Enterprise Formalization
Informality: Understanding the Concept
Informality refers to economic activities, particularly among enterprises that lack legal recognition or compliance with regulation, such as business registration, tax withholding, labour and social-security provisions, and licensing. Importantly, this definition encompasses legal activities conducted outside formal regulatory frameworks—not illicit or criminal operations.
In Pakistan, the Labour Force Survey (2020–21) defines informality in industrial units as those with fewer than ten employees, no regular employees, and unregistered status, though this excludes service-sector activities.
Informality in Pakistan and Its Ramifications
Pakistan’s economy remains predominantly informal, with an estimated 84 percent of the national workforce, including the agricultural sector, operating outside the formal economy. Informality is especially pervasive among small and medium enterprises (SMEs) and their supply chains, reaching 87 percent in export-oriented textiles and ready-made garments and extending to the manufacture of automotive parts and other industries where many firms remain unregistered.
The formalization of enterprises therefore presents a critical opportunity to extend formal employment protections to a large segment of the labour force.
This limits:
- SMEs’ access to finance and new markets
- Workers’ access to social protection and skills
- Pakistan’s ability to meet international trade compliance requirements (e.g., GSP+, EU Due Diligence, EU Green Deal)
Concurrently, climate-related requirements in major export markets will necessitate significant adaptation of products and production processes. Yet many SMEs and home-based workers operate within a constrained business environment and lack the capacity to undertake such transitions.
Enterprise formalization is a priority under the Decent Work Country Programme and the United Nations Sustainable Development Cooperation Framework (2023–2027), as well as the National SME Policy 2021, which also underscores the promotion of women’s entrepreneurship.
SMEDA, with the International Labour Organization (ILO), is leading a major initiative through the project titled “SME Formalization and Just Transition” to support SMEs and workers in transitioning to the formal economy, especially in Karachi and Lahore’s textile and automotive supply chains.