Understanding the Determinants of Economic Informality in Paraguay

A Kaleidoscope of Measures

Michael J. Pisani, Fernando G. Ovando Rivarola

• Publisher: Palgrave Pivot
• Year: 2019
• Print ISBN: 9783030243920
• eBook ISBN: 9783030243937
• Topic: Economics
• Subtopic: International Business
• Index: Economics

For several years, the government of Paraguay has sought to address the issue of informality, both as a response to poverty reduction and a means to expand its tax base. While effort has been undertaken to describe informality, the government lacks the capacity and perhaps the will to analyze the phenomenon through a robust empirical lens. Hence, little is known about the informal economy beyond anecdotes, personal interactions, and description.This book is the first to comprehensively, rigorously, and empirically study the determinants of informality in Paraguay. This book is of vital interest to those studying the Paraguayan economy, development economics, Latin American economics, and informality.

© The Author(s) 2019

M. J. Pisani, F. G. Ovando RivarolaUnderstanding the Determinants of Economic Informality in Paraguayhttps://doi.org/10.1007/978-3-030-24393-7_1

Begin Abstract

1. Introduction: Informality in Paraguayan Context

Michael J. Pisani¹ and Fernando G. Ovando Rivarola²

(1)

Department of Management, Central Michigan University, Mount Pleasant, MI, USA

(2)

Centro de Análisis y Difusión de la Economía Paraguaya, Asunción, Paraguay

Michael J. Pisani (Corresponding author)

Email: [email protected]

Fernando G. Ovando Rivarola

Email: [email protected]

Abstract

This chapter introduces the subject and importance of informality in Paraguay. It also outlines our research question: “What are the determinants of economic informality in Paraguay?” and our purpose in writing the book. To contextually situate informality in Paraguay, we provide a brief overview of the nation’s history, geography, society, economy, and polity. We offer insights into contemporary informal activities and the current ongoing debate as to the economic threat and promise of informality in Paraguay.

Keywords

Informal economyParaguayDeterminantsResearch question

End Abstract

1 Introduction

Morning and night, the whistle or the call of the chipera ¹ announces the arrival of fresh chipa throughout the capital city of Asunción and beyond in Paraguay. Many passersby succumb to the simple, traditional, tasty, and inexpensive treat made from the base ingredients of manioc and cheese. Ubiquitous and innocuous, the street trade in chipa occurs almost exclusively “off the books”. This market exchange in chipa is part and parcel of a wider exchange outside the purview of government authorities. This is but one example of a myriad of routine informal market exchanges in Paraguay.

From household services such as tile repair and replacement, cleaning, laundry, and chauffer services to more extensive and public market exchanges involving commercial electrical wiring and installation, automotive maintenance and body repair, and the contracting of “off the books” labor, the Paraguayan informal marketplace is on full display. And on full display the informal economy may be found at Mercado Cuatro in Asunción at the intersection and area of Avenida Silvio Petirossi, Avenida Dr. Francia, and Avenida Perú. Mercado Cuarto is a public labyrinth of footpaths and hidden walkways with many hundreds, perhaps thousands of market stalls of all sizes stretching and snaking from the street to the alley ways. Everything under the sun is seemingly for sale here for a price where tens of thousands of shoppers navigate vendors and government authority.

Mercado Cuatro is so popular because the prices are often a significant fraction of comparable or even the same goods in the formal marketplace. In some locales in the market, it is possible to get a sales receipt often for an added charge because sales documentation requires the collection of the value-added tax (impuesto al valor agregado [IVA ]) of 10%, the reporting of sales income, and the added paper work of the transaction and subsequent bookkeeping. As such, some transactions actually follow fully legal procedures; the vast majority of sales, however, do not. The intermingling of the permissible, but illegal and the legal is all around.

The high rate of economic informality ranks Paraguay among the highest in South America and in the upper tier within the whole of Latin America. The Paraguayan La Dirección General de Estadística, Encuestas y Censos (DGEEC) or census bureau estimates that more than 70% of the workforce is actively employed in the informal sector (DGEEC 2018a). Persistent and structural labor informality of around 70% is part and parcel of the economic history of Paraguay (see Fig. 1.1).² Pro Desarrollo estimates that these informal workers contribute and generate 40% of GDP in Paraguay (Pro Desarrollo 2018) and Medina and Schneider (2018) report that the Paraguayan shadow economy represents an average of 34.5% for the period 1991–2015 (a number that includes much of the informal and underground economies).

Fig. 1.1

Estimates of labor informality in Paraguay, 1950–2017. (Sources: Arturo León (1986), Gamón and Campos (1988), Authors’ estimates from CICRED (1974), ILO (2014), Tornarolli et al. (2014), DGEEC (2018b) and Authors’ estimations)

The size and scope of informality cannot be ignored in Paraguay. Informality is everywhere. But what does it really mean for market transactions to occur outside the legal purview of government authorities anyway? Informality simply means that market transactions go unrecorded, untaxed, and unregulated from the perspective of the government. It is as if the transaction never occurred from the standpoint and perspective of the government.

However, the informal producer and/or seller may keep business records to better understand market demand, market trends, product margins, inventory movement, and customer credit. While taxes are not collected by a government entity, a toll maybe assessed to the seller for access to public market space such as sidewalks, plazas, and streets.³ Unstated regulations may exist for vending times, cleanliness, and space allocation, perhaps imposed by associations of similar sellers, by geographically bound markets, or by corrupt officials.

Informal exchanges may take place in public or private spaces; after all the good or service is wholly legal. In the capital city of Asunción, some informal exchanges take place outside or adjacent to the most formal of institutions—the Congress building, government ministries, and embassies. As of late 2018, it was reported that 22 congressmen had failed to register for the personal income tax (impuesto de la renta personal), indicating an abject disregard for the law even from congressional lawmakers (5días 2019). So if the leaders of the government don’t abide by the law, as many Paraguayans argue, why should Paraguayans writ large follow the law? Consequently, informality is in essence “baked” into the psyche of Paraguayans; it is part and parcel the legacy of governmental illegitimacy. This is an illegitimacy borne of a non-democratic past that stretches back to the colonial era through the Stronato (the last dictatorship of General Alfredo Stroessner ending in 1989).

In some ways, informality in Paraguay is reflective of informality across the Americas. Generally, governments, elites, labor unions, and the public view informality as an obstacle to economic growth, a blight on the economy, and as a sign of economic backwardness. This view is often clouded by what is missing with informality—social benefits, tax revenues, and worker and consumer protections—and does not imagine or consider what informality provides—such as jobs, incomes, and market complementarity and innovations. An alternate perspective to the general view sides with what informality produces, be it because the state has made formality too costly and cumbersome or because the informal economy displays marketplace dynamism. In this latter instance, informality serves as an economic engine and may be the primary driver of economic growth. In other ways, informality differs from Latin America particularly at cross-border junctions, its persistent elevated level, and informality’s near universal acceptance and practice. Due to its size, a healthy Paraguayan economy cannot exist without a healthy informal sector.

The purpose of this book is to better understand the contemporary environment of informality in the democratic era (1989 to the present) in Paraguay. While the government devotes much attention, description, and public speech to the topic of informality, there has yet to be a comprehensive empirical study into the determinants, across measures, of informality in Paraguay. Beyond description, empiricism seeks to uncover the statistical links between a multitude of variables or determinants associated with informality. In essence, we use the science of economics to help explain informality in Paraguay.

More formally, we seek to address this knowledge gap through our endeavor to answer the following research question: “What are the determinants of economic informality in Paraguay?”⁴ In seeking to shed light on this question, we utilize the premier in-country data source—the Encuesta Permanente de Hogares (EPH ) (Permanent Household Survey), years 2017 and 2018⁵—and employ several proxies that approximate informality in relation to various predictor variables in hopes of triangulating a set of findings that reveal the primary determinants of informality in Paraguay. Sharpening this informal view from the EPH are new perspectives regarding self-employment in Paraguay segmented by performance. We create three sub-groups—survivalist enterprises, latent gazelles, and top performers—that permit a more focused and nuanced view of informality and potential policy intervention (discussed in Chap. 5).

Complementing findings from the EPH are several vignettes inserted throughout the book that serve as a source of qualitative perspectives to enrich the empirical analyses. We intersperse science with first-hand examples of informality to provide personal insigh...

Table of contents

• Cover
• Front Matter
• 1. Introduction: Informality in Paraguayan Context
• 2. Literature Review: The Informal Economy
• 3. Informality Measures and Models
• 4. Logistic Regression Results of In/Formality in Paraguay
• 5. Discussion of Results
• 6. Policy Recommendations and Conclusions
• Back Matter