The undocumented economy, also known as the informal or shadow economy, is a significant issue that affects many countries worldwide. In Pakistan, the informal economy is responsible for a large portion of the economic activity, with an estimated 70% of the country’s GDP being generated by the informal sector. However, this poses several challenges in the implementation of laws, especially when it comes to regulating economic activities and ensuring compliance with various laws and regulations. The purpose of this article is to explore the undocumented economy of Pakistan and the difficulties it poses in the implementation of laws.
The undocumented economy is a term used to describe economic activities that are not recognised by the government or are not included in official records. This economy includes activities such as street vending, unregistered small businesses, and other forms of informal labor. These activities are often not taxed, and those who participate in them may not have the proper licenses, permits, or registrations required by law. Over the past few decades, developed countries have seen a declining trend in undocumented businesses, however, in countries like Pakistan, the rising trend of unrecorded economy is a major challenge.
The undocumented economy poses several challenges for governments, particularly in developing countries. Regulating the informal sector can be difficult because those who participate in it are often difficult to track and may not have the proper documentation required to conduct business legally.
One of the main challenges of regulating the undocumented economy is the lack of transparency. In the informal sector, transactions are often conducted in cash, making it difficult to track and regulate economic activity. This lack of transparency makes it challenging to enforce laws and regulations, such as tax laws, labor laws, and environmental regulations.
Another challenge of regulating the undocumented economy is the lack of reliable data. Since many of the economic activities in the informal sector are not recorded, it is challenging to obtain accurate information about the size and scope of the informal sector. This lack of data makes it difficult for governments to design policies that can effectively address the challenges posed by the informal economy.
Moreover, the government hesitates in eradicating labor-intensive informal sector due to the pressure of rising unemployment rate because the formal economic activity is incapable of accommodating the otherwise unemployed workers. Secondly, the workforce lacks the technical skills required in national as well as international documented markets. Studies have found that the rise in higher education in the youth has a negative relationship with the growth of the informal sector.
In Pakistan, besides the business community, consumers also prefer to deal in cash. According to a report published by McKinsey Global, where share of digital payment is 55% in the UK and 49% in the USA, it is less than 1% in Pakistan. The State Bank of Pakistan (SBP) reported that more than 60% of business is conducted in cash in the economy of Pakistan. Cash-based employment is common in hiring labor for construction, production factories, and other similar small-scale businesses. Cash-based businesses, services, and employments are very difficult to be monitored effectively, thus a significant portion of economic output evades documentation and taxation simply because it operates under the shade of cash dealings.
Unfortunately, Pakistan’s poorly controlled border system makes undocumented trade relatively easy and economical. Regarding documentation of Pakistan’s across the border trade, the following boundary markers appear to have a major share in the ungoverned movement of goods: Durand Line (Pak-Afghan Border) and Pakistan-Iran Border.
The undocumented economy presents significant challenges for governments, particularly in developing countries like Pakistan. Regulating the informal sector can be difficult due to the lack of transparency and reliable data, making it challenging to enforce laws and regulations. The rise of cash-based transactions and poorly controlled borders also contribute to the prevalence of the undocumented economy in Pakistan. Addressing these challenges will require policies that promote transparency, increase digital payments, and establish effective mechanisms for regulating economic activity. Only then can Pakistan move towards a sustainable and inclusive economy that benefits all citizens.