The phenomenon of informal economy and employment in the context of Covid-19 pandemic

Informal economic activities and informal employment represent an important part of Moldovan economy. Due to its complexity, this phenomenon deserves more thorough analysis and understanding. Informal economy may be both, a cause and an effect of the major problems faced by the economy. On one hand, it may devour public finance at the central and local levels, including the pensions’ and health system; it may undermine fair competition, as the companies which do not pay taxes may be more competitive from price perspective as compared to those companies, which are obedient; it may contribute to corruption, as it is associated, most of the times, with cash-based transactions, which are difficult to be traced; and it also can be a trap for companies working in informal sector due to difficulties/impossibility to get foreign financing for development, hence being subject to undermined sustainability. On the other hand, it may result from breaking up the social contract, because of the negative perception by population and companies about the quality of public goods and services (e.g.: infrastructure, public service, pension system, healthcare system, etc.); it may also result from deficient tax regulations (not necessary high taxes), inefficient administration and corruption, which fuels companies’ propensity to enter/remain in the informal sector; it may result from low level of legal and economic literacy among employees who accept informal jobs (for instance, salaries in envelopes) or the result of weak negotiation power of employees as related to that of the employer.

The informal economy problem becomes even more complex if taking into account the fact that not all informal economic activities are illegal, some of them representing subsistence farming activities, which are widely spread, considering the big share of rural population and limited economic opportunities in rural areas. Hence, to a certain extent, the increased share of Moldovan economy informality is the result of a series of objective structural peculiarities of the country.

Hence, the phenomenon of informal economy should be analyzed, understood and tackled properly through adequate political measures, which would take into consideration the above-mentioned complexities. Moreover, this problem becomes even more acute during the “corona-crisis” because of increasing financial constraints and higher vulnerability of companies and individuals practicing informal activities. An increased propensity is frequently noted towards tax evasion and fiscal optimization in order to cope with financial constraints in the context of crisis. Furthermore, the employees who work informally are widely exposed to the crisis because of missing social and legal security, which leads to two basic problems: (i) higher probability to be dismissed, because it is easier for the employer to resort to such practices; and (ii) in case of those left without a place of work, it is very difficult to get unemployment allowances, emergency loans or any other form of cash benefits due to non-reporting the previously obtained revenues.

Taking into consideration the above-mentioned context, this study was carried out to describe informal economic activities and informal employment in the Republic of Moldova, dynamics registered over the last years, especially in the context of Covid-19 pandemic, as well as the population and business perception regarding this phenomenon. These analyses were used to formulate policy recommendation for the Government to address efficiently this problem, considering the complexities it implies.

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This report was developed by the Independent Think-Tank Center “Expert-Grup“, with the support of the United Nations Development Programme (UNDP). The content of this publication is the sole responsibility of the author and does not necessary represent the views of the UNDP.