Reserve Bank of Peru (BCRP) have training bodies such as the Diplomatic Academy and the Extension Course to select their personnel, who will become future career officials of both institutions, which are two of the best functioning in the country thanks to the fact that they can educate in the knowledge and skills that both the diplomatic service and the implementation of monetary policy require, respectively.

vii. Proposal from the private sector to the State: Comprehensively and constitutionally, reform the process of preparing laws and other regulations with such a rank by institutionalizing regulatory and regulatory impact studies offices in the Congress of the Republic and the Presidency of the Republic. Regulatory Impact Analysis (AIN) is a process by which the intended results and potential positive and negative impacts of a proposal or modification of a norm with the rank of law are evaluated. This analysis is carried out on draft measures to determine their real need, suitability and opportunity, estimating the probable impact in different dimensions of reality if they are approved.

On the other hand, Regulatory Impact Analysis (AIR) is a systemic approach to critically evaluate the positive and negative effects of regulatory proposals and existing regulations and their respective non-regulatory alternatives.

Both proposals, not yet fully materialized, represent a reform for Peru, which has its origins in the recommendations of the Organization for Economic Cooperation and Development (OECD) on the country’s regulatory policy, and includes the prior, systematic and comprehensive analysis to identify, evaluate and measure, on the basis of evidence, the possible impacts of different alternative solutions to a public problem in order to achieve the adoption of a solution to improve the well-being of society.

The purpose is that no type of relevant norm escapes the minimum evaluation that it must receive before being debated in the Plenary of Congress or in a session of the Council of Ministers. For this, the private sector should insist through the different guilds that make it up, as well as the bar associations, to establish an unavoidable reform to avoid low-quality standards that could have a negative effect on society. With this, there would be a filter to contain populist legislative proposals and those that only seek to favor certain interests. These analysis bodies should be made up of a mixed manner, that is, by representatives of the private and public sectors to have a balance under strictly professional criteria to guarantee their suitability. Once the proposal is approved, no relevant draft norm could skip or avoid the rigorous technical evaluation. By means of this measure, informality would be reduced with which different legislative initiatives have been approved to the detriment of society.

It is necessary to mention that both mechanisms have been applied, but it is necessary to give them a greater degree of obligatoriness with regulatory modifications in the organic laws of the Executive and Legislative Powers, as well as in the Constitution to guarantee that the discussion, formulation and enactment of laws are carried out under eminently reflective and general interest criteria.

viii. Proposal from the private sector to the State: Help improve the public procurement system to make it more transparent and competitive. This could reduce the amount of unnecessary procedures, promote the formalization of companies and informal workers, and generate greater efficiency in the public sector. The aim is to make procurement processes clearer, less cumbersome, more flexible and adaptable, and to allow the economic inclusion of those informal entrepreneurs who could offer their products or services through electronic bidding systems. The existence of hundreds of thousands of companies that do not meet the requirements to contract with the State deprives them of income and important clients such as the different entities that make it up. The objective is that contracting with the State is the incentive that motivates them to formalize, as long as the State and the private sector help in this process, that is, that they can guide them with advice and accurate information so that they can achieve this goal. The private sector could offer recommendations and studies on how to address the problem and propose various improvement proposals, clearly indicating where the bottlenecks in public procurement are, both in terms of personnel and goods and services. This cooperation could be extended to the training of companies and informal workers by digital platforms and online guidance. The volunteering of private sector workers themselves could be aimed at helping to consolidate small and micro-enterprises (SMEs) that need specialized knowledge and advice. For this purpose, available technological resources could be used to create applications and tutorials on social networks.

ix. Exclusive proposal for the private sector: The private sector can promote the formalization of economic activities by offering real incentives for companies and informal workers to become formal. This could include simplifying contracting procedures, but always under quality and price standards. The private sector can provide access to financing, business training and technical assistance to informal entrepreneurs who intend to start formal businesses. This can help reduce dependence on informal work and promote the creation of formally established companies. Formal companies, especially extractive ones, can help strengthen companies and informal workers in the areas of influence where they operate to access contracting opportunities. This implies the effective provision of training and advice to help informal entrepreneurs understand and take advantage of the benefits of formalization.

x. Exclusive proposal for the private sector: Companies can contribute to reducing informality by creating more and better formal jobs, offering fair working conditions and benefits to their employees. This implies complying with labor laws and providing social security, health insurance, paid vacations and other benefits to their workers, which is common in large and medium-sized companies nationwide, although less frequent in smaller companies due to deficiencies in government supervision and greater internal scrutiny in larger companies.

xi. Exclusive proposal for the private sector: Formal companies, especially the most recognized and visible in the market due to the magnitude of their activities, must comply with all established regulations and regulations to serve as an example for the rest, that is, to have social legitimacy when proposing regulatory modifications and structural reforms to government officials, congressmen and the general public. This naturally includes the scrupulous payment of taxes, the obtaining of necessary licenses and permits, compliance with safety and environmental standards, among other requirements. Compliance with these regulations contributes to the formalization of the economy and the reduction of informality.

xii. Exclusive proposal for the private sector: The adoption of ESG (Environmental, Social and Governance) criteria by the private sector can play a relevant role in reducing informality by promoting responsible and sustainable business practices that benefit both employees and local communities. By adopting people-centered approaches, inclusion, transparency and accountability, companies can contribute to creating a fairer, more equitable and more conducive business environment for economic formalization.

Here are some specific examples of how companies can apply these criteria to reduce informality:

a) Promotion of sustainable practices: Companies driven by the incorporation of ESG parameters prioritize environmental sustainability, reducing their negative environmental impact and contributing to a healthier ecosystem. This can attract consumers who value environmentally friendly products and services, which could lead to a greater demand for formal companies that adhere to such practices.

b) Social and labor aspects: Companies that comply with ESG criteria tend to respect labor rights, offer fair working conditions and provide professional development opportunities for their employees. This may include paying fair wages, complying with labor laws, promoting equal employment opportunities, and fostering a safe and healthy work environment. By improving working conditions, these companies can help reduce the attraction to informal employment.

c) Inclusion and diversity: Companies committed to inclusion and diversity often adopt policies and practices that promote equal opportunities for all workers, regardless of their ethnicity, gender, sexual orientation or disability. By fostering inclusion and diversity in the workplace, these companies can help reduce social and economic exclusion that often fuels informality.

d) Community development: Companies committed to sustainable development often invest in projects and programs that benefit the local communities in which they operate. These initiatives may include education programs; job training, health, infrastructure, and economic development that help strengthen local capacities and create formal employment opportunities. By improving living conditions in communities, these companies can reduce

e) Community development: Companies committed to sustainable development often invest in projects and programs that benefit the local communities in which they operate. These initiatives may include education programs; job training, health, infrastructure, and economic development that help strengthen local capacities and create formal employment opportunities. By improving living conditions in communities, these companies can reduce the need to resort to informal employment as the only option for subsistence. ESG-driven companies contribute to a more inclusive economy by creating decent work opportunities, protecting the environment, and upholding ethical practices. This can reduce poverty, improve social well-being, and promote sustainable economic development.

f) Reduce risks and improve reputation: By adhering to ESG standards, companies can mitigate the risks associated with informality, such as labor conflicts, environmental damage, and reputational damage. This can lead to long-term stability and growth, making formal companies more attractive to potential partners and customers.

g) Transparency and accountability: Companies that meet corporate governance criteria tend to be more transparent in their operations and accountable to their stakeholders, including employees, investors, customers and society in general. This transparency and accountability can contribute to reducing the corruption and opacity that often facilitate informality, while promoting trust and legitimacy of companies in society.

xiii. Exclusive proposal for the private sector: The private sector can make a decisive contribution to reducing informality by aligning its actions with the relevant United Nations Sustainable Development Goals (SDGs) and working in collaboration with other stakeholders to address this multifaceted phenomenon or challenge that affects the economy and society as a whole. By focusing on creating formal employment, promoting equal opportunities and strengthening institutions, it can significantly contribute to building a more inclusive, just and sustainable economy.

Here are some ways in which the private sector can help address this challenge, considering some of the most relevant SDGs:

a) SDG 1: End poverty: Informality is closely linked to poverty, as many people resort to informal jobs due to a lack of formal opportunities in the market. In this regard, the private sector can contribute to reducing poverty by creating formal jobs, offering decent wages and providing economic development opportunities in disadvantaged communities, especially in the case of the mining industry that operates in areas of socioeconomic exclusion and absence of the State.

b) SDG 8: Decent work and economic growth: Promoting formal and decent work is essential to reduce informality. The private sector, therefore, can create formal jobs by investing in sectors that generate productive and sustainable work. In addition, it must guarantee fair working conditions and professional growth opportunities to help discourage informal work.

c) SDG 10: Reduced inequalities: Informality often perpetuates socioeconomic inequality by marginalizing certain groups in society and excluding them from the benefits of economic development. Companies can help reduce these inequalities through inclusive labor practices, transparent hiring policies, and community development programs that address the training needs have marginalized groups to promote local human capital development.

d) SDG 16: Peace, justice and strong institutions: Informality can weaken institutions and undermine the rule of law by operating outside of legal and regulatory frameworks. Private companies, in this sense, can support the construction of strong institutions by complying with laws and regulations, promoting transparency and business integrity, and collaborating with the government in anti-corruption initiatives.

e) SDG 17: Partnerships for the Goals: Addressing informality requires close collaboration between the private sector, government, civil society and other stakeholders. The private sector’s contribution can be to reduce informality through strategic and collaborative alliances that leverage the resources, experience and influence of different actors to implement comprehensive and sustainable solutions.

xiv. Exclusive proposal for the private sector: Place greater emphasis on participation in corporate social responsibility (CSR) and shared value programs: Through these approaches, companies can contribute to reducing informality by implementing CSR and shared value creation (CVC) programs that address the underlying causes of informality, such as poverty, lack of access to education and training, and social exclusion. These programs may include education and job training initiatives, support for small businesses and entrepreneurs, and community development projects.

ANNEX ONE — STRATEGIES FOR REDUCING INFORMALITY. –

Addressing informality requires a comprehensive approach that targets its underlying causes and addresses its multidimensional nature. Key strategies for reducing informality include:

i. Strengthening formal institutions: Enhancing the capacity and effectiveness of formal institutions, including legal and regulatory bodies, law enforcement agencies, and administrative authorities, is crucial for reducing informality. This involves improving governance structures, promoting transparency and accountability, and combating corruption to create an enabling environment for formalization.

ii. Promoting economic opportunities: Creating opportunities for formal employment, entrepreneurship, and investment is essential for reducing informality. This requires implementing policies that promote economic growth, innovation, and productivity, as well as providing access to finance, training, and market linkages for informal businesses.

iii. Enhancing social protection: Expanding social protection programs, including social insurance, healthcare, education, and housing, can help reduce the vulnerability of informal workers and households. This involves extending formal social security coverage to informal workers, improving access to quality education and healthcare services, and providing targeted support to marginalized groups.

iv. Fostering social inclusion: Promoting social inclusion and addressing discrimination and social exclusion are essential for reducing informality. This involves implementing policies that promote gender equality, youth empowerment, and minority rights, as well as providing access to basic services and infrastructure for marginalized communities.

v. Facilitating formalization: Simplifying administrative procedures, reducing regulatory barriers, and providing incentives for formalization can help encourage informal businesses to transition to the formal sector. This involves streamlining business registration and licensing processes, providing tax incentives and subsidies for formal businesses, and improving access to credit and markets for informal entrepreneurs.

vi. Strengthening enforcement mechanisms: Enhancing enforcement mechanisms, including monitoring, inspection, and enforcement of laws and regulations, is essential for reducing informality. This involves increasing the capacity and resources of law enforcement agencies, improving coordination between government agencies, and imposing penalties for non-compliance with formal requirements.

vii. Promoting public awareness: Raising public awareness about the costs and consequences of informality is essential for fostering a culture of compliance and promoting formalization. This involves conducting information campaigns, providing training and capacity-building programs, and engaging with stakeholders to raise awareness about the benefits of formalization.

viii. Enhancing international cooperation: Strengthening international cooperation and collaboration is crucial for addressing cross-border dimensions of informality, including illicit trade, money laundering, and tax evasion. This involves sharing information and best practices, coordinating enforcement efforts, and promoting regional and international initiatives to combat informality. Assistance could be expanded to the knowledge and study of those cases in which different countries successfully combated informality within their economies, jurisdictions, and territories.

In this regard, it is advisable to review and analyze the cases of Turkey, Taiwan, Hong Kong, Singapore, South Korea, among others, countries where a firm hand was applied (effective sanctions and policies of no impunity or zero tolerance towards social misconduct and criminal offenses), following the strengthening of the State which resulted in a strong and omnipresent State capable of carrying out rigorous social control — through mechanisms of incentives and punishments — and generating sustained economic growth and development at very high rates that raised average incomes and expanded the middle class, thanks to a successful process of educational transformation and industrial modernization in which various reforms were carried out, starting with cultural reforms to decrease and break radically with informality, given that it is a clear cultural phenomenon.

ANNEX TWO — THE ROLE OF THE PRIVATE SECTOR IN ADDRESSING INFORMALITY

The private sector’s role in tackling informality is pivotal. Businesses often engage with informal economies, directly or indirectly, and their actions can significantly influence the prevalence of informality in society. Here are some key aspects of the relationship between the private sector and informality:

i. Employment Practices: Many businesses, particularly small and medium enterprises (SMEs), operate within informal sectors due to factors such as lower regulatory burdens, reduced taxation, and flexibility in hiring practices. While informal employment may provide benefits such as lower labor costs and greater flexibility for employers, it often comes at the expense of workers’ rights, social security, and job stability. To combat these practices, it is necessary for the private sector to contribute to the strengthening of labor supervision mechanisms through training for officials and public servants, as well as the provision of necessary equipment and materials for fulfilling this function. Another way to address this problem is for both the private and public sectors to condition participation in their procurement processes on the regularization of the employment status of workers in informal businesses.

ii. Supply Chains: Many formal companies often engage informal suppliers or subcontractors to reduce costs or access specific skills/resources. However, this can perpetuate informality by creating a demand for informal labor and expanding informal networks within supply chains. Therefore, among formal enterprises, the adoption of ethical sourcing practices and close collaboration with suppliers should be encouraged to reduce reliance on informal labor. This situation can change if formal companies assist in formalizing their suppliers and subcontractors through training programs and the implementation of strict controls (inspections) throughout their value chain.

iii. Competition: Informal businesses, especially those operating outside regulatory frameworks, often engage in unfair competition with formal companies by undercutting prices of goods acquired in the black market (smuggling), evading taxes, occupying public spaces for sales (as in the case of clothing vendors competing with formal galleries and stores in the Gamarra textile and commercial emporium in Lima), and ignoring labor, safety, and environmental standards. This naturally distorts market functioning and hinders formal business and employment growth. In this regard, supervision mechanisms must be strengthened, and initiatives supporting the formalization of informal enterprises promoted to mitigate this. Achieving this undoubtedly requires increased state presence in supervising informal and illegal trade; however, the private sector could leverage the channels, stalls, and sales force of informal businesses to offer products of legitimate origin, providing incentives such as bonuses for sales made, offering sales training, among others.

iv. Partnerships and Collaboration: The private sector can actively address informality by collaborating with governments, civil society, and international agencies. This may involve capacity development for informal entrepreneurs, support for formalization, and advocacy for public policy reforms to reduce regulatory barriers and promote inclusive growth. Along these lines, the private sector can contribute by identifying bureaucratic barriers that hinder the formation of new businesses and proposing reforms to streamline hiring and firing practices, as there are labor costs in economies such as Peru’s, which disincentivize formal employment.

v. Corporate Social Responsibility (CSR): Many formal businesses integrate CSR initiatives to address social and economic challenges related to informality. CSR programs focused on skills development, education, healthcare, food security, and financial inclusion empower informal workers and contribute to broader efforts to reduce informality. As businesses help generate more human capital, especially in areas with significant social disparities, there will be better-trained workers who will have real options to join the payrolls of formal companies, obtain decent wages, and have better opportunities for personal and professional growth.

Overall, engaging the private sector in efforts to reduce informality requires a multi-stakeholder approach that recognizes the incentives and challenges faced by businesses operating in diverse economic environments. By fostering dialogue, promoting responsible business practices, and incentivizing formalization, stakeholders can work together to create a more inclusive and sustainable economy.

ANNEX THREE — STRUCTURE OF THE GENERAL THEORY OF INFORMALITY (GTI)

CHAPTER I: Definition and nature of informality. — (Presentation and introduction to the topic): https://lnkd.in/e-jGMsvP

CHAPTER II: Background or origins. –

First part: a) Conquest and Viceroyalty of Peru: https://lnkd.in/ebBS48Vh

Second part: b) The Republic 19th-20th centuries — present day: the new millennium: https://lnkd.in/eSbmhQp2

Third part: c) Historical interpretation of the informality phenomenon: https://lnkd.in/euwE6DkH

CHAPTER III: Theoretical framework and causes of informality. –

a) Development of structuralist, legalistic, and holistic approaches: https://lnkd.in/gTWmtyd
b) Historical-cultural approach (to be developed)

CHAPTER IV: Introduction to the General Theory of Informality (GTI).

Content: causes, characteristics, and principles of informality

Informal Labor: A New Approach: https://lnkd.in/gvcshJt

CHAPTER V: Economic theory of informality. –

5.1. Introduction: https://lnkd.in/eicyajqc

5.2. The informal market (first part/to be developed)

5.3. The relationship between the formal and informal economy (second part/to be developed):

5.4. Infracapitalism (third part/to be developed)

CHAPTER VI: Consequences for the State, economy, and society. — (to be developed)

CHAPTER VII: Measurement instruments of Informality. — (to be developed).

7.1. Presentation of the Indicator that measures informality at the country level.

7.2. Indicator for the public sector: used to calculate the degree of informality within the public administration (emblematic or relevant entities such as the Ministries of Health, Education, etc.)

7.3. Indicator for the private sector according to the size of the company: micro, small, medium, and large.

7.4. Indicator by type of economic activity: applied to measure the degree of informality in the main productive activities and services: mining, transportation, commerce, construction, fishing, agriculture, education, health, etc.

CHAPTER VIII: Possible remedies or solutions to eliminate, reduce, or combat informality (to be developed)

CHAPTER XI: Conclusions and recommendations (to be developed)

Notes:

[1] Reyna Ugarriza, C. (2019). General Theory of Informality. Medium.

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Cesar Reyna Ugarriza

Creador de la Negociación Integrativa Transformadora Intercultural (NITI) y de la Teoría del Relacionamiento Intercultural... Correo: cesarreyna78@gmail.com