Human Capital Investment: Key in Navigating the Shift from Informal to Formal Economy
Education and capacity building are key factors in reducing informality.
In order to ensure that all economic sectors may benefit from greater trade, inclusive trade works to reduce inequality, promote shared prosperity, and facilitate the transition to the formal economy.
In this sense, APEC can significantly contribute to the advancement of sustainable and inclusive trade and investment in the Asia-Pacific region by promoting trade policies and supporting technical cooperation and capacity building that value inclusivity, foster the transition to the formal economy, and remove trade barriers.
This is captured in the APEC Putrajaya Vision 2040 and the Aotearoa Plan of Action, which seek to foster quality growth that brings palpable benefits and greater health and wellbeing to all, including micro, small and medium enterprises (MSMEs), women, and others with untapped economic potential. Both establish that APEC economies should take collective action to “promote ecosystems that support MSMEs” and “promote MSMEs’ access to finance, global markets, and global value chains as well as assisting in building their capacity to effectively participate in the wider economy.”
In Peru, for example, foreign trade has become one of the main engines of economic growth, development and poverty reduction. Last year, we registered a new record in our exports, with more than USD 64 billion dollars. We had more than 9,300 exporting businesses, which exported goods to around 180 markets. This has been possible because Peru has maintained, for more than two decades, a trade policy based on openness and liberalization focused on promoting its participation into global markets and value chains.
However, we see that even though MSMEs represent 68 percent of the total exporting businesses, its participation in the total exported value was only 3.5 percent. Moreover, we see that only very few exporting MSMEs can sustain their exports for more than five consecutive years.
This shows that we need to keep working on strengthening the participation of MSMEs in global value chains, by reducing obstacles and increasing their capacities to engage in trade directly or indirectly. By doing so, we will also be promoting the transition to the formal economy.
Informality is the missing link of APEC’s inclusion agenda. The informal sector is one of the fundamental components of the social dimension of economic growth and development, which is the cornerstone of APEC year 2024, particularly in emerging economies.
According to the International Monetary Fund (IMF), about 2 billion people or 60 percent of the total employed population globally are in the informal sector. The IMF considers too that one third of the global economy is informal, affecting every economy in different ways and proportions.
The International Labor Organization states that 85 percent of informal workers are employed in small, informal enterprises characterized by lower productivity and slower physical and human capital accumulation.
Studies indicate that an improved access to quality education is probably the single most powerful way to lower informality. Informal workers are more low-skilled and, therefore, are paid less than formal workers.
The OECD points out that 45 percent of informal workers have at best a primary level of education, compared to 7 percent of those in formal employment, and 94 percent of workers with no education are informal and have very limited opportunities to upgrade their skills, perpetuating their informal condition.
Education and capacity building are key factors. We can improve our regulations in terms of tax system, labor and social protection, streamlined procedures to officially register companies and even enhance financial inclusion, but if the skills of the workers are not good enough, they won’t be able to be more productive.
The quality of human capital constitutes, in my view, one of the foundations to reduce informality and in this digital era, digital skills are fundamental. Enhancing human capital and capacity building, and harnessing innovation and digitalization as cross-cutting tools to promote the transition to the formal economy, are key elements that are instrumental to empowering our people.
The theme and priorities of 2024 are very rich and complex. Nonetheless, the cross-cutting concept is empowerment. If we don’t develop capacities and skills of the most vulnerable groups of our respective populations, it will be extremely difficult, not to say impossible, to include them in our formal and global markets and as a consequence we won’t be able to reach an equitable and sustainable growth.
Taking these into account, we proposed three priorities: Trade and investment for an inclusive and interconnected growth; digitalization and innovation for the transition to formal and global economy; and sustainable growth for resilient development. These three priorities are primarily focused on achieving practical results in terms of deliverables.
One, a new vision of FTAAP. Inclusive trade and digital economy are two of the possible approaches that are being discussed closely interlinked with informality. This will be a key component of the new vision of FTAAP that we will adopt. Similarly, the joint statement of women and trade will emphasize the empowerment of women by supporting digital literacy initiatives and capacity building programs for women-led SMEs, the majority of which are informal.
Two, the roadmap for facilitating the transition to a formal, global economy, which includes essential components that ought to be used in a comprehensive and cooperative manner. Among these are concerns about inclusive trade and investment.
Three, we aspire to adopt a set of principles to prevent and reduce food loss and waste. According to the FAO, one of the main causes of food insecurity in Peru is informality. To achieve the objectives of this deliverable, we need to promote capacity building and education among our farmers and the economic actors—many of whom are informal—involved in every step of logistic chain of food distribution.
Finally, the “Arequipa Goals,” the first deliverable of APEC 2024, include recommendations for empowering people with disabilities for sustainable and inclusive growth. Ninety percent of disabilities are in the informal sector and 50 percent of them don’t receive basic education. Goals for capacity building and education are key elements of this already adopted 2024 deliverable.
Each of these deliverables communicates with the others and, with proper implementation, ought to foster synergies. Education and capacity building as a means of empowerment are among the intersecting concerns. And that, in my perspective, is the unifying thread that gives each of these deliverable’s coherence.
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Ambassador Carlos Vasquez is the SOM Chair for APEC Peru 2024.