Informality in Guatemala: A Growing Problem

The National Economic Research Center (CIEN) released some initial findings of its CIPE sponsored informal sector project this past week. According to their research, 75% of the economically active population in Guatemala is employed in the informal sector. This makes Guatemala the country with the largest percentage of informality in Central America.

CIEN has organized focus groups among important informal entrepreneurs, administered surveys, and conducted extensive field research to understand the complex nature of informality in Guatemala. Many informal entrepreneurs have highlighted that there is no real incentive for them to formalize their activities. They prefer operating in a system that is based on mutual trust and punishment for those that do not comply.

CIEN’s project is particularly valuable because it is exploring how informality is different in indigenous groups that are concentrated in rural areas. Previous research has primarily focused on informality as an urban phenomenon. CIEN’s research has shown that the indigenous communities in Guatemala are the “forgotten entrepreneurs”, disassociated from the government that wants to enforce regulations that are alien to their way of doing business.

In an article that was published this week in the Guatemalan newspaper Prensa Libre, CIEN’s project director, Hugo Maul, argues that the consequences of having such a large informal sector are devastating to the Guatemalan economy. CIEN’s research shows that

when one takes into account the average productivity of a formal worker, they produce 5.66 times more than the informal workers.

CIEN is currently engaged in an advocacy campaign to address the problem of informality in Guatemala. CIEN is advocating for reforms that would make entry into the formal economy easier. Reducing, for example, the number of procedures to start a new business will allow more entrepreneurs to formalize their activities. Dated labor laws in Guatemala have also discouraged individuals and groups from formalizing. Current regulations are simply out of sync with reality.

Mr. Maúl explains that

the main challenge for the state is to realize that the informal sector is “the majority.” 

It is time that public policies and legislation take this into account.