Empowering informal entrepreneurs

The informal economy is like a house built without a foundation-providing shelter for many, but vulnerable to collapse at any moment thus ruining years of work and unlived potential. In the bustling streets of Dhaka, thousands of vendors sell their goods without any official record, millions of labourers work without contracts, and small businesses thrive outside the tax system. This vast informal economy, while providing livelihoods for many, is also a major obstacle to Bangladesh's growth. Unlike developed nations, where job markets are largely formalised, developing countries like Bangladesh struggle with economic sectors that operate outside the purview of regulations, taxation, and worker protections.

The informal economy in Bangladesh accounts for an estimated 85 per cent of employment, according to the International Labour Organisation. While this provides opportunities for those who might otherwise be unemployed, it also means that the government loses billions in potential tax revenues. Informal workers lack job security, social protections, and access to financial services, which keeps them trapped in a cycle of low wages and economic instability. Moreover, businesses operating informally find it difficult to scale, limiting overall economic progress.

For entrepreneurs and informal business owners in Bangladesh, operating outside the formal system often means being locked out of critical growth opportunities. Without official registration, these businesses struggle to access bank loans, government support, or insurance-tools that are essential for scaling operations and managing risks.

Formalisation can empower small business owners by offering legal protection, increasing their credibility with customers and partners, and enabling participation in broader markets, including government tenders and export channels.

Moreover, by becoming part of the formal economy, entrepreneurs can benefit from training, mentorship, and financial literacy programmes that improve long-term sustainability. Access to these resources not only boosts individual businesses but also contributes to national economic resilience.

Unlike Bangladesh, countries like South Africa and Uruguay have taken bold steps to transition their economies from informal to formal structures, ensuring long-term stability and inclusive economic growth. South Africa tackled informality by implementing labour market reforms, strengthening small business policies, and ensuring social security for informal workers. One of its landmark policies was the introduction of the Expanded Public Works Programme, which provided temporary jobs with formal benefits while gradually integrating workers into the formal economy. Additionally, South Africa simplified business registration processes, reducing the bureaucratic hurdles that often discourage small entrepreneurs from formalising their operations. On a micro level, the Small Enterprise Development Agency (SEDA) was established to provide business training, mentorship, and funding opportunities to informal entrepreneurs, helping them transition to formal enterprises. SEDA's efforts included access to microfinance, financial literacy programmes, and technical skills training, ensuring that informal business owners were well-equipped to sustain themselves in the formal economy. These reforms not only benefited the macro economy but also had a direct impact on grassroots entrepreneurs. Many informal vendors and home-based workers transitioned into registered micro-enterprises, gaining the ability to open business bank accounts, apply for credit, and join cooperative networks. As a result, South Africa saw improved business survival rates and a gradual narrowing of income inequality in urban areas. Another impactful initiative was the National Informal Business Upliftment Strategy, which provided targeted support to informal traders, enabling them to comply with regulations while maintaining profitability.

Uruguay, on the other hand, focused on financial incentives and social protection. The government introduced pension schemes and healthcare benefits tailored for informal workers, encouraging them to register their businesses and contribute to the tax system. A key initiative was Monotributo, a simplified tax scheme that allowed small informal businesses to pay a single, affordable tax while gaining access to social security benefits. This model was particularly successful in bringing self-employed workers, such as street vendors and artisans, into the formal sector.

Uruguay also introduced financial literacy programmes to educate informal workers on the benefits of formalisation and implemented mobile banking solutions to facilitate tax payments and business transactions for those previously excluded from the formal financial system. Additionally, the government worked with trade unions and cooperatives to provide training and legal guidance to informal workers, ensuring they understood their rights and the benefits of transitioning to the formal economy. By integrating digital banking tools, Uruguay made it easier for informal workers to make small, gradual tax contributions, thereby reducing the burden of formalisation and making compliance more attractive. For informal entrepreneurs, Uruguay's approach was a game-changer. The simplified tax system reduced both the financial and psychological barriers of formalisation, offering tangible incentives like healthcare and pension coverage. Many artisans, food stall owners, and small service providers found themselves better positioned to reinvest in their businesses, hire additional workers, and plan for the future.

Bangladesh can draw valuable lessons from these countries by implementing targeted policies to formalise its economy. Simplifying business registration should be a priority, as many small businesses avoid formal registration due to complicated legal procedures. An easy-to-navigate online registration system with minimal fees could encourage small entrepreneurs to formalise their businesses. Expanding social security for informal workers by establishing pension schemes, health insurance, and worker protection programmes can provide incentives to move into the formal economy. Offering reduced tax rates or temporary tax exemptions to newly formalised businesses could further encourage compliance and long-term integration. Many informal businesses struggle to expand due to a lack of financing, and facilitating access to microloans and credit facilities for newly registered businesses could help them grow. Encouraging mobile banking and digital payments through incentives may also bring informal transactions under regulatory oversight and increase transparency in the economy.

Bangladesh stands at a crossroads. It can continue to function with a predominantly informal economy or take decisive steps toward formalisation, unlocking higher economic potential. Without a solid foundation, no house can stand for long, and without a formalised economy, sustainable growth remains out of reach. The path forward won't be without challenges, but with the right policies and a focus on empowering informal entrepreneurs, Bangladesh can lay the groundwork for inclusive, sustainable growth. By turning its informal energy into formal strength, the country can build an economy where even the smallest business has the chance to grow, compete, and succeed.

The writer is studying at the Department of Development Studies, University of Dhaka. rupok.du.ds@gmail.com