SMALL BRANCHES CONFERENCE: 2 - INFORMAL ECONOMY IN SMALL STATES
economic activity being included within the mainstream. Policy should encourage the
integration of the formal economy into the formal sector, but this is not so easy in small States. The informal economy harnesses entrepreneurial activity and keeps people in work, and to enable integration we should encourage education, reduce business costs, enable credit facilities and so help the informal economy to make a real contribution to the mainstream economy. Deputy Langlois asked why the
informal economy was a concern. Guernsey, for example, has no unemployment, and no absolute poverty although there is relative poverty in some instances. People seek to better themselves
through hard work and enterprise. The primary activity in Guernsey is financial services, a high-skill area to which not everyone can aspire. If people work harder, they will pay more tax and higher social security contributions as a result. So instead, they do odd jobs and cash-in-hand work. The ‘black market’ of services is hard to monitor. Informal trading falls in this category and includes fishing, car boot sales and work for cash. In many ways this informal
trading is not a problem, except that Guernsey is geographically close to countries where there is high unemployment, and transient workers in the informal economy can undermine local employment markets. A thriving informal economy can
thereby threaten the ability to provide equality for the local work force. It is therefore necessary to keep the informal economy in perspective, in proportion and under control.
The tax effect Hon. Philip Braidwood, MLC, of the Isle of Man highlighted the problem of those who buy items at car boot sales, then sell them on eBay. This represented losses in sales tax in Jersey, Guernsey and the Isle of Man. The Isle of Man reduced the sales tax payable on construction work and this has meant that local residents
Deputy Allistair Langlois (second right) delivering his presentation at the second session.
are more likely to use reputable companies. Hon. Stephen Rodan, SHK, of the
Isle of Man pointed out OECD figures which suggest that the higher the tax and social security burden, the greater the incidence of informal economic activity. In the U.S.A., however, where the tax rate is just 30 per cent, the informal economy was assessed as being 10 to 12 per cent only. He asked whether the informal economy is good or bad? This depends on the point of view. Individuals will try to sidestep paperwork and tax/ social security contributions while governments will lose out on payment into benefits systems, health and safety rules will be ignored, there will be an inequality of competition. Individuals will be receiving benefits without having paid towards them. In developing countries the
informal economy can represent as much as 80 per cent of income. Governments in such places will need to review their own structures to see if improvements can be
302 | The Parliamentarian | 2012: Issue Four
made to improve transparency. If there is corruption, with handouts to bureaucrats or kickbacks to politicians, then there is little incentive to improve. Deputy Langlois responded
that he held a healthy skepticism towards statistics produced about an unregulated activity, but governments should ask themselves whether matters were improving. Hon. Stanley Lowe, MP, of
Bermuda advised that in Bermuda, tourism is no longer the mainstay industry. Financial services have overtaken tourism, although somewhat hamstrung by perpetual requests by the OECD for more and more regulation. Bermuda naturally complies, so as to stay off the black list, and TIEAs (Tax Information Exchange Agreements) have been entered into with many countries. The country is looking seriously at Islamic financing to offer another strand. He stated that Bermuda is not a tax haven, it is a low tax jurisdiction. As regards the informal economy,
prostitution can be discounted as it has always been illegal. Gaming offshore is a difficulty, and it was proposed that Bermuda legalise gaming on ships anchored in Bermuda waters so as to benefit from the tax return, but the draft legislation failed. This year, the government passed an Act for a referendum on gaming. The people are being asked to decide whether gaming should be legalised on cruise ships which it is hoped will lead to additional financial resources. Mr Penn responded that B.V.I.
was also looking at allowing gambling on cruise ships in port, so that the passengers could then come ashore to spend money in B.V.I.
The economic contributions of all Hon. Abdulla Shahid, MP, of Maldives asked how governments can incorporate currently illegal activity into the mainstream economy. He suggested one answer would be to legalize the activities. The economy
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