The Informal Economy Provides a Twist to Mongolia’s Growth

By Michelle Tolson

The informal economy has a significant place within Mongolia. Definitions vary, but at its most broad, the sector includes street sellers, home-based businesses and family workers who might not be paid a wage, domestic workers, trash pickers and garment workers, construction workers and small farmers according to Women In Informal Employment: Globalizing and Organizing (WIEGO), an organization researching the sector. The Solidarity Center based in Washington, D.C. includes taxi drivers and entertainment workers—essentially those without formal measures to ensure worker rights and safety. Mongolia does not export domestic workers nor does it have a large manufacturing sector, but if we look at the above listed groups, it is easy to see that Mongolia has a rather thriving informal sector.
Unlicensed taxi drivers sell rides–rates negotiated by the kilometer. Vendors on the street sell services and goods such as shining shoes, and pine nuts or other small food items. Farmers and herders fit into this category, depending on the definition. Entertainment workers are found at night clubs, hotel bars and karaoke bars as female companions to men wanting company. Some of informal work is considered illegal, but for many, it is a way to feed oneself.
Mongolia has come a long way since the ILO published the first study on its informal sector in 2006: Informal Economy, Poverty, Employment in Cambodia, Mongolia and Thailand: Good Practices and Lessons Learned FINAL REPORT. With the disbanding of the Soviet state in 1990, factories and manufacturing gave way to small scale businesses and agricultural pursuits in order for people to survive, which created a robust informal economy. In 2006 the official measurement of the informal sector was at 14% (the World Bank measured about 18%), however, including agriculture, the ILO reported the true measurement of the informal sector to be at 60%. At that time, mining comprised a mere 9% of the GDP, while agricultural and livestock businesses comprised 79.5 %. Mining had a large informal sector, with an estimated 100,000 people working small scale gold mines at the time. A separate report on informal mining was published in 2006 by the ILO, called Informal Gold Mining in Mongolia: A Baseline Suurvey Report Covering Bonuur and Zaamar Soums, Tuv Aimag.
In 2006, small scale vendors consisted of 133,000 people with sales totaling 1.3 trillion MNT (52 % were informal–unregistered). About 51% of venders surveyed then noted that licenses and fees were difficult to manage, contributing to the informal workforce, according to the 2006 ILO report.
The aim of the 2006 study was to recognize barriers to formalization of employment and to improve worker safety while creating a database of the informal sector in Mongolia. This sector is the area with the most labor abuse issues and the lowest wages.
Times have changed a great deal in six years. The World Bank noted in Mongolia Quarterly Economic Update, published February 2012, that the economy of Mongolia grew 17.3 % in 2011, up from just 6.4% in 2010. Rising spending reflects in better wages, but the informal sector tends to suffer the most according to the report, as unskilled workers’ wages are not keeping up with inflation. Taking into account that informal workers tend to work without contracts, their wages are not set competitively. So, while unemployment has gone down from 13% to 9% between 2010 and 2011, labor inequities are still evident and this could worsen in 2012. However, construction is growing. The sector lacks a trained and skilled workforce, requiring companies to hire from abroad to fulfill the gap in labor as skilled workers are being drawn to mining companies. Roads are required and facilities are needed to be built to keep pace with the mining boom and to make it competitive for timely extraction, but the World Bank report cites a lack of local workforce to meet this need. Unskilled workers, comprising a large part of the informal sector, are used in construction and it is possible that they might fill this gap in labor.
The Brooking Institute wrote in January of 2012 that the informal economy could influence the growth rate of Mongolia’s economy—pushing growth beyond the 15% estimate for this year predicted by the Asian Development Bank and Economist Intelligence Unit to up to 40%–if the informal economy is factored into the equation.
Owing to its underground nature, the informal sector is difficult to predict. Whatever the outcome, 2012 looks to be a wild ride. However, the new Social Welfare Law which passed in January is set to replace the previous cash handout scheme to provide funds to those that need it the most. Therefore a safety net will be in place for the most marginalized in Mongolia’s economy, an estimated 130,000 of the poorest households, according to the World Bank Report.

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